To all participants, thank you for standing by. The conference call is ready to begin. Welcome to the CN First Quarter 2015 Financial Results Conference Call. I would like to turn the meeting over to Janet Drysdale, Vice President, Investor Relations. Ladies and gentlemen, Ms. Drysdale.
Thank you, John. Good afternoon, everyone. Thank you for joining us. We are very pleased to be taking the call today from Memphis, Tennessee, where we will be holding our annual general meeting tomorrow morning. In the meantime, we're enjoying the fine weather, the southern hospitality, and of course, the Memphis barbecue. Just before we get started, I would like to remind everybody of the comments that have already been made regarding forward-looking statements. With me today are Claude Mongeau, our President and Chief Executive Officer, Luc Jobin, our Executive Vice President and Chief Financial Officer, Jim Vena, our Executive Vice President and Chief Operating Officer, and J.J. Ruest, our Executive Vice President and Chief Marketing Officer. In order to be fair to all participants, I would ask you to please limit yourselves to one question.
It's now my pleasure to turn the call over to CN's President and Chief Executive Officer, Mr. Claude Mongeau.
Thank you, Janet, and it is indeed a sunny day here in Memphis. Thank you all for joining us on this call. We have a solid start to the year, very good first quarter results, and we would like to take you through them. But let me just give the highlights. Clearly, revenues have been growing. Some of it is because of last year, but most of it is because of our strong momentum in many markets. Revenues are up 15% on nearly double-digit volume growth. J.J. will give you the detail of that. Clearly, we're able to grow faster in the economy as per our plan and bring it down to the bottom line. We're balancing operational and service excellence. Jim's team has been able to run a very fluid network throughout the winter. It was an easier, milder winter in Western Canada with less extreme cold.
But make no mistake, we had our fair share of issues, particularly in Eastern Canada with a lot of snow and difficult winter conditions on the east end of our network. You put it all up together, we're able to drive that growth at low incremental cost. We're very pleased with our operating ratio at 65.7%, and the rest flows. Strong earnings growth, up 30%, and strong free cash flow. Now, Luc will give you some of the details. We're obviously getting help from the exchange and from the fuel surcharge lag, but you take it all out and look at the underlying performance, very much a good start to the year and overall results that we are very pleased with. So without further ado, because we want you to have as many questions as possible, I will turn it over to Jim to discuss our operating performance.
Claude, thank you very much, and I will be brief this year or this quarter. Maybe just to frame it a little bit more with the weather in the first quarter, we had a strong first quarter. Workload on a GTM basis, which gives me a good reflection of what the workload is like, was up 9.8%. As you'll hear later on, the RTMs were up about 7.1% higher. No ifs and buts, but compared to the first quarter last year, weather was much more temperate than last year in Western Canada through Wisconsin and Minnesota, but was much more impactful in Eastern Canada and, in fact, in Atlantic Canada, significant winter as I've seen or we've seen in many years.
So given that, we expected a betterment in our operating metrics, but the fluidity of the network, as evidenced by double-digit improvement in car velocity, significant betterment in terminal put-through, train velocity, locomotive utilization, provided great feedback on our agenda of operating excellence. Our capital investments on pinch points with an unending view to use all our assets, whether it's people, the plant, or the locomotives, in a manner which does not change the fabric of who we are and delivering on service excellence is a strong combination, and I think the first quarter was a good reflection. Turn over to the next page, please. Our agenda does not change. Our culture is built on foundation of moving equipment as fast as possible in a safe manner. Nothing compromises being able to move fast and in a safe manner.
But we did have two significant derailments in the first quarter, and we have been aggressive in analyzing what occurred to see if we need to change anything we are doing. We have not completed the entire review, but will not stop until we understand if there is anything else we need to do. Our overall safety metrics for all incidents and injuries, if you put them all in the mix, is better year-over-year. But we know safety is at the cornerstone of everything we do, and we will not rest until we understand better what we need to do and change, if anything.
The keys to operating and service excellence are understanding the entire supply chain, better understanding customer needs by using technology, which we've implemented to give us more visibility, and having key measures that we both, the customer, ourselves, and the different parties that we interact with, so we can measure and understand how we're doing, if we're doing better, improving, or whether we need to work on some things. We're very happy with the progress we've made and still some progress to make, but at this point, very comfortable with where we are. It's all supported by what we do for capacity. We've been double-tracking on the Steelton Hill. We've been adding capacity east of Edmonton. We've not only added capacity on our mainline quarter, we've added capacity in our yards to make sure we're more efficient.
We've announced and we continue to invest in our secondary mainlines and, of course, continue to invest in training because of the number of new recruits we have, recertifications, or refamiliarizations. But before I pass it on to J.J., just let me finish with this. Good quarter, but it's where I expected us to be. We'll continue to work hard on our agenda to improve and provide our marketing and salespeople the best product to sell. J.J., over to you.
Well, thank you, Jim, and thank you for all of you who are joining us on the call today. It's J.J. speaking, and I will go over the next few minutes, bring you through the highlight of our first quarter revenue performance, and then provide you with our commercial outlook. Revenue for the quarter totaled $3.1 billion, an increase of $405 million, and as stated by Claude earlier, 15% over last year. The broad breakdown is as follows: volume produced about 8% revenue growth. CN led the industry in volume with carload increase of 9% and revenue-ton mile increase of 7%. Same-store price produced 3.9% after adjusting for exchange and fuel surcharge in line with our fourth quarter pricing result. Exchange added another 7.5%. The Canadian dollar is at $0.81, was weaker versus the $0.91 that it was last year.
