Canadian Pacific Kansas City Ltd (CP) 2012 Q4 法說會逐字稿

Good morning, my name is Simon and I will be your conference operator today. At this time I would like to welcome everyone to Canadian Pacific's fourth-quarter 2012 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you. Miss Weiss, you may begin your conference.

Thank you, Simon, and good morning. Thanks for joining us. Today's presenters will be Hunter Harrison, our President and CEO; Jane O'Hagan, EVP and Chief Marketing Officer; and Brian Grassby, our Senior Vice President and Chief Financial Officer. The slides accompanying today's call are available on our website.

As always, let me remind you that this presentation contains forward-looking information; actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described on slide 2 and 3 in the press release and in the MD&A filed with Canadian and US securities regulators. Please read carefully as these assumptions could change throughout the year.

All dollars quoted in the presentation are Canadian unless otherwise stated. This presentation also contains non-GAAP measures outlined on slide 4. When we do go to Q&A in the interest of time and in fairness to your peers I'd ask you to limit your questions to one primary question. You can press star 1 to re-queue up if you do have additional questions. And finally, if we do not get to everyone in the queue, certainly investor relations would be happy to follow up with you and answer any outstanding questions. So here then is our President and CEO, Mr. Hunter Harrison.

Thanks, Janet, and good morning to everyone. I trust you have seen our press release; we've got a busy agenda this morning, Brien has got a lot of numbers to talk to you about. So I'm going to make some kind of abbreviated remarks to kind of fill you in on my observations of the quarter, which I think goes without saying that I was extremely pleased with.

The plan is working; it's clearly ahead of schedule. Let me fill you in on where we stand in a couple of areas. One, we will be moving into our new headquarters I think at the end of fourth quarter which is in little bit ahead of time. Our labor issues are generally behind us, we have signed recently four new collective bargaining agreements, so those issues are out of the way.

From a headcount standpoint, I think we had guided you toward a number of at the end of first quarter about 2,300; we will be there or maybe fractionally ahead of there. Our operating metrics, without going through them -- you've got the deck -- were pretty record-setting. We continue to fine-tune the reorganization, I think Jane is finishing up some issues in marketing and Scott is working on some issues with the engineering group.

We are adjusting to the rationalization of the terminal network and that is fitting well with the plan. We are seeing improved service across the board and I couldn't be more pleased. So without further ado, I will have some remarks at the end, let me turn it over to Jane to talk about the revenue picture.

Thanks, Hunter. Our market initiatives are delivering growth and value and we delivered a strong level of sustainable profitable growth in this quarter. In merchandise we delivered our sixth consecutive quarter of double-digit revenue growth and we are seeing a very positive response from our customers in terms of our service, our consistency and our reliability. So with that I would like to review the results for 2012.

As I summarize the full year results, we reported a solid revenue gain of 10%; we are up 9% on a currency adjusted basis and volume and price accounted for 7% of that gain. The fuel surcharge was 2%. We had RTM growth of 5%, which was higher than carload growth of 3%, which reflected the significant increase in volume of long-haul crude oil traffic. Average revenue per car was up 7% and our team delivered on our price renewal targets in each and every quarter.

So as I turn to Q4, our reported revenue was up 6% and we were up 8% on a currency adjusted basis where volume and price accounted for 6% of the gain and fuel surcharge was 2%. Our RTM growth of 4% was higher than carload growth due to an increase in the volume of long-haul traffic and other mix changes. Our average revenue per car was up 6%. We delivered on our price renewal target of 3% to 4% in the quarter and we expect to deliver inflation plus pricing throughout 2013.

Now I'd like to walk you through our lines of business, and note that as I go through each of the lines I will be speaking to currency adjusted revenues.

So in grain for the quarter revenue was up 12% and we had record revenue for grain in the quarter. Our units were up 1% reflecting a strong demand domestically and globally. Volumes were well above our three- and five-year averages approaching our record Q4 of last year. And our overall grain strength was driven by solid year-over-year recovery in the US production on our territory with strong commercial and regulatory pricing.

