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Canadian National Railway (NYSE:CNI)
Q4 2017 Earnings Conference Call
Jan. 23, 2018 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Paul Butcher -- Vice President, Investor Relations

Good afternoon, everyone, and thank you for joining us for CN's Fourth-Quarter and Full-Year 2017 Earnings Call. I would like to remind you about the comments already made regarding forward-looking statements. With me today is Luc Jobin, our president and chief executive officer; Mike Cory, our executive vice president and chief operating officer; JJ Ruest, our executive vice president and chief marketing officer; and Ghislain Houle, our executive vice president and chief financial officer. In order to be fair to all participants, I would ask that you please limit yourselves to one question.

I will be available after the call for any follow-up questions. It is now my pleasure to turn the call over to CN's president and chief executive officer, Mr. Luc Jobin.

Luc Jobin -- President and Chief Executive Officer

Thanks, Paul, and welcome, everyone, to our fourth-quarter and full-year 2017 earnings call. Well, we faced, in the fourth quarter, some very challenging operating conditions. On top of record workload levels, specifically in key segments such as western Canada and the U.S. Midwest, we encountered in the quarter a series of outages on our main line and very cold December weather across the entire network.

These conditions, while largely outside of our control, nevertheless resulted in disruptions and put our network resiliency to the test, as our operating team worked hard to maintain the best level of service possible for our customers in the circumstances. I'm extremely proud of what our dedicated team of railroaders at CN have been able to accomplish in the face of such adversity. In fact, when you look at our operating ratio in the fourth quarter, at 60.4 it is -- when you look at the previous record in terms of volume -- it is lower than the previous record in terms of volume going back to 2014, where we had an OR of 60.7. In any event, to deliver this kind of environment, in this kind of environment implies however an exponential level of resources, higher cost, and less efficiency, as trains are shortened, delayed, and/or detoured.

Many of our partners in the supply chain also faced weather-related issues and some of their own capacity issues in the fourth quarter, also compounding the challenge. Mike will give you more color in a minute on how we've been ramping up resource -- and that's people, mode of power, and infrastructure -- in the last quarter but more importantly, how our 2018 operating plans are addressing this situation as we move through winter and then build momentum in service and efficiency throughout the year. That being said the fourth quarter capped an impressive year for CN in 2017, a year where we delivered strong all-around results, as we on-boarded significant volume, adding over $1 billion of revenues while growing adjusted diluted EPS by 9%, to $4.99. We also generated solid free cash flow.

With this strong performance and good prospects for the future, we announced today that our board has approved a 10% dividend increase for 2018. In essence, we have witnessed strong growth across a broad range of business segments in '17, and JJ will recap our fourth-quarter and full-year performance. He'll also give you our perspective on key markets as we look ahead in 2018. Turning to financials, Ghislain will give you more flavor for the fourth-quarter and the full-year results.

We'll also share with you our outlook for 2018. All right, so on that note, let me turn it over to Mike and the team for more detailed comments. Mike?

Mike Cory -- Executive Vice President and Chief Operating Officer

Thank you very much, Luc. To start, 2017 saw a record volume in workload handles. To put the growth story in perspective, volume growth in 2017 has been by far the biggest increase I've experienced in my time as an operating executive at this company. Our ability to handle it, and the complexities that come with the demand of our customers and changing operating environment, is a testament to the talented group of railroaders I'm proud to lead.

Our traffic workload, or GTMs, continued to climb in the fourth quarter, up 3% from Q4 2016 and 7% versus Q4 2015. For the full year, overall workload was up 11% over 2016 and 6% compared to 2015. The real story, though, is that in segments of our network, volume was up by as much as 20% compared to 2016 and 18% compared to 2015. But as I've explained before, our standard approach is to accommodate growth through increased trainload.

Over time our investment in the network-related components, like sidings and double track, has allowed us to safely and efficiently increase our train length and tonnage at a rate to accommodate growth at a low incremental cost but not necessarily reducing additional trains. As you can see, even in the tougher operating conditions, we've continued to respond to growth by increasing train size by 8% in the last two years. This has been accomplished with minimal network investment. The growth we experienced in 2017 came on quickly and concentrated.

This concentration placed resiliency pressure in certain geographic areas, and it's had an effect on fluidity and resource availability as portions of our network have seen substantial volume increases. This rate of growth has required additional train starts, and as a result, we've not been able to maintain the speed of trains in segments of our network. Our network is primarily a single-track operation, with some components of double track on our main line. Those are wise investments we made in previous years that will continue to be made in the coming years as we leverage this railroad to grow.

As I mentioned on the third-quarter call, our western Canadian and Wisconsin corridors have experienced the greatest growth. In Wisconsin, volume was up 17% year over year and 13% compared to 2015. This was driven by strong movements in specific commodities -- notably frac sand, which doubled relative to 2016, while crude, intermodal, finished vehicles, and fertilizers all experienced double-digit increases. In northern BC, coal and intermodals were up volumes of 20% year over year and 18% compared to 2015.

Operating crews, locomotives, and cars are all operating at less than optimum velocity as a result of the loss of resiliency through the concentrated growth. In the fourth quarter, we had a series of significant outages on our western Canadian mainline corridor in October and December. And early winter also impacted network fluidity and productivity. Like cars on a freeway when rush hour hits or disruptions occur, fluidity drops.

In the railway, you see this in train speed, car velocity, or terminal dwell. As we recovered our fluidity in December, cold weather set in, and both train size and fluidity were affected. To date, this harsher winter coupled with higher volumes in certain segments of our network has had a greater impact on overall velocity and productivity than we've seen in the previous three years. In order to combat the effect of the present conditions, we brought on additional locomotive fleet through short-term leases and are working to move more people into high-growth areas using provisions in our collective agreements.

While we're very skilled at managing through temporary situations like this, we've worked equally hard to take the necessary steps to identify and create plans to increase network capacity and resiliency in order for us to meet our future growth opportunities and customer demands. I'm very confident that once winter conditions subside, our performance will improve and we'll be in position to deliver some very strategic capital programs that will continue to produce top-line growth at low incremental cost. As Luc mentioned earlier, we're bringing our capital investment to a record $3.2 billion this year with approximately $700 million targeted to increase network capacity and resiliency, providing the level of service and efficiency required. On the locomotive front, we're acquiring 200 locomotives, with 60 coming online in 2018.