Fuel surcharge, which revenue we're heading down, reducing revenue around 3%, a trend that will definitely worsen next quarter. The applicable WTI tariff was based on $61 crude this quarter versus $91 of last year. The applicable on-highway diesel tariff was based on $3.35 versus the $3.87 of last year. Recall that there is a two month lag in applicable WTI and on-highway diesel tariff. All in all, a solid first quarter driven by volume growth, consistent pricing, and solid operating execution by Jim's team in the field. Now, I will review each segment. This time, I will speak to the revenue variance on the as-reported basis in Canadian dollars and inclusive of the fuel. Starting with grain and fertilizer, the grain revenue were up 19% on solid operating execution. Our Canadian grain revenue was strong, with commercial grain increasing 33% and regulated grain rising 26%.
Our spotting program in western Canada increased to 4,500 hoppers per week on average versus the 3,700 of last year. The US grain revenue was up 6% despite carloads falling 8% as we ran out of export grain early. Fertilizer revenue was also strong, up 38%, led by solid global potash demand and solid operating execution in the field. Coal, our Canadian coal revenue was almost cut by half, shrinking to a handful of mines, which continued to operate in Canada at reduced rates. Our US coal revenue continued to increase with stronger export carloads and stronger domestic utilities carloads during the first quarter. At Petroleum and Chemicals, growth in crude by rail revenue was up 10%. We moved 30,000 carloads of crude, down sequentially from the fourth quarter of 33,000 carloads and up from last year's Q1 of 28,500 carloads.
Our mix of heavy to light crude remained at 60% in favor of heavy. Natural gas liquid produced well now that the Cochin Pipeline is reversed and no longer available for Canadian NGL transport. Low feedstock price contributed to strong production rate at our plastic plants, and finally, movement of TIH carload was down 25%. Now, for our softwood, lumber and panel produced 33% revenue increase driven by a 12% U.S. volume growth from U.S. housing starts, obviously, and highway-to-rail conversion of Asian export over the Port of Vancouver. Pulp was up 10% on account of higher Asian export, and we are having good success with our high-velocity pool, low-velocity pool system, which prioritizes order taking. The velocity of our premium boxcars and center beam fleet has increased, and we are achieving a higher customer order fulfillment and a more positive customer sentiment.
Metals and minerals frac sand revenue rose almost 70% over last year. We moved over 23,000 carloads in the quarter, 50% more than the 15,000 carloads that we moved last year, but sequentially down from the 29,000 carloads of the fourth quarter. The Iron Ore supply chain, including vessel and dock revenue, was up 25% due to solid execution by the Iron Ore supply team of CN. We had an upside in non-energy-related semi-finished steel, aluminum, and non-ferrous, but this was partly offset by much weaker energy-related steel demand and much lower North American steel production rate of 73% in the first quarter, down 7% from last year. Production is hurt by the U.S. strong dollar, resulting in a surge of steel import in the U.S. Automotive revenue increased 23% on strong demand across the board and on new business volume.
We have pent-up demand as one of our major customers experienced an extended quality hold delay, and our European imports were delayed by many East Coast ice storms. Automotive, overseas revenue was strong and came from the volume through the West Coast ports of Prince Rupert and Vancouver and in the east via the Port of Montreal. Domestic revenue was down 3%, in part because of the derailment in Gogama, Ontario, which specifically affected our domestic service. The inland terminals of Chicago, Memphis, Detroit, and Joliet saw the biggest overall intermodal growth for CN. Now turning to the outlook. Broadly speaking, for the coming months, exchange and fuel surcharge will create very strong opposing winds. We are likely to have a sizable gain from exchange rate, which is likely to be offset by a sizable reduction in fuel surcharge revenue.
On crude, we see potential from the start of this mid-quarter of new crude rail terminals in both Alberta and Illinois, but we also see increased volatility in crude volume. On frac sand, we foresee a volume pause for the seasonal spring breakup and a wait-and-see after that. Because of that, overall, our crude and frac sand for the full year, we are now aiming for 40,000 carloads of combined carloads of crude and sand. We have weak production from the Canadian coal mines and in Canadian grain export, a smaller carryover than last year, not quite enough grain to keep our exports at the level of the spring and summer of last year. On a positive note, we count on US housing start-related volume, that is lumber, panels, and container imports. We count on automotive sales, that is carloads, the finished vehicle, and import containers of auto parts.
We hope for a positive potash market during the spring. We count on the strength of our intermodal franchise and on the strength of the US consumer confidence supporting consumption-driven business. We also count on our expanded merchandise railcar fleet to capitalize on the manufacturing sector despite some decline of the purchasing manager index in both Canada and United States. Longer term, the container ports we serve are in very good shape, and our intermodal international franchise will be enhanced by the Maher Prince Rupert terminal 500,000 TEU expansion, by the Port of Montreal 600,000 TEU expansion, and by the future new rail-on-dock service in Mobile, Alabama. In conclusion, we have a very diversified portfolio, which carries us throughout the rotation of diverse commodity markets and through the regional economic cycle. We are aiming for 3% carload growth.
We reiterate our 3%-4% same-store price, and we continue to focus on yield. Luc.