Our team did a great job of capturing domestic movements as short-haul DM&E export markets declined. You can see this reflected in our strong average revenue per car in this segment. We've had great feedback from our customers on servicing grain, particularly in the US, and we are moving more grain with fewer assets based on new levels of productivity and velocity.

So in terms of our outlook for Q1, with our strong service and our unique network we are very well positioned to leverage the movement to a North American grain marketplace post the Canada Wheat Board. With demand and production in our territory I expect Q1 if year-over-year increase in the mid-single-digits.

So, let's turn to sulfur and fertilizers. Our Q4 results saw revenue up 2%. The carload decrease of 10% was in line with what I told you last quarter due to lower export potash moving in long-haul shipper supplied hoppers handled in our efficient unit trains. Domestic potash and nitrogen shipments partially offset exports and raised our cents per RTM.

As an outlook for Q1 what I can say it appears that potash is back. The recent Chinese export announcements are encouraging, but the size and timing of the potash turnaround remains somewhat uncertain due to the timing of when India may reenter the market.

On the domestic side strong farmer incomes, relatively higher crop prices mean good fundamentals for farmers to apply fertilizer. I expect continued nutrient replenishment in the US and, while there is a little bit of uncertainty around the drought on the soil nutrient levels, Q1 is expected to be flat with upside potential.

So now let's turn to coal. Our Q4 results showed revenue down 1%, units were up 1%, but I will remind you that CP's coal franchise is very different from that of other railroads. The great majority of our traffic is export met coal destined to seaborne markets. The lower average revenue per car you saw in the quarter was due to mix change. This resulted from long-haul Canadian volume that was reduced to eastern markets and an increase in short-haul PRB traffic.

I will remind you in the quarter that over 80% of our West Coast volume was moved in trains operated at 152 car lengths. But on a go-forward basis essentially we will operate 100% of these trains at that 152 car length.

In terms of the Q1 outlook for coal, we model to Teck's forecast and we will be unaffected by the West Coast incident at Westshore that impacted ship loading capacity. If you are looking at the first several weeks of January, you will see some volatility in car loadings, but this isn't due to some near-term choppiness that we have seen in all West Coast ports.

The low international thermal prices are creating uncertainty, but we expect PRB volumes will continue. And again, this is opportunistic for CP; we offer an efficient route, but it will be dependent on the economics. So overall in Q1 I expect volumes to be flat year over year.

In intermodal 2012 was a year of renewal and rebalancing. We made some very purposeful decisions to exit selected terminals and short-haul lengths. We at CP offer a premium service in intermodal that is second to none. Our service improvements and disciplined pricing for value creates a base for sustainable profitable growth.

So if we step back to 2012, our revenue was up 5% and our units were up 3%. The business profile shift that we saw was due to the changes we made in the second half; this is where we had that discretionary exit of lower profit short-haul markets, we had economic driven strengths at the port of Vancouver and weakness at the Port of Montreal and our domestic intermodal markets were dynamic. This had the effect of increasing average length of haul for the business that moderated our cents per RTM growth.

In terms of Q4, revenues were up 3% and units were up 1%, consistent with the guidance I gave you in Q3. Our strong haul -- long-haul Vancouver traffic offset weakness in select markets. Montreal was decreased due to European weakness and the US uncertainty.

And in domestic Canadian retail store closures dampened our domestic traffic, but we are well-positioned to participate in new retailer growth. What you saw in this quarter was a result as marginal cents per RTM declined versus an increase in average revenue per car.

So for an outlook for Q1 for intermodal, our carloads will be lower, but this reflects changes in our service offering, changes with our select terminals exits, recent impact of international contract renewals, and, as well as I've told you before, the continuous review that we are doing of the book.