As mentioned earlier, we have term-leased locomotives to bridge the gap. Overall, we're well-positioned for mode of power and have flexibility to respond to changing demands. We've been very busy hiring, and are starting to see the qualified new employees put into service. In Q1 we'll have about 400 new conductors qualify.

Our hiring continues in pace with growth forecasts of this year and in response to attrition. We're stepping up our investment in network capacity with detailed plans in place for network enhancements, mostly double-track and long sidings. These investments will realize benefits in later quarters as we continue to leverage this franchise for growth. Our approach to network investments is building resiliency to support continued growth at low incremental cost and to increase our network fluidity.

Our trains will continue to get bigger. With more trains on the network, we must reduce the number of times trains have to stop for a meet and the duration of that stop. That is why a number of our investments are targeted for building double-track sections where our big trains can meet without stopping. Imagine driving on a one-lane logging road having to stop and pull over every time there's an approaching truck.

As the number of oncoming trucks increases, you pull over more often, ultimately adding time to your journey. This is why we are creating more opportunities to keep moving even as oncoming traffic approaches. Further, these investments in added resources will help us regain speed and prepare us for continued growth, notably in our high-growth corridor between Edmonton and Chicago, as well as on the British Columbia territories. Our investments in capacity will help enable this, and are positioning us well for 2018 and beyond, as we work closely with JJ and his team to leverage this great franchise for future growth at low incremental cost.

With that, over to you, JJ.

JJ Ruest -- Executive Vice President and Chief Marketing Officer

Why, thank you, Mike. This is JJ speaking. I'm going to do a brief commercial overview of the last quarter, because it was very strong growth in calendar 2017 with over $1 million of top-line growth or approximately $1.15 million on an FX-adjusted basis. Regarding the last quarter, revenue was up $68 million, 2.1% above last year, or 5.1% on the FX-adjusted basis.

CN revenue on the revenue-ton-mile were up 1%. We are currently very tight on network capacity, but as Mike mentioned, we have a very strong CAPEX program to add to our network by late summer. The same-store price on the last quarter was up 2.4%. The core pricing from recent renewal concluded in the last 90 days produced core pricing averaging 3.8%.

Same-store price is a backward-looking measure of price applied on our full book of business of the prior quarter. Core pricing from recent renewal is a forward-looking measure of price trend from the deal that just got renewed in the last 90 days. As a reference point of the rail industry cost inflation, the AAR All-Inclusive Less Fuel index for calendar 2017 came in at 1.9%. Last quarter the strong Canadian currency was $96 million negative headwind on last quarter revenue while the fuel surcharge program was a $50 million positive addition.

I will now -- Let's now turn to some of the details of the last quarter but also, more important, on the outlook forward, starting with frac sand. Frac sand revenue was up about 50%. This segment remains very solid on the CN network, especially for destination service centers that are unit-train capable. International container revenue were up 22% and demand for import stays very strong, so much it has created poor congestions.

We are now in the process to evaluate all of our trade [Inaudible] and to redesign our forward book of business. Regardless of the outcome of some contract negotiations, our 2018 volume outlook is to set new record volume in the West Coast. The North American market demand for imports and for our product is that strong. Last quarter Prince Rupert revenue was up more than 35%.

Vancouver, Halifax, and Montreal were up about 15% each. On export potash we diverted almost 1.5 million ton in calendar 2017 from the West Coast to the East Coast port of St. John, mostly heading to Brazil as a final destination. The CN Canadian grain volume was down from last year's record carload as we experienced a number of disruptions on the network.

However, the current harvest is strong at 71 million metric tons and the export from the CN catchment area should stay solid til the middle of this summer. Coal revenue grew by 7%, mostly from export via both the West Coast and the Gulf Coast. China and India have really driven the world price and demand for seaborne coal. CN coal export prospects for 2018 and 2019 is solid.

Some mine will increase production, and some other mines will be starting up. We de-emphasized crude by rail volume last quarter to save network capacity for regulated Canadian grain, and we brought our crude business down by 30% for the time being. However, since December the crude price spread for western Canada select versus WTI, Brent, and Maya shot up in the $25 to $30 U.S. dollar -- about U.S.-per-barrel range, creating a very favorable forward volume and pricing environment for crude by rail.

As our new CAPEX capacity get deployed by this summer, we will reenter Canadian crude with improved core pricing and with take-or-pay volume contract. Demand held up for lumber volume despite the application of the U.S. import tariff. The higher lumber selling price has basically neutralized the U.S. import duty. In conclusion, to wrap this up, demand for transportation services is strong and broad-based. Demand visibility is good, and it's in line to with the business sectors that we describe in our last June investor meeting. On pricing, as demand is rising for most transportation mode and on most individual carriers, core pricing at de-renewal are generally trending up.

On volume and network capacity, in the case of CN, RTM is the data set to follow. Currently, January to date, CN's volume and RTM are down 3.5% and generally speaking our business will grow in line with our network capacity. Our volume will ramp up as our capacity CAPEX become operational and as our new crews become qualified. At this point I'm going to pass it on to our fearless CFO, Ghislain.

Ghislain Houle -- Executive Vice President and Chief Financial Officer

Thank you, JJ. Starting on Page 13 of the presentation, I will summarize the key financial highlights of our fourth-quarter performance. Then I will comment on our full-year 2017 results. And finally, I will provide our financial outlook for 2018.

As JJ previously pointed out, revenues for the quarter were up 2% versus last year at just under $3.3 billion. Fuel lag on a year-over-year basis represented a revenue headwind of $15 million, or $0.01of EPS, driven by an unfavorable lag in the fourth quarter of $25 million, versus an unfavorable lag of $10 million experienced in the same quarter of last year. Operating income was $1.3 billion, down $94 million, or 7%, versus last year. Our operating ratio came in at 60.4%, or 380 basis points, higher than last year.