All right. Thanks very much, J.J. Starting on page 12 of the presentation, let me walk you through the key financial highlights of our first quarter performance for 2015. As J.J. mentioned, revenues were up over $400 million, or 15% to reach $3.1 billion in the quarter. In the quarter, fuel lag represented $57 million tailwind in revenues. Operating income was $1.63 billion, up over $240 million, or 30% versus last year. Our operating ratio was 65.7%, a record level for a first quarter. This represents a 390 basis points improvement over last year as we enjoy strong business volumes, and in contrast to 2014, we experienced a more normal winter season on average across our network. Other income was $4 million. This compares to $94 million in 2014, which included a pre-tax gain of $80 million on the sale of a subdivision to a transit agency.
Net income stood at $704 million, up 13%, and the diluted EPS reached 86 cents, up 15% versus last year. Meanwhile, the adjusted diluted EPS, also at 86 cents, was up 30% after excluding last year's major asset sale. Foreign currency exchange was $56 million favorable to net income in the quarter. Turning to page 13, we once again were able to deliver superior growth at low incremental cost. Operating expenses were up 9% at just over $2 billion. Expressed on a cost and currency basis, this is up 2%, or $46 million. At this point, I'll refer to the changes in cost and currency. Labor and fringe benefit costs were $668 million, a 9% increase over last year. This was the result of two elements.
First, an increase in overall wage cost of 6% made up a 3% wage inflation and 6% increase in average headcount, partly offset by higher capital work. Second, the second element was a higher pension expense for $15 million, or 3% points of the total labor variance. Purchase services and material expenses were $457 million, up 12%. Higher volume drove increased costs, including materials for 8% points, as well as repairs and maintenance expenditures for 3% points. The fuel expense stood at $361 million, or 31% lower than last year. Price was $161 million favorable versus last year, and fuel productivity went up by 2.5%. But this was partly offset by higher volume for $41 million of unfavorable variance. Depreciation stood at $296 million, $29 million higher than last year, or 11%.
This was a function of asset addition as well as the impact of depreciation study and other adjustments. Equipment rents at $94 million were $9 million higher than last year, or 12%. This is due to increased net car hire higher expense and equipment leasing costs. Casualty and other costs were $159 million, $54 million above the prior years. Two elements drove this increase. First, accident-related costs were $40 million higher than last year. Second, workers' compensation costs were approximately $10 million more as we had the benefit of a one-time credit received in 2014, which obviously didn't come around in 2015. Moving on to cash, we generated free cash flow of $521 million in our first quarter, and that's approximately $27 million higher than in 2014. This was mostly driven by higher cash flow from operations at $992 million, partly offset by higher capital expenditures at $468 million.
Finally, on page 15, our 2015 financial outlook. We continue to be confident in terms of CN's prospects, notwithstanding the fact that we are experiencing conditions that are weaker than expected in energy-related markets as well as coal exports. As we look to the immediate future, while North American economic conditions are somewhat mixed, consumer confidence is solid, and expectations for increased spending should support continued growth in housing, automotive, and intermodal sectors. These and other key assumptions underpinning our outlook should translate into approximately 3% carload growth, with pricing in line with our inflation plus policy. Therefore, we are affirming our 2015 financial outlook, calling for double-digit EPS growth over the 2014 adjusted diluted EPS of $3.76. We're also raising our capital investment program for the year from $2.6 billion to approximately $2.7 billion, allocating an additional $100 million to safety-related infrastructure investments.
Furthermore, we continue to pursue our shareholder return agenda with a substantial stock buyback program underway, a 25% increase in dividends for 2015, while gradually moving towards a 35% dividend payout ratio. So a great quarter, and on this note, I'll turn it back over to you, Claude.
Okay. Thank you, Luke and team. So clearly, our agenda is delivering the right results, and we are very pleased with the start to the year. We're focusing on more than just the quarter. We're focusing on building the future. Our approach and focus on helping our customer win in the marketplace is resonating. It's helping us outpace the economy and outpacing the rest of the industry in terms of growth. We're able to accommodate that business at low incremental cost because we have a very fluid network, and our operating metrics are continuing to improve. This is driving productivity, but it's also driving service efficiency to help have the right value proposition for our customers. And we are investing for the future.
This $2.7 billion capital envelope is a testament to our long-term confidence in our ability to continue to play our role in helping our customers win in the marketplace. We're doing it overall with a lot of investment in safety, a lot of investment in growth, a lot of investment in productivity, and everything that drives our agenda. But we're also starting off with a number of very large-scale projects that are indications of our willingness to stay ahead of the curve. Our investment in Milton for our announcement of a new Milton project, for instance, in Toronto, is a very good example. We are an important intermodal carrier in and out of Canada, and we need the growth in terminal capacity to allow us to link up to the investments that are being made by our partners on the West Coast. J.J. referred to one in Rupert, but we expect others to follow in Vancouver, Montreal, and elsewhere. We're increasing our overall capital envelope to double down on our agenda of moving goods safely and doing that with a high level of service. If you do that consistently with a marathon-like approach, in the end, you drive value for shareholders, which is what we're geared up to do every quarter, every year, for many years to come. With that, we will move over to the question period, John.
Thank you. We'll now take questions from the telephone lines. If you're using a speakerphone, please pick up your handset before making your selection. If you have a question, please press star one on your telephone keypad. You may cancel your question by pressing the pound sign. Please press star one at this time. If you have a question, there will be a brief pause allowing you to register. Our first question is from Fadi Chamoun from BMO. Please go ahead.