So let's turn to merchandise where I'm going to talk about the book from an overall perspective. Overall Q4 double-digit revenue growth, again, as I said in my initial remarks, for the sixth quarter in a row. Revenue was up 14%, RTMs were up 23% versus a carload gain of 2%. We saw strong gains for long-haul crude oil and declines in shorter haul industrial product lines of business.

These mix changes had the effect of increasing average revenue per car and decreasing cents per RTM. And I will tell you we expect this trend to continue as crude oil forms a larger part of my book.

So let's dive into industrial consumer products. Revenue was up 19% producing double-digit growth for the seventh quarter in a row. RTMs were up 29% on gains in long-haul crude oil volumes as a comparatively lower 4% carload gain was due to declines in lines of business that are directly tied to North American industrial demand. The difference in average revenue per car and cents per RTM is due to mix change in the quarter.

So let's talk about crude. We continue to work on a strategy that sees us working with customers, investing in crude by rail and improving and creating diversity in our origin and destinations. We remain on course to achieve our targets.

And I'm really pleased to tell you today that our 70,000 annual carload run rate was reached in January and this includes the recent Phillips 66 and Global contract. We have line of sight to two to three times present volume and this remains our longer-term goal as I outlined to you at Investor Day.

When I turned to frac sand and the pipe outlook, we have strong frac customers on CP who are proceeding with their mine developments. Our frac sand shipments from new mines are expected to commence in Q1 and two of CP's new mines are now in production. The rate of growth in this sector will be dependent on continued growth in shale oil drilling and the turnaround in natural gas drilling. So overall for Q1 industrial products, we expect another quarter of double-digit revenue growth.

I'm going to quickly touch on automotive and forest products. In automotive Q4 revenue was up 8% and carloads were flat. The average revenue per car gain of 5% reflected an increase in long-haul import shipments. Forest products in Q4 saw revenues as flat and carloads were down 6% as pulp declined stronger than lumber and panel gains. Average revenue per car was greater than cents per RTM improvements due to an increase in long-haul lumber and panel.

So when I look at these two lines of business, automotive growth will be in line with car sales, we say mid-single-digit core growth in Q1. And Forest products, again, because it's linked to the housing market improvements, will be likely see forest products flat given the pulp closures that will moderate that line of business.

So as I conclude, one of the messages that I would certainly like to leave with you is that our continued improvement in service is effectively giving my team the foundation and opportunity to convert opportunities into sustainable profitable growth. We have multiple opportunities for growth across our book.

Again, our strongest opportunity remains in crude oil where I will reiterate our strategy and the potential for two to three times our current initiatives based on our 70,000 carload run rate. I've seen a strong start to the year and I'm very optimistic on growth for the year.

When I put all the pieces together for the first quarter, we should see low- to mid-single-digit volume growth and revenue growth coming above that in the mid- to high-single-digit range. And for the 2013 revenue guidance, I expect that CP revenue growth will be expected to be in the high-single-digits for 2013. And with that I'm going to turn it over to Brian to give you a summary of the financials.

Thanks, Jane, and good morning, everyone. The fourth quarter was a strong quarter from an operational point of view. Scott, Guido, Doug and their teams did a great job on driving efficiencies while improving service. We also had to make some tough decisions that had financial impacts on the quarter, but all in we have great momentum going into 2013.

Now let me get to the numbers. As Jane spoke, to revenues were up 8% on an FX adjusted basis. Expenses before significant items were up 3% on increased RTMs of 4%. Significant items we booked in the quarter totaled CAD318 million, I will speak to these shortly. All in we reported an EPS of CAD0.08. However, if you exclude the significant items EPS was CAD1.28 and the operating ratio was 74.8% or an improvement of 370 basis points -- solid evidence that our improvements are being driven to the bottom line.

Now let me give you some color on the significant items. At Investor Day we outlined (technical difficulty) our plans to significantly reduce our costs and improve service. We talked about reducing our work force by 4,500 positions, improving our asset utilization and relooking at all parts of our network.