Higher fuel prices accounted for 100 basis point of this increase in the quarter. Excluding this impact, the operating ratio would have been 59.4%. Net income stood at slightly over $2.6 billion, or 156 percent higher than last year, with reported diluted earnings per share of $3.48 versus $1.32 in 2016, up by 164%. Excluding the impact on deferred-income tax expense from the U.S. tax reform and the enactment of higher provincial tax rates in Canada, our adjusted diluted EPS for the fourth quarter came in at $1.23, or 2% lower than last year. The impact of foreign exchange was unfavorable by $26 million on net income, or 3% on EPS, in the quarter. Turning to expenses on Page 14, our operating expenses were up 9% versus last year at $1.984 million, impacted by higher fuel prices; a less fluid network, including harsh, early winter weather across our network; and higher volumes. 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 $589 million, 6% higher than last year. This was mostly the result of higher expenses, partly offset by lower incentive compensation. We finished 2017 with the pension tailwind of $30 million versus the prior year.

As the discount rate finished at 3.51% at December 31, pension expense will be a headwind of around $50 million in 2018 versus 2017 on a year-over-year basis. In addition, pursuant to a new accounting GAAP on pensions starting in January, only current service cost will be accounted for in labor and fringe-benefit expenses, and all other components of pension expense will be reclassified in a separate caption called "net periodic benefit income" or cost excluding current service cost below operating income. Purchased services and material expenses were $473 million, 13% higher than last year. This was mostly the result of higher trucking and transload expenses, higher material and repair costs, and lower credits driven by our capital program.

Fuel expense came in at $379 million, or 27% higher than last year. Higher fuel prices accounted for roughly a $60 million increase, while higher volumes was an $8 million unfavorable variance versus 2017. Fuel productivity was unfavorable by 1.7% in the quarter versus last year, driven by commodity mix and lower velocity, but was essentially flat for the year. Depreciation stood at $316 million, 4% higher than last year.

This was mostly a function of net-asset additions. Equipment rents were up 18% versus last year, driven by increased car-hire expenses. Finally, casualty and other costs were $120 million, which was 12% higher than last year, mainly driven by an insurance recovery claim recorded in the fourth quarter of 2017. Let me now turn to our full-year results on Page 15.

We completed 2017 with revenue slightly above $13 billion, over $1 billion, or 8% higher, than 2016. Our operating expenses, at around $7.5 billion, were 11% higher than last year, producing a 5% increase in operating income versus 2016. The operating ratio stood at 57.4%, 150 basis points higher than last year. Higher fuel prices accounted for 90 basis points of this increase.

Net income was up 51%, just shy of $5.5 billion. Excluding the impact of the one-time line sale in 2016 and income tax adjustments in both years, including the U.S. tax reform in 2017, adjusted diluted EPS for 2017 came in at $4.99, up 9% versus 2016. This is quite a performance in a strong volume growth environment.

Now moving to free cash flow on Page 16, for the full year 2017 we generated $2.778 million of free cash flow, which is $258 million, or 10% higher, than in the prior year. This was mostly driven by improvements in net income and favorable working capital, partly offset by higher cash taxes. Our capital expenditures finished roughly at our increased budget of $2.7 billion, and our balance sheet remains strong, with debt and leverage ratios well within our guideline. Finally, let me turn to our 2018 financial outlook on Page 17.

As the demand environment remains solid, we continue to be optimistic with regards to CN's prospects for the year. While we expect volume growth in 2018, we are continuing to experience some volatility in a number of commodity sectors. North American economic conditions should remain supportive, with continued favorable consumer confidence supporting growth in many sectors. While energy markets -- mainly frac sand, crude, and steel -- have demonstrated strong growth in 2017, we would expect more moderate growth this year.

In addition, we are assuming the Canadian-to-U.S. dollar exchange rate to be approximately $0.80 and fuel prices to be in the range of 60 to 70 U.S. dollar per barrel WTI. Finally, our effective tax rate should be around 25% for the year, versus 26% in 2017.

This environment should translate into volume growth in the range of 3% to 5% in terms of RTMs for the full year versus 2017, with overall pricing above inflation. Therefore, we expect to deliver EPS in the range of $5.25 to $5.40, versus 2017 adjusted diluted EPS of $4.99. On the capital front, we remain committed to reinvesting in our business to support safety, service, and growth. Given the strong volume environment we have experienced in 2017 and to continue to support future growth opportunities with superior service, we are increasing our capital envelope for 2018 by a full $0.5 billion, to approximately $3.2 billion.

A good portion of the increase relates to step-up and capacity investments to accommodate strong volumes. Investments in PTC and other mandated regulatory initiatives should be roughly flat on a year-over-year basis. Furthermore, we continue to pursue our shareholder-return agenda. In 2017 we returned to shareholders roughly 85% of our adjusted net income through dividends and share repurchases, and our current share-buyback program is approximately $2 billion for 2018.

Finally, we are pleased to announce, as Luc mentioned, that our board of directors has approved a 10% dividend increase for 2018, reflecting our solid performance in 2017 and our confidence in the future as we progress toward a 35% dividend payout ratio. In closing, we remain committed to our agenda of operational and service excellence with our supply chain focus, and we continue to manage the business to deliver sustainable value for customers and shareholders today and for the long term. On this note, back to you, Luc.

Luc Jobin -- President and Chief Executive Officer

All right. Thank you, Ghislain, and thanks, guys, for giving a little bit more color and detail around the quarter, the year, and more importantly, I think, the bright prospects ahead. Our outlook for 2018, to sum it all up, is actually quite constructive. The economic backdrop remains favorable in the North American economy, and we expect continued volume growth.

Although this will be muted for CN in the first quarter, it will increase through the balance of the year. Mike is ensuring that our resource investments get fully deployed, and this will support gains in service, efficiency, and volume starting sometime in the second quarter but much more robust in the second half of the year. JJ highlighted future opportunities for CN, and in the context of tighter capacity and generally strong demand for transportation services, however judiciously, managing our demand portfolio, and pricing accordingly. [Inaudible] our EPS guidance and key underpinning assumptions.