Yes. Good afternoon.
Good afternoon, Fadi.
So I just wanted to circle back on the CapEx. I mean, you're revising your volume expectation a little bit down that your CapEx is going higher. My sense is that there's a bit of change in terms of the risk tolerance towards safety and derailment, maybe. And I'm just wondering whether you would consider this sort of a systematic change in how you look at your infrastructure and what you are willing to tolerate in terms of safety risk, or is this sort of a one-time sort of identification of issues that you want to fix?
No, Fadi. I think you have to look at this as a consistent strategy. We are always staying ahead of the curve. We've been investing in our core mainline network in terms of capacity over the last couple of years. You may have seen last week we announced a multi-year program to invest in our feeder network. It's a long-term program to make sure that the growth that we see coming off of our Western Canada feeder network, that we have the infrastructure to do it safely, and that we have the infrastructure to grow with our customers in that part of our network. So it's for safety. It's for growth. It's for capacity. It's for all of those things that we are investing, and we are doing so with a lot of confidence in our future prospects.
It's not about anything that we have found lately that is causing us to increase our CapEx.
Okay. Great. One other thing sort of on the energy carload change. Is that decline from 75 to 40? Can you split that sort of between crude and sand? Is it more sand-driven than crude?
We've given you guidance. That is combined, and there's a reason for that, Fadi. It's kind of difficult in this uncertain environment. So I think 40,000 overall, that's about as good as it gets in terms of growth outlook and guidance that we feel in a position to give you.
Okay. Thank you.
Thank you. The next question is from Ken Hoexter from Bank of America. Please go ahead.
Hey, Claude. Thank you very much for that insight. But can you maybe, I think I just follow up on that. I want to understand the moving down on carloads but increasing CapEx. I just want to understand, are you over-investing, or are you saying these are longer-term projects that you need to get out in front of because the volumes are—I just want to understand, given the downtick on volumes, maybe I'm not clear on your answer on that prior question.
Yeah. Well, as I said in my closing comment and in my answer to the question, we run a marathon. We run a business over many years, and we line up our initiatives, our assets, our resources over a longer-term cycle. I think you are reading too much in terms of our decision to move forward with our feeder network investment in Western Canada and this quarter's revision to our energy outlook. If anything, we are making those investments because we think there's a bright future for frac sand and for energy movements of our products in the long-term future. So it's geared up to a view that the business will be there, and we are starting those programs this year, adding $100 million to our overall capital expenditure as part of a program that will span over the next three years, close to $500 million in Western Canada.
Great. As a follow-up, you mentioned the increasing investment on Western Canada, and I saw that Prince Rupert is changing ownership at Prince Rupert. Is that enhancing the opportunities there, or is that looking for expansion compared to what you've seen? Just maybe you can talk a little bit about the growth on the intermodal side there.
So the prior owner or the current owner, Maher, announced they're going ahead with the construction of an expansion of the terminal, 500,000 TEU. 90% will be rail. Say 5%-10% will be truck. And then subsequently, a new owner is coming in Dubai, Maher, the DP World, Dubai Port. Great company, large-scale over the world, a lot of customers' contact that could help to market and pre-market the capacity of the terminal that they're just about to buy. So I think from a CN point of view, it's fantastic new expansion of our line. Very strong partner who has a world scale basis, and we are already marketing that aggressively.
Thank you, Ken . Next
Thank you.
Thank you, Ken. I will take this opportunity to remind everybody of our rules of engagement. One question per participant.
The following question is from Walter Spracklin from RBC Capital Markets. Please go ahead.
Thanks very much. This is Erin in for Walter. I just wanted to clarify sort of your FX sensitivities given the movement that we've seen in exchange rate and the updates to your assumptions. I think your previous disclosures have said that 1 cent change is about 2 cents in EPS. Hoping you can provide an update there.
Yeah. I mean, as we look at the current environment, it's Luc, I would say 1 cent change translates now roughly into about $30 million on net income, which then again translates into about 4 cents on EPS.
Great. Thanks. That's my one question.
Welcome.
Thank you. The next question is from Bill Greene from Morgan Stanley. Please go ahead.
Yeah. Hi there. Good afternoon. Claude, CN for so many years had this tremendous cost advantage over its peers, and you can see that in the long-term growth rates that you've achieved. A lot of the competitors are focusing a lot more now, obviously, on costs. Does that change the competitive landscape for you? Do you worry that that puts at risk any of these targets to grow faster than the economy and to continue to sort of drive the top line in ways that maybe some of your peers haven't been able to?
I mean, if you look at our first quarter results, we like how our performance stacks up versus the rest of the industry. We think we are investing to stay ahead of the curve because that's the way to have the right assets in place to provide the solid service that differentiates our capability in the marketplace. We're innovating in terms of end-to-end supply chain thinking. Our customer-centric agenda, our sale-once CN, all of those initiatives are resonating. And so we feel good about the market response, and we believe that it's a competitive world out there. As others get better, we have to continue to improve and get better. But we're resonating. We have good growth, and we feel good about the prospects for the future.
It's not just cost, but also services.
your point.
I'm not sure we have that many customers who look at our operating ratio before they make a decision to award us some business. They're looking for value. So cost advantage gives us the ability to compete for the business, but the customers will award us business based on service and service differentiation. I mean, that's when you look at what we've done the last two years, especially. People came to us because of the service we offer, not because we had the best operating ratio. You put yourself in the shoes of a customer. That's how they see it.
Excellent. Thanks for your time. Appreciate it.
Thank you, Bill.
Thank you. The next question is from Cherilyn Radbourne from TD Securities. Please go ahead.
Thanks very much. Good afternoon. Just wanted to ask one about the energy business. Curious if you could speak to how much of your crude by rail business is with large integrated companies and whether there was any change to the mix of origins and destinations in the quarter?
Well, there's definitely a shift from what was moving in carload service, merchandise service, to unit train service. At the same time, that means that shift also we're dealing now with typically bigger players, either the refiner themselves, the product people who ultimately buy the product, or the producer of the crude back at the origin. The shift is toward larger companies, larger block of business, and less of the midstream company who are in between. I don't know if that answers your question.
Yeah. Just given the shift in differentials during the quarter, was there much of a shift in terms of the mix of origins and destinations?
No, not so much because the market was already moving toward big buyer and big seller and big block. But the fluctuation in the spread does definitely impact the business from month to month because when people make the transaction for what crude they're going to buy to feed the refinery for the following month, like right now they're looking at May, all these spreads start to matter more than they're in the range it matters.
Okay. That's helpful. That's my one. Thank you.
Thank you.
Thank you. The next question is from Chris Weatherby from Citi. Please go ahead.
Great. Thanks. Just a question. In the next couple of quarters, did you see volume growth naturally decelerate because of the tougher comps? How should we be thinking about headcount as it plays out through the rest of the year?
Well, Chris, it's Luc. In the first quarter, we were up about 6% in terms of average headcount. For the whole year, we're probably looking closer to about 3%. So you'll recall we accelerated through the second half of last year. So we'll be showing slightly higher numbers through the first half of this year, but our target overall would be probably around the same level of growth as we're seeing in the carload. So about 3%.
Okay. Thanks, Mohammed. Thanks.
Okay. Thank you, Chris.
Thank you. The next question is from Jason Seidel from Cowen & Company. Please go ahead.
Thank you, gentlemen, for taking the time. I wanted to talk a little bit more about sort of the Prince Rupert expansion. Obviously, we've probably seen a little bit of freight won from the West Coast ports, but it seems like this expansion's more than temporary and that you guys think there's a lot of business to generate through Prince Rupert into other areas. I was wondering if you could talk to how much business you think you probably took from the West Coast ports and also talk about the growth going forward.
So in terms of the West Coast port, Rupert is only so big, and what was happening in the US West Coast was quite large. Probably the biggest benefit of the US West Coast diversion was the East Coast port, New York, Norfolk, Savannah, and the like. Up to a point, the Canadian port, Vancouver, and Rupert had a little capacity available. But at the same time, we've been marketing this for quite a while. People came to Rupert. I want to say people, I mean the importers. We didn't get a new shipping line coming to Rupert in the first quarter. What we had is more importers who really want to spread their eggs into more ports, East Coast port and Canadian port. We feel fairly confident that obviously the business will stick with us.
When you look at our commitment, we're investing into major capital investment in Toronto, which partly will be fed from the West Coast. DP World also is very confident and believes that Rupert is a great port to serve the U.S. Midwest and a great port to serve Eastern Canada. Us and them are very much aligned in the future of Rupert as a solid growth area.
Okay. Thank you. That's my one.
Thank you.
Thank you. The following question is from Benoit Poirier from Desjardins Capital Markets. Please go ahead.
Yeah. Thank you very much. So just in terms of volume, we understand that you'll be facing a tough compare in Q2 with the grain obviously going into the negative territory. What should we expect in terms of RTM because so far you're trending downward 2%? Any expectation for the Q2?
So broadly speaking, we might in the second quarter see an RTM which will be a little weaker than the carload. So we'll see it in the quarter how things add up, but you might see that the RTM is somewhat weaker than the carload growth for the second quarter.
Okay. Thanks. That's my one.
Thank you.
Thank you, Benoit.
Thank you. The next question is from Brandon Oglensky from Barclays. Please go ahead.
Good afternoon, everyone, and thanks for taking my one question. Claude or JJ, small play by the rules here. There's a big concern not only for the railroads, but I think across industrial investors right now that we're just late in the cycle. Obviously, commodity prices are trying to signal something potentially. FX has moved a lot for Canada. I mean, what's the confidence in your visibility with your big customers, maybe outside of energy, maybe more talking about the merchandise segment, the automotive segment, intermodal, that leads you to the idea that, hey, we're actually going to see positive volume growth even on the back of what turned out to be a really strong 2014?
Definitely, if you take it sector by sector, this is where you see the positive growth. The Canadian forest industry at an exchange rate of $0.80-$0.82 is doing very well, especially for the export to the U.S. If you look at the automotive industry, they want us to move more product. And also because they make more product, they want to bring even more containers from Korea, Japan, and China. So when you break it down by sector, this is where you see where the growth's coming in, which is really aligned to what you would see in the economy. And at the same time, when you talk about grain, it's a one-timer. We had a fantastic crop two years ago, good and bad, politically and commercially. And the next crop will come in, and after that, we'll pick it up from there again. You look at China.
China is doing not too bad, but in terms of making more steel, the world is at war with steel. So I mean, when you take them one at a time, the visibility is fairly good. The place where the visibility is maybe a little more challenge is energy. What's going to happen to the price of crude? If anybody on the line can help us out here, that would be useful. Same thing with the price of gas and how much activities will take place in terms of drilling. That's a complicated question to answer. And that's a good question, Jason. Brandon and so, basically the confidence of the consumer is where we see bright spots. Now, we may be wrong. Things can change, but there has to be a lot of discretionary income flowing to the consumers with lower energy prices.