Keep in mind here that in 2017 in the first half, our RTMs were actually up on average about 17% and our EPS was up about 18%, so clearly, we're going against some very, very strong comps at looking back to last year, and so you know you've got to keep those numbers in mind as you're modeling, trying to model all of this. Our decision to step up our capital investments to $3.2 billion in support of both our short-term business requirements and long-term opportunities will allow CN to grow profitably while delivering superior shareholder value. We have a solid plan, a very strong team, and the determination to see it through, so we remain confident in our ability to deliver for our valued customers while positioning CN for long-term success. This has been a strategy at CN since 2010 and we remain on track.

So on that note, I will turn it over back to you, Patrick, for questions.

Questions and Answers:

Operator

Thank you. Please press *1 at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for patience.

The first question is from Brandon Oglenski from Barclays. Please go ahead.

Van Kegel -- Barclays -- Analyst

Hi, this is Van Kegel on for Brandon. Thanks for taking my question. CAPEX uptick is pretty significant at close to 23% of revenue. Is that kind of within your range of the expectations you set out for the 20%-plus level through 2021?

Ghislain Houle -- Executive Vice President and Chief Financial Officer

Yeah, absolutely. As you remember, during the -- this is Ghislain -- during the Investor Day, we guided our CAPEX to be on average for the next five years around 20% of revenues. I would tell you, in the next few years, I would tell you that we're looking more in the low 20s. So, again, if you look after this year it'll be around 23%, so the low 20s is probably a good number.

Luc Jobin -- President and Chief Executive Officer

Yeah, I think, again, as we look at 2018 and with the book of business that we brought on in '17, it was clear that, you know, we wanted to very quickly get back to the spot that we have been holding for quite some time in terms of superior service and superior efficiency. So we actually looked to '18 and said, "You know what? We're not going to mince our words, we have the opportunity," and we felt good. And this is, if you to go back to 2013-'14, we also faced similar conditions, and, again, so we took the same approach. It is an opportunity, so we're quite confident that the capital we're going to be deploying is going to bear fruit.

Where we go from there and looking beyond '18 will remain a factor of what it is that the business looks like and the growth. JJ did outline some pretty significant opportunities, and we did that both back in June at our investor day as well as in his update, so we feel the opportunity is there, and the smart capital, which for us revolves mostly around our main line and key equipment, such as locomotives, is clearly a good place to be deploying the capital. So we feel good, and it will be somewhere in the 20 to 25% range is really, you know, what we think is not an unreasonable range, and we'll go from there. Thank you for your question.

Van Kegel -- Barclays -- Analyst

Appreciate it.

Operator

Thank you. The next question is from Fadi Chamoun from BMO Capital Markets. Please go ahead.

Fadi Chamoun -- BMO Capital Markets -- Analyst

Thank you. Good evening. I just want to kind of drill a little bit on the operating side. I mean, it sounds like you've kind of brought on board some capacity in terms of crews and in terms of locomotive.

If you can talk us through, like, what are the critical project on the network that you need up and running to kind of restore fluidity to normal level, an incremental margin to normal level, and the timing of that. Is this an early spring turn or is it a little bit more delayed than that?

Mike Cory -- Executive Vice President and Chief Operating Officer

It's Mike here, Fadi. Let me put a little color around this first. We did some work at the tail end of 2017 because we had the ability in Wisconsin to help a little bit with our frac sand franchise and, at the same time, provide a little bit of relief around a couple of the operating yards that up to that point our main lines ran right through. This work we're talking about now is definitely located in western Canada, where we've seen -- I wouldn't say normal disruptions, but in my experience this can happen -- we've had a series of disruptions since the middle of October.

It really shows us that our resiliency in Winnipeg and Edmonton is not there. Those disruptions -- this is already on a piece of track that is handling probably 15% more volume, and it's our highway essentially between western Canada and eastern and the U.S., but that 15% with these disruptions, exponentially, the volume started to grow 20 and 25% that have to move, because every time we stopped we had no way around. That area specifically will see about four to five pieces of double track put in -- that's between Winnipeg and Edmonton -- and then to JJ's point, we see tremendous growth in the BC north corridor with both coal and intermodal to Rupert, that success story, we're going to spend quite a bit of time up there this spring and start to put about six sidings up there that will help us create that fluidity we need. As well, a little bit of work on the corridor to Vancouver, same thing.

So as soon as the winter is over and as soon as we can start -- and this will not be one crew, obviously, this will be numerous work crews that are out there -- but as soon as we can start laying the foundation to build the track and the double and the sidings, we'll be out there, so that's, you know, some point in late Q2, but we see this starting to come to fruition in Q3 and Q4, where you'll start to see us perform and not just on the main line but that will also allow us to relieve the pressure in our yards. We have four major yards in western Canada that have really had a hard time pushing traffic out on to this really heavy highway, so to speak. So I'd say, Fadi, just in closing, western Canada is really primarily the location we're going to be focusing our capital spend investment this year and that will take place as soon as winter allows us to get in onto the track, and that we'll see the results of that in the second half of the year, as Luc said.

Luc Jobin -- President and Chief Executive Officer

Fadi, it's Luc. We're certainly looking for an early spring [Laughter], so we'll be out there with a sense of urgency, and of course it takes a little bit of time for that infrastructure, but we've actually done, where we could, we've prepared the groundwork, so again, we should be off to the races as soon as the weather conditions permit. Thanks very much, Fadi.

Operator

Thank you. The next question is from Chris Wetherbee from Citi. Please go ahead.

Chris Wetherbee -- Citi -- Analyst

Hey, thanks. Good afternoon, guys. Want to ask a question on sort of the cadence of the year, maybe keeping guidance in perspective. So, Luc, you mentioned that obviously there's going to be some headwinds in the first quarter in particular but maybe the first half in general, you know, how should we think about earnings growth? Could it be down in the first half before sort of comping in your numbers in the second half and growing? And then maybe just a little bit of a question about that network recovery.

It sounds like we're hearing maybe second quarter could be when we get the work going, but maybe second quarter could be when we start to see results. I just want to make sure I'm kind of clear on some of the puts and takes about timing of how things play out in 2018.