So we're hopeful that that will help durable goods like automotive, housing starts, the construction material in general as a market that's still below where we were in five years ago in the recession. So we have markets that are sleepers where secular growth is still very solid. We have markets where our ability to be differentiated in terms of our product offering is helping. Intermodal would be the best example of that. And then we have global offshore markets that are facing headwinds and uncertainty in the energy sector. Overall, the diversification of our business mix and the strength of our franchise allows us to grow and continue to expect to grow faster in the economy and to drive shareholder returns that way.
Appreciate it.
Thank you. The next question is from Alison Landry from Credit Suisse. Please go ahead.
Good afternoon. Thanks for taking my question. So I was wondering if there's a way for you to bookend your expectation for double-digit earnings growth within the context of muted carload growth and at least for the second quarter, somewhat softer RTMs as well. So should we be thinking of something in the low double-digit range versus the consensus of roughly mid-teens?
That's a very good question, but our guidance will stand for what it is where we're confident that we will be delivering double-digit earnings growth, and we're not uncomfortable with the consensus that's out there today as we speak.
Okay. Thank you.
Thank you, Alison.
Thank you. The next question is from Scott Group from Wolfe Research. Please go ahead.
Hey, thanks. Afternoon, everyone. So wanted to ask about pricing. So came in at the upper end of the expectations for the year and wanted to get your sense on how sustainable that is and if that's a potential source of upside to keep that pricing at that upper end of that 4% range. And then just more specifically on pricing, as you lowered the energy volume expectations, have you seen any changes at all in the pricing that you're getting for crude or sand?
So, starting broadly, we've guided the price to be same store basis, 2%-4% for the year. And remember, August 1st, because we're Canadian railroad, August 1st, the Canadian grain cap will be reset, and it will be reset at -1%. So we will see that kind of flowing through the second half of the year. Regarding frac sand and crude, not necessarily a change in pricing direction of those markets. A lot of the, I guess, newer thing happened during the first quarter as to where these markets are heading volume-wise. We like to be paid for what we do. It's not because the commodity in the car is a high price or low price that this sale should impact, which does impact our freight rate. We provide transportation services, and commodity price goes up and down, and freight rate are in other markets.
JJ, I'm just not sure I understood kind of what you were trying to say about the oil and sand pricing that you're seeing out there and how that's changing or maybe mix is changing.
What I'm saying is that there's no relation between the freight rate and what's happening in the volume or the space of frac sand and crude. It's not that the crude is weaker, that freight rate for the crude will be weaker.
Thank you. The next question is from Turan Quettawala from Scotiabank. Please go ahead.
Yes. Good afternoon. Luc, I had a question on the headwind from the fuel surcharge. In the last call, you had talked about, I believe it was a $100 million headwind for the full year on fuel surcharge, and I think that was based on $50 crude. I know crude is obviously incredibly volatile here, but can you just provide an update to that headwind for $15 now that fuel is pretty much hitting $60? Or maybe is there some easy sensitivity that we can think about there?
Yeah. Turan, it's a good question. And again, it's one where there's so much volatility that it's a tough one to call. Suffice it to say, we have seen a little bit of upward movement in the WTI. I mean, so it's hovering around 55 right now. The question for us and what we're going to have to see is where does the exit point at the end of the year towards the last part of the year, the last quarter or so, what's it going to do? We haven't changed so far our assumption, which is on average for the year about 50, but with an exit that probably will be closer to 60. So it's difficult to modulate with great precision, but I would probably, for now anyway, stick to the roughly $100 million or so kind of range. And we'll have to walk it home.
So it's going to be a bit bumpy, and we'll see how it goes. Hopefully, if I can get better clarity, I'll update in the next quarter.
Thanks. But for in Q2, just to be specific, is it going to be about this? Should still be a tailwind though?
Well, it depends. You tell me where the WTI is going to earn, and I'll respond. So if it takes a big step up, of course, then we're going to have a bit of a fuel lag, and we'll see where that all shakes out.
Got it. Thank you very much.
Thank you.
Thank you. The next question is from Matt Troy from Nomura. Please go ahead.
Thanks. Just in light of the agreement you reached with the Teamsters Canada Rail Conference, I guess a few days ago, I was wondering if you could just put kind of the outcome of that into context and just give us an update across the labor force where you stand in terms of negotiating with the various agreements you've got expiring over the next few years? Thanks.
Okay. Matt, it's Jim. Thanks for the question. So that's the last major one we have in Canada. So it basically gives us a framework that nothing is good. No new agreements are going to have to be negotiated before the middle of 2016, and then the timeframe will be into 2017 before we get it. So nice stable area where we're at right now. It was very much a pattern agreement. We had some changes in productivity that will help us, and the wage increases patterned with the rest of the agreements that we put in place. In the U.S. we have a number of agreements, but of course, anybody that follows the railroads real close, it's a different regulatory and different process negotiating in the U.S. than it is in Canada, and we continue to negotiate.
We don't see any stumbling block or anything that we're concerned with with any of the agreements that would affect us operating the railroad in an efficient manner.
Thanks for the time.
Thank you.
Thank you.
Thank you. The next question is from Tom Wadewitz from UBS. Please go ahead.
Yeah. Good afternoon. I wanted to ask you about the intermodal yields. It looked like it was down about 3% year-over-year. You had strength in intermodal yields in fourth quarter, so it's a bit of a change. Wondering, is that some price competition, maybe contracts rolled over? Is there something else or really big fuel impact, or what's behind that, and would you expect that to be the pattern if you looked the next couple of quarters? Thanks.
Maybe just to clarify, our same-store price on ethanol is positive. But when you look at the, I think you're looking at the cent per RTM or the revenue per unit.
Yeah. Revenue per car.
Yeah. Mix is a big factor. Exchange rate is another big factor. Fuel surcharge, which obviously is down, is another big factor. And in ethanol is where we have a higher proportion of our WTI fuel surcharge formula, which, as I said earlier, we're converting over time. So when you add all these things, it's a lot of noise. But what we do is we measure things on the same store price basis, and those are we're getting price increase on the base price. So I wouldn't worry. Other than those moving parts, Tom, that are difficult to predict, the effects, the fuel surcharge, the value of our service and our pricing approach in intermodal is very much to get value for those services. There's nothing to be concerned about, and we'll continue to do that for as long as we offer good service.
What is the mix that you referred to, JJ? I just don't have intuition on what that is.
Well, mix as in length of haul, mix as in how much we have priced in Canadian dollars, how much we have priced in U.S. dollars. Mix as in we have some of that priced fuel surcharge WTI, some is priced in highway diesel that we're converting to highway diesel. So all these things do impact the revenue per unit and are significant in the big scheme of things.
Right. Okay. Thank you.
Thank you. The next question is from David Vernon from Bernstein. Please go ahead.
Hi. Thanks for taking the question. Just a question on overall sort of business mix. The last few quarters, it looks like gross ton miles are growing at a much faster rate than revenue ton miles. I'm just wondering if that's something that we should expect going forward from an efficiency perspective or if there's some one-time things happening in terms of the way the growth is developing that's driving that?
I think it's really a question of mix of the commodities that we move. Because really, the fundamentals are you get the business in a carload, you get the distance in terms of your OD pair, and you get the weight in terms of the type of product that you're moving. The two measures are typically very much in sync, but from a quarter to a quarter, there might be some mixed differences that would play into making a little bit of a gap.
I mean, it just strikes me the last two of the last three quarters are the lowest it's been in, I don't know, 10 years. So I was just wondering if there's something else that might be there or if this is just normal mix.
No, I think it's just normal mix. Really, it's just normal mix.
All right. Thanks.
Thank you. The following question is from Steve Hansen from Raymond James. Please go ahead.
Oh, yes. Good afternoon. I think you noted in your commentary that the reversal of the Cochin Pipeline has had a beneficial lift on your natural gas liquid volumes that you're moving here, given the stranded nature that we're likely to see over the next couple of years. I'm just wondering if you're trying to quantify that opportunity as it evolves here. And I understand there's also multiple export terminals now being proposed for the West Coast. Trying to get a sense of what that could mean for the next year or two.
Yeah. I'm not sure we will get down to forecasting carload by commodity group here. But definitely, the value of the propane and the butane and natural gas, natural gas is very low, very cheap. Leaving the propane in it is kind of a sin because propane should be selling better than natural gas value. So already a number of producers in Western Canada, namely around Edmonton, are building fractionator to extract the propane and some of the liquids from the gas so they can sell it for the value that it should have. Some of it within North America, some of it for export projects, as you mentioned.
So when you talk about the energy renaissance, we talked about crude and the frac sand earlier, but one can also talk about the liquid which are trapped in the Canadian gas, which no longer can move to the US market by their own distinct pipeline. So it does give us an opportunity, especially in 12 months from now when these plants start to start up, as you know. So those capital investments give us a visibility that somebody out there does believe that propane should have its own value and that should not be sold at a price of natural gas.
Thank you.
Okay. Thank you.
Thank you. The following question is from Brian Ossenbeck from J.P. Morgan. Please go ahead.
Hi. Thanks. Good afternoon. So you mentioned automotive is fairly strong over the remainder of this year. I was just curious how you view the potential for more production moving to Mexico and possibly shutting down, relocating from Eastern Canada. How big of a shift do you think that could be, and what timeline do you think you have to start preparing for that dynamic?
I think we've already. This is not a new phenomenon. There's a lot of it already taking place, right? There's a number of plants actually running or in construction in Mexico. So the base that we have, I would say in Michigan, Ontario, and up to a point, we participate in the parts going to the Ohio plant. It's an exciting part to see in as much as the finished vehicle, but also there's a big business in moving parts into these assembly plants. There was an article in Wall Street Journal a while ago that was explaining how much of a foreign content denial there is into a car manufactured in North America, meaning more and more of the parts are not necessarily coming from Mexico. They're coming from overseas. They're coming in containers.
So the automotive story is as much as the finished vehicle story as it is as the intermodal story. And we're very much on this market opportunity in a big way. I mean, our customers are investing in global vehicle platforms. And over time, you have to expect that we will be able to move Michigan/Southern Ontario vehicles for export as well as for North America. So as J.J. said, there's been a lot of conversion, but the plants that are there are competitive. The Canadian dollar is helping. And as long as they produce good vehicles, we will move them to market. Yeah. Both of them should grow, finished vehicle and parts. And as I mentioned earlier, we're also now paying attention and focus on what's happening in Mobile, Alabama, and we think that's another nice gateway for CN to exploit, namely for the part coming from South America.