Luc Jobin -- President and Chief Executive Officer

Yeah, thanks for your question, Chris. Listen, I think you got it pretty good. You know, obviously, we do not guide on a quarterly basis but I think it is helpful to give you folks a little bit more of that sense of timing. And, yes, I mean, the first half, strong comps, a little bit of flex because we've got more crews and we've got more motive power, so as we're dealing with winter, of course, weather-permitting, any time we have a little bit of a reprieve, you can see, we can move the volume, and it's encouraging, but we can never really expect a mild winter to finish up the first quarter.

So first quarter, it will be difficult, and, again, we're going against some very, very strong comps last year. Second half, we're flexing and some of the infrastructure is starting to happen, and, again, I mean, it'll be a positive momentum, but it really bills and delivers really in the second half, so it's going to be a tale of two halves in 2018, and if you look at the first half, again, it'll be at a tale of a very tough first quarter followed by clearly some momentum in the second. Thank you, Chris.

Chris Wetherbee -- Citi -- Analyst

Thank you.

Operator

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

Benoit Poirier -- Desjardins Securities -- Analyst

Yes, thank you very much and good afternoon. Could you maybe provide more color about the pricing? You were quite detailed about the core pricing for renewal, which seems a positive. I was just wondering what type of expectation should we be looking for in 2018, and also if you could talk about the mix, also, if it will offset, kind of, the pricing strength you see. Thank you.

JJ Ruest -- Executive Vice President and Chief Marketing Officer

Thanks, Benoit. It's JJ. So when we look at forward pricing, we can maybe break this into two buckets. One bucket is deal that were renewed in the last 90 days, so they're new deal -- let's say from October 15 to January 15 -- and on average those deals [Inaudible] the difference was 3.8% core pricing, so that's pricing going forward.

And as you will know in every quarter we also have a multiyear contract -- two, three, five years contract -- when we apply the GRI, the general rate of increase, and those applications of GRI, are based on whatever the market was when those contracts were signed. So forward pricing is a combination of past trend, a multiyear contract, as well as recent trend of the other work that were made the last 90 days. So the trend is right now based on core pricing, as capacity is tight, at least at CN, and I think it is also in some other transportation mode and companies, is for better pricing environment for 2018. I think that's pretty much all I can say about the way forward, and hopefully that helps.

Thank you.

Benoit Poirier -- Desjardins Securities -- Analyst

Thank you.

Operator

Thank you. The next question is from Matt Grosso from Goldman Sachs. Please go ahead.

Matt Grosso -- Goldman Sachs -- Analyst

Yeah, thanks for taking my question. Just wanted to follow up on the crude-by-rail commentary you had on the call. Is this something where you've already discussed with customers, or you are discussing and seeing interest in longer-term contracts, volume commitments on those contracts, and can you provide any additional guidance about how much is baked into your estimates for 2018 and how long we should think about this opportunity lasting?

JJ Ruest -- Executive Vice President and Chief Marketing Officer

It's JJ again. So the first thing we do is, we set down a very specific workout detail with Mike's team as to what kind of capacity we have month by month for 2019, and looking at 2018 and looking at 2019 as well. You know that the history of crude by rail is a bit of a yo-yo, it's kind of a more, a spot business than an ongoing long-term business like [Inaudible] regulated grain is, so therefore as we now deploy very fresh capital, and Luc and Ghislain and our shareholders expect return on that fresh capital, we've offered some of that future capacity to a crude company are willing to commit with us. We commit capacity, we apply fresh capital, we expect they will be there when the capacity comes in enough to jump ship, so on those basis we've offered capacity for the second half of this year and some of 2019.

We have made agreements where the capacity is now locked in a better price than what crude by rail was in the last 12 months. When the two parties commit with one another they will move they will move product no matter what, and we still have some capacity we can offer on that basis.

Luc Jobin -- President and Chief Executive Officer

Thank you for your question, Matt.

Operator

Thank you. The next question is from Turan Quettawala from Scotiabank. Please go ahead.

Turan Quettawala -- Scotiabank -- Analyst

Yes, good evening and thank you for taking my question. I guess you sound pretty bullish on volumes overall despite all the capacity issues, and I do understand that there's going to be some capacity issues that'll maybe hurt you in the first half. I guess my question is maybe for JJ. When you think about your 2 to 5% RTM growth estimate for the year, is there room for potential upside in the second half, and I guess also, where would it come from? And maybe you can talk a little bit about some of the areas that you think there might be some risk.

Ghislain Houle -- Executive Vice President and Chief Financial Officer

I think this is maybe a question I can answer jointly with Mike. Three to five is where we're comfortable. You know, we don't know yet what kind of a winter we'll have the next two months. So far it hasn't been that great, so that's not giving us a lot of confidence, but you never know.

Then after that it's a question of how the work block will work out during the summer and whether or not we'll have access to the network that Mike talked about in July and August and September, so capacity is a question of whether a construction site -- and Mike's even running a big construction company this year.

Mike Cory -- Executive Vice President and Chief Operating Officer

Yeah. Turan, we're sitting down literally as we speak going through the best possible opportunities to continue to upgrade not just our service but the volumes JJ's bringing, and find a way to do this tremendous amount of work in that already heavy corridor that goes from the West Coast to the East Coast. So, look, we're going to get this work done, we're going to get the volumes that JJ's predicting, or not predicting but saying we're gonna have, and this isn't the first time we've had to do this, and we'll make it happen.

Luc Jobin -- President and Chief Executive Officer

Yeah, I think it's fair to say, Mike, that, you know, when we look at the detailed plans we've laid out for all of this infrastructure work, it's probably down to a level of precision that we haven't seen, you know, we haven't really done in this company before, so we're kind of doubling down. Listen, I mean, we are, we tend to be a cautious bunch. Some have called us conservative before, and we're not insulted. You know, we want to deliver and we want to regain the momentum.

So it's with that that we've approached the guidance. As JJ said, 3 to 5, you know, there's always potential but we're being thoughtful about when and how to on-board more volume growth, but clearly, if you look at us historically, we've been opportunistic where it makes sense. And you know last year we got a lot more than we expected, and again, it's a nice problem to have, so we're just in the process of making sure that we digest that as much as we can in the first and second quarter, and, you know, but you should expect, as I said, a strong second half and we'll be there, if there's any upside we'll be there for it.