Thank you.
Okay. Thank you.
Thank you. The following question is from Thomas Kim from Goldman Sachs. Please go ahead.
Thanks. I have a question on cost. Just given the improvement that you're seeing in service levels as well as your increasing network velocity, should we expect to see this reduce your overall cost growth, particularly in purchased service expenses and equipment rents?
Well, that depends on volume. I'll let Jim give you a sense of this initiative, but we focus on every lever of cost. Fuel efficiency during the quarter was up 3%. Our yard productivity is up significantly on a year-over-year basis. If we have more volume, we will have more expense, but we focus on efficiency and productivity in every piece of the activity that we drive. Jim?
Listen, Paul, the only thing I can add is this is something we look at on a daily basis. We're always concerned about where the business level is, how efficient that we run the railroad, and efficient isn't just how fast you move it and what it costs you. I'm very comfortable with the mechanisms we have in place to react. I'm very comfortable that if the business comes in and it keeps on growing, that we'll put it up to the bottom line, be able to handle it efficiently like we have up to this point with less cost per unit.
If it slows down and the growth isn't quite at the level that we expected, we've taken into account what we would do and we'll react quick and make sure that we drive as much of the cost out as we can as quickly as possible and make sure we get it to the right place. That's what we look at when we come to cost.
Thank you.
Thank you. The next question is from Steven Paget from FirstEnergy Capital. Please go ahead.
Good afternoon and thank you. It's a sunny day here in Calgary too. Supply chain management, maybe if I can rephrase it, could be about how CN works with customers, non-rail and transportation and logistics networks. Is supply chain management more about winning new customer contracts or about operating the existing network and the existing business more efficiently?
Yeah. Listen, supply chain approach is a mindset. We are a great railroad. We're leading the industry in service and other key efficiency metrics. But we think of our role as connecting the dots from end to end. I'll give you a good example. When we are dealing with containers, that land that comes from a ship lands on a dock in Western Canada and wants to go inland, whether it's Toronto or the U.S. Midwest, the end-to-end journey of that container often touches other participants in the marketplace. It's our Global Container Terminal in Vancouver. It's Maher, soon DP World in Prince Rupert. It's about all the way to destination, including the inland terminals, the trucking arm of our, the trucking leg of the journey to destination.
We think about it end-to-end, and we try to optimize that supply chain so that the customer gets the best possible efficiency and service reliability from one end to the other. It's a mindset. It's an approach of daily engagement, but it's also an approach of marketing. The more you know about your customer, JJ was talking about automotive parts, for instance, the visibility to the inbound container flow, the ability to load those containers that are empty when they get to Detroit and fill them with export so that the return journey is as a matchback movement and you lower the cost for the shipping line, round-trip economics, end-to-end visibility, daily engagement, the ability inside CN to think like supply chain enablers as opposed to just great railroaders. It's that entire package that's giving us the results that we have. They show up in top-line growth.
They show up in joint efficiency initiatives, and they show up in our ability to, over time, drive value for our shareholders.
Sounds easy.
Well, thank you, Claude. That's my question.
Yeah. That was a good one. Thank you.
Thank you. The next question is from Keith Schoonmaker from Morningstar. Please go ahead.
Thanks. Quick question for Jim, perhaps. Terminal dwell and velocity improved despite the strong RTM growth. I recognize there may not be a standard metric for this, but could you quantify how these metrics are translating into changes in your on-time and departure performance? As well, could you indicate if this is still improving, or would you say it's in pretty good shape at this point?
Well, you know what? There comes a point where the metrics get to a level where you start saying to yourself, "Wow, what else is left?" And I'm very comfortable with where the first quarter ended up, and that's why I didn't make a big deal out of it. We worked hard at it. It's at the right level. Every metric below, you could if I brought up the sheet that I keep track of and look every day, there wasn't a metric that I would say moved sideways or down. They were all positive. Second quarter continues to be strong metric-wise. So at the end of the day, we're going to do everything we can to optimize it and make sure that we've got it at the right place. But again, the second quarter this year is headed in the right direction, and hopefully, it keeps on there.
But more important for me is that this is not about how much money and how much capacity you can put in to run the railroad quicker. It's being smart about what we put in for capacity. It's investing properly into the company and then making sure that we give a competitive advantage. We're still fairly quick, I think, compared to everybody else. And that's where we want to be, is at the top of the heap or right close to the top and stay at the top if we can. So that's what drives me, and that's what drives the whole operating team.
Jim, are you willing to share the on-time performance?
Yeah. It's very high. I don't have the numbers sitting right in front of me, but it's pretty nice.
Thank you.
Thank you. You're judging his best here on the potential for future productivity. Thank you, Ken, for that question.
We have no further questions. I'd like to turn the meeting back over to Mr. Mongeau. Please go ahead, sir.
Thank you. It's been a very good call. As we said, we are pleased with our first quarter results. It's an uncertain environment in terms of the certain parts of our market, and we have to face up to it. We're trying to give you our best sense of what it means in terms of overall growth. We have a lot of initiatives. We're building for the future. We like how our agenda is delivering, and we look forward to meeting you at the end of Q2 to talk about another bang-up quarter. Thank you.
Thank you very much, everyone.
Thank you.
Thank you. The conference call has now ended. Please disconnect the lines at this time. Thank you for your participation.