Mike Cory -- Executive Vice President and Chief Operating Officer

Any carload available, we'll grab.

Luc Jobin -- President and Chief Executive Officer

Thank you for your question, Turan.

Turan Quettawala -- Scotiabank -- Analyst

Thank you.

Operator

Thank you. The next question is from Tom Hoexter from Merrill Lynch. Please go ahead.

Ken Hoexter -- Merrill Lynch -- Analyst

Hey, good afternoon, it's Ken Hoexter. So Luc, maybe just a little bit on your thoughts. Is this the end of precision rail, and is it becoming now a cyclical business purely dependent on volumes and adding capacity along with those volumes? Or, in hindsight, I don't know, Mike, maybe it's for you. Is it something that how you catch the regional growth, how it grows so rapidly, or is it just really a surprising ramp-up in volumes?

Luc Jobin -- President and Chief Executive Officer

Well, you know, to be honest, Ken, we have been on the same strategy since 2010, all right, which is to balance operational excellence, service and operational excellence. So we have looked to continue to grow a little bit faster than what the markets with would normally have. You know, it's not a straight line and sometimes it happens a little more quickly than you hope. If it's over a period of time, then you have the opportunity to layer in your capital and your investments in a more thoughtful and longer-term time frame.

So you know what, the strategy hasn't changed. I think as I mentioned earlier, you know, we are still very much focused on delivering on both fronts. The operating ratio, as I did mention, actually when you look at, you know, comparable volume is actually lower than the last record and you know, I mean, we all knew that 2016 was not a year of comparison for '17. So all that to say, strategy's the same, we are continuing on a bias toward growing a little bit faster and doing that in a way that balances these two things, so it's not all about growth and it's not all about cost.

It's just, you know, the reality lies somewhere in between and given the cards that you're dealt as the business comes on, you do the best job possible in the short term to accommodate it, but you know, with the $3.2 billion, you can clearly see that our commitment is strong and our confidence in the future is as well. So, Mike, I don't know if you want to add a couple of comments?

Mike Cory -- Executive Vice President and Chief Operating Officer

I just, you made the reference of precision railroad -- look, this has been an extremely tough quarter just from the, again, from the lack of resiliency we've had in our major corridors, the concentrated growth, and then, you know, you throw in some pretty tough winter conditions. But when it comes to sweating assets, controlling costs, managing the process tightly, we're all disciples. That never leaves our operating team. It's about delivering just those three things like I said, Ken, so that doesn't change.

Ken Hoexter -- Merrill Lynch -- Analyst

Appreciate it. Thanks.

Luc Jobin -- President and Chief Executive Officer

Thanks, Ken.

Operator

Thank you. The next question is from Walter Spracklin from RBC. Please go ahead.

Walter Spracklin -- RBC -- Analyst

Thanks for taking my question here. I'd like to -- I guess this one's for both Ghislain and Luc. Looking at your, going back to your longer-term 10% EPS growth guidance that you provided back in kind of May, at that time you were benefiting from some significant growth in the first half of the year, and obviously the pipeline looked attractive and that was the lay-up to the guidance that you gave. That growth came on a little bit more, in a more challenged fashion that you had envisioned and now we're looking at about a 9% earnings growth in 2017 and a 5 to 8% that you're providing in guidance for 2018.

Does that mean that with the volume coming in a little differently than you expected, your five-year target now is, you're not as comfortable with any longer, and should we have a reexamination of the 10% EPS growth rate over that period? Or is this something that you believe in the later years you can get up to the low teens that you would require to get that 10% CAGR?

Luc Jobin -- President and Chief Executive Officer

Thanks for your question, Walter. OK, so listen. If you look at the numbers, first of all, for 2017, and if you remove a little bit of the FX noise, we're actually up 10% EPS growth. And, you know, when you look at the guidance we provided, you can see as well that there's an FX headwind in there.

Now, we can't control LAP and so, you know, we'll take it as it comes. But our overall, the overall longer-term guidance we provided back in June remains the same. It's unchanged. As we mentioned back then, I mean, the way in which this comes about is not linear, it's not steady, but the prospects are good, and frankly, you know, we're very much on track.

I think a little bit more growth than we expected in '17, a little bit more digestion in early '18, but JJ reaffirmed his sense that a lot of these opportunities continue to be out there for the taking and we're very well-positioned for that. And so, you know, we feel very good about the longer term and the 10% on average over the time frame, that five-year time frame, is absolutely still within our scope.

Walter Spracklin -- RBC -- Analyst

Thank you very much.

Luc Jobin -- President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from Cherylin Radbourne from TD Securities. Please go ahead.

Cherylin Radbourne -- TD Securities -- Analyst

Thanks very much. Good afternoon. I wanted to ask a question on the intermodal outlook because the slides mentioned that you expect to test the expanded capacity limit at Prince Rupert this year, which is pretty extraordinary. I'm just curious, what do you think that with your partners you'll be able to exceed the nameplate capacity as you did in the last phase, or whether in fact this is a suggestion that the next phase might be needed sooner than expected?

JJ Ruest -- Executive Vice President and Chief Marketing Officer

Thank you, Cherilyn. It's JJ. So this year what we would like to test is the nameplate capacity, which is 1.35 million TU per year. We don't really want to go, we don't have ambition at this time to go beyond that.

That's something we probably would like to test in 2019 if successful the first phase, and I know DP World intend to proceed -- my understanding, the intent is to proceed to the next phase of construction -- which means eventually there'll be some more capacity in the future. So to test the capacity of Rupert this year, it could be one of two things or it could be two things. One is existing customers of Rupert today may come in with bigger vessel, with bigger discharge, and we've had discussion with the boat alliance using Rupert, and they're off actually voting plan right now to look at that very seriously. Or it could also be a new service from a new alliance, the one which is a combination of Japanese and German and the Taiwanese, that's also a serious possibility.

And they could possibly do with both these things happening at the same time. So that's why I really, when I was saying we have these two opportunity, bigger vessel and/or new alliance, plus the Korean shipping line who wants to enter the Vancouver market, plus we have a major contract renew with the Japanese in Vancouver. Look at it as a baseball team where you have more players coming from the farm team coming up to the majors, and we can't accommodate all four. So we will make the choice in the weeks to come.

We intend to set record in the West Coast this year. Rupert is one of the place where we think there's biggest potential in term of the assets and the capacity to move there. Mike is deploying some extra siding and double-track in that direction, and right now we haven't said how we're gonna play these four cards, but we think we have enough cards to be successful about creating some new record this year.

Cherylin Radbourne -- TD Securities -- Analyst

Thank you. That's what I wanted.

Operator

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

Ravi Shanker -- Morgan Stanley -- Analyst

Thanks, good evening, everyone. Just to follow up on the earlier CAPEX commentary, can you just help us understand all the $3.2 billion CAPEX? What's the timing on the ROI of those investments? I mean, is that pretty quick, and you know, what percent is that when you see returns starting in the second half of '18 versus what percent of that is longer-term contracts that take a few years to deliver returns?

Ghislain Houle -- Executive Vice President and Chief Financial Officer

Yeah, let me—Ravi, it's Ghislain—let me give you a little bit more color on the CAPEX. So, again, as you mentioned and I mentioned in my remarks, the total investment that we're looking at is $3.2 billion. We're looking at, again, very consistent and basic investments, and we've done that year-in, year-out of about 1.6, and this is maintenance investments on our track infrastructure; we're looking at PTC to remain basically flat at about $400 million year over year; equipment -- and Mike referred to it on locomotives and cars -- is $400 million; and then when you look at the other, they're for growth and efficiency in capacity is about $800 million. So now, if you strip out the new look at capacity per se, and capacity meaning investments that Mike has referred to in terms of siding, and also the capacity in our intermodal terminals and also capacity in terms of our rolling stock and locomotives, then you're looking at $700 million of capacity investments.

So it's significant, and as Luc mentioned, I think we, on the infrastructure side, we have a very robust plan that we will monitor very closely to make sure that we deliver on that plan. Now, all of the projects that we have at CN, the CAPEX go through a very rigorous process, and, again, we've provided some visibility at our Investor Day in June that really, again, there's some maintenance CAPEX on the track but all of the projects were looking for a rate of return of 12% and that's our threshold, so again, we're looking at, we're getting all these projects in the ringer. Obviously these capacity, and what Mike is referring to, we've got all this profitable business coming at us, so I think -- and Mike has gone through some very detailed work as to where these capacity are required, and we're very confident that this will provide very good value for the company, and we're looking forward to monetize on those as they come online in the second half of the year.

Luc Jobin -- President and Chief Executive Officer

Yeah, and Ravi, it's Luc, I'll just add a little bit of color on this. You know, frankly, Mike is chomping at the bits. I mean, when he looks at the opportunity for getting our operating numbers to where, you know, he's used to, you know, this is going to pay off very, very quickly. I mean, both in terms of service and in terms of efficiency.

So, you know, we're not really worried about the return on this and, as I said, it's all on the main line. I mean, this is capital that serves the entire book of business because it does extend, you know, between the West Coast all the way down to probably halfway through our southern region, and that's where we've seen the growth being concentrated, and as we look forward, that's where we continue to see good growth prospects. So expect, you know, in our view it's almost a no-brainer investment and one that will bring returns in the very short term. So I hope this helps you get a bit more comfort around that.

Ravi Shanker -- Morgan Stanley -- Analyst

Yup. Very helpful. Thank you.

Operator

Thank you. Your next question is from Sheldon Clark from Deutsche Bank. Please go ahead.

Sheldon Clark -- Deutsche Bank -- Analyst

Hey, thanks for the question. In terms of your 2018 capital plan, what type of excess capacity does this give you above your current revenue run rate, and if you could just help me understand how current capacity constraints and sort of the timing the way of these investments might impact some of the more near-term contract negotiations.

Mike Cory -- Executive Vice President and Chief Operating Officer

I'll start with the capacity. Capacity is relative. And for us and for what our customers demand, whether it be speed or reliability, we obviously need more capacity or resiliency than we have today. So these investments, I think, as you said earlier, start to provide us with the ability not only to bring on more traffic but, the traffic we have moving today, do it faster, do it cheaper.

So sweat the assets harder, control those costs, and that's what allows us, actually then to now, go back with JJ and provide that level of service that he needs to get that good volume growth that we've been, you know, working through.

Luc Jobin -- President and Chief Executive Officer

Yeah and then just before JJ jumps in -- you know it's Luc -- listen, Sheldon, the reality is historically we've always erred on the side of being there at five to midnight as opposed to five after midnight. It turns out this year or '17 that, you know, the onslaught of business was amazing and, you know, so here we are. We clearly need more resiliency as Mike indicated. You know, when we as a team look to the prospects for the next three, four years, they are very good, and so you know, what you should expect is that we will continue to invest in a pretty robust fashion.

Again, we think that the prospects longer term are good and we do want to be a little bit more ahead of the curve than we were in '17. It's always a very difficult measure in terms of exactly how much capacity -- I mean, it's more of an art than a science -- but we feel good that the investments we have on the books for '18 are actually going to give us very, very good momentum, not just for '18 and catching up but momentum, which will be there to carry through '19 and beyond. And as we continue to look at the opportunities, if we continue to see them as we've indicated, we'll be back looking at, you know, again, continuing to build a network in '19 and beyond. So that's kind of how we're looking at.

Mike Cory -- Executive Vice President and Chief Operating Officer

Again, you said it's a network and these investments are not singularly done in locations. These are not to just broaden this whole entire network but they're very valuable pieces for us to be able to deliver this growth, this volume, at the service level and the price -- at the service level and the efficiency and cost that we feel that we're accustomed to.

Luc Jobin -- President and Chief Executive Officer

As you relieve pinch points, you know, there's always, in the business world there's always the next pinch point, there's the next opportunity for, you know, again, either efficiency gains or service enhancements. Thank you for your question, Sheldon.

Sheldon Clark -- Deutsche Bank -- Analyst

Thank you very much.

Operator

Thank you. The next question is from Steve Hansen from Raymond James. Please go ahead.

Steve Hansen -- Raymond James -- Analyst

Yeah, good evening, guys. Just a quick one for me. JJ, I think if I caught it in your prepared remarks, you said you were in the process of redesigning or reevaluating your current book of business given that you've got tight capacity right now. Outside of the crude opportunity that I think we've discussed here already, are there other parts of your book that you're looking at shaking up to make way for better pricing or for better opportunities in the book?

JJ Ruest -- Executive Vice President and Chief Marketing Officer

So, yes, Steve, so one of them was regarding the international container business on the Canadian West Coast and I did describe in my answer to Cherilyn the three, the four things that we're looking to select from to promote on the West Coast book of business. Another example, you could argue, the work we did between Christmas and New Year on our very detailed month-to-month capacity program for 2018 and how we after that went to market with some of that on the take-or-pay contracts and these contracts are very month-specific, and so these would be two example of how we are doing. We're going to be doing crude in 2018 much different than last year, and we're going to be doing the West Coast international business somewhat different this year than we did last year as an example. But broadly speaking, when you talk about price you're talking capacity is tight and the network is a highway used by all, and therefore the capacity is tight by all, therefore the pricing environment is good, more favorable for all market regardless of color, size, or, you know, where they come from, east or west.

Steve Hansen -- Raymond James -- Analyst

Understood. Helpful. Thanks.

Operator

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

Justin Long -- Stephens -- Analyst

Thank you and good afternoon. So I was wondering if you could provide an update on where you stand as it relates to PTC implementation. I know you mentioned that CAPEX should be relatively flat this year, but how should we be thinking about the potential ramp in operating costs related to that technology both in this year and beyond?

Ghislain Houle -- Executive Vice President and Chief Financial Officer

Yeah, Justin this Ghislain. Let me give you a bit of color. As you know from an operating standpoint, PTC, OPEX standpoint, PTC in '17 was about $120 million, a third of which was depreciation. I think as we look at '18, it looks like PTC operating expenses will be more around $160 million, about 40% of which is depreciation.

Again, I'm not going to go into the future years, I mean, I think this year is going to be a big year for PTC. As you know, we have to deliver half of our PTC subdivision that we committed to do these FRA by the end of the year. I think we've got good momentum and we've got a very good team, and we're very confident that will deliver on our commitment by the end of the year.

Justin Long -- Stephens -- Analyst

OK, great. Thank you.

Operator

Thank you. The next question is from Brian Ossenbeck from JP Morgan. Please go ahead.

Brian Ossenbeck -- JP Morgan -- Analyst

Hi. Good evening. Thanks for taking my question. So just, if you can give us an update on the labor side -- I know you're trying to hire, I think, around 250 conductors in the fourth quarter, looking at 400 or so in the first quarter -- how many more from there do you think you need for the second quarter and for the full year? And what's the hit rate on being able to get people back into the training system and back on the network and especially in some of these pinch points where you really need them the most?

Mike Cory -- Executive Vice President and Chief Operating Officer

It's Mike, here, Brian. First of all, training is at full bore in both our training centers right in Chicago and Winnipeg. You know, we're looking at qualifying, I think I said 400 conductors for the quarter and we'll continue to replace people one-for-one in the transportation ranks. We will follow growth closely with JJ, we'll match that up with what our productivity levels will be and how they'll improve as we invest in capital, and we'll hire accordingly.

I don't want to get into too many specific numbers at this moment, but we're fully ramped up to do it. We're doing it as we speak and as the need comes through attrition and/or growth, we'll hire accordingly.

Luc Jobin -- President and Chief Executive Officer

And Brian, it's Luc, just to add a little bit to what Mike said. You know, so about 400 or so conductors in the first quarter, I would, you know, again, our best estimate is about the same in the second quarter, so you know a little bit more front-ended. On the year all in all, but this is total labor, we're probably looking at somewhere in the neighborhood of 2,000 or thereabouts. So but be careful because here, they're not all conductors.

And so you know, as I said, we'll be erring on the side of being a little bit long, and for the rest of labor, we're not replacing one for one. So we continue to have some gains on the non-T&E, we continue to invest on the mechanical side, that's very important for us —

Mike Cory -- Executive Vice President and Chief Operating Officer

To be ramping up for engineering programs.

Luc Jobin -- President and Chief Executive Officer

Yup, and so that gives you a little bit more specifics around that hopefully. Thank you for your question.

Brian Ossenbeck -- JP Morgan -- Analyst

Yeah, it does. Thank you.

Luc Jobin -- President and Chief Executive Officer

All right, Patrick, I think we'll bring the session to a close. I want to thank everybody for joining us on this call for the fourth-quarter results, as well as the full year 2017. We look to 2018 with a great deal of anticipation, you know, and frankly, as I mentioned earlier, we can't wait for winter to subside and really get out there and railroad the way CN has done over the years. The prospects remain bright, and so we're pretty excited about the way forward.

We're deploying capital, we're mobilizing resources, we've got great plan and, as I said, the team is really pumped, so I hope you all will join us for the first-quarter results and in the meantime, I hope everybody will be safe. So thank you very much. Patrick will now bring the call to a close.

Duration: 67 minutes

Call Participants:

Paul Butcher -- Vice President, Investor Relations

Luc Jobin -- President and Chief Executive Officer

Mike Cory -- Executive Vice President and Chief Operating Officer

JJ Ruest -- Executive Vice President and Chief Marketing Officer

Ghislain Houle -- Executive Vice President and Chief Financial Officer

Van Kegel -- Barclays -- Analyst

Fadi Chamoun -- BMO Capital Markets -- Analyst

Chris Wetherbee -- Citi -- Analyst

Benoit Poirier -- Desjardins Securities -- Analyst

Matt Grosso -- Goldman Sachs -- Analyst

Turan Quettawala -- Scotiabank -- Analyst

Ken Hoexter -- Merrill Lynch -- Analyst

Walter Spracklin -- RBC -- Analyst

Cherylin Radbourne -- TD Securities -- Analyst

Ravi Shanker -- Morgan Stanley -- Analyst

Sheldon Clark -- Deutsche Bank -- Analyst

Steve Hansen -- Raymond James -- Analyst

Justin Long -- Stephens -- Analyst

Brian Ossenbeck -- JP Morgan -- Analyst

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