As a result of decisions made in the quarter we have recorded a charge of CAD318 million. In driving our workforce reduction we expect attrition to play a major role. However, in certain eras we need to go quicker, so we are booking a charge of CAD53 million or CAD0.22 EPS. This charge covers over 600 positions that have been or will be eliminated. These are not easy decisions, but they are the right thing to do.

As a result of our improvements on locomotive utilization we have decided to sell a series of locomotives that are only 14 years old but have been very problematic from both a reliability and maintenance point of view. This has resulted in a charge of CAD80 million or CAD0.34 EPS.

Finally, as announced in December, we are taking a charge on the option to build into the Powder River Basin.

Now let me get into the different expense lines which I will speak to before the impact of a stronger Canadian dollar, let me start with comp and benefits. At the end of Q4 our total headcount, including contractors, was down 1,800 positions from July 1, 2012, in line with what we outlined in December. By the end of Q1 we expect to be down greater than the 2,300 positions we talked to previously and that is over halfway to our 4,500 target.

Comp and benefits were down CAD8 million or 2% driven by efficiency savings of CAD20 million as we had fewer employees and less overtime while handling greater volumes. Training was down CAD8 million as we had a significant new hire training program in Q4 2011.

Stock and incentive costs were up CAD22 million quarter over quarter; the majority of this increase was driven by higher incentive comp as we paid no annual bonus for 2011. While our stock price was up significantly on the quarter, we saw a similar increase last year, so not a large year-over-year variance.

As I look to 2013 I expect wage inflation to be in the 3% range, pension expense will go up, and I will speak to that shortly. And finally, stock comp sensitivity will be roughly CAD700,000 for every dollar change in our share price.

Now let me turn to fuel. Fuel expense was down CAD4 million or 2% on the quarter. We saw an CAD8 million savings due to a 3% improvement in fuel recovery, a fourth-quarter record. Increased workload added CAD3 million and higher fuel price cost us CAD1 million. For 2013 we are targeting a further 1% to 2% improvement in fuel efficiency.

Equipment rents were down CAD2 million or 4%. Q4 saw a 10% improvement in both active cars online and car miles per car day, driving a savings of CAD7 million. These savings were partially offset by higher lease rates and lower car hire receipts.

Let me update you on lease turn backs. Year to date we have provided notification to return 7,000 cars and 5,400 cars have been removed from the property. Looking to 2013 we are anticipating a full-year run rate savings of CAD15 million to CAD20 million. The benefits of improved asset philosophy are now starting to bear fruit and we will continue to look for opportunities to right size the fleet.

Purchased services before land sales were up CAD8 million or 4%. We saw some efficiencies from fewer crew starts with lower dead heading and crew accommodation costs. However, these were offset by higher IT costs. CP is in the process of updating its IT infrastructure; as we move forward we are looking to in source some of this IT work, but this will take some time as we wait for certain contracts to expire.

Land sales were down CAD19 million as we had a large land sale in Q4 2011. And as you model 2013 we are expecting land sales to be in the range of CAD10 million to CAD15 million.

And finally, materials were up slightly and depreciation was up CAD17 million. This increase was driven by capital additions as well as a depreciation study which includes decommissioning certain IT assets as we retire legacy systems and renew our IT infrastructure.

Before I wrap up I would like to update you on pension expense. At Investor Day I provided a 2013 pension expense outlook about CAD140 million to CAD150 million. However, based on strong 2012 returns and the completion of labor negotiations with our major unions in Canada, we are revising our guidance to CAD50 million to CAD60 million for 2013 and 2014 with Q1 2013 being the implementation period.

A large component of this reduction is tied to the introduction of a pension cap. From an accounting point of view the associated reduction in the liability is amortized over the life of the contract. That is why we see the significant drop in 2013 and 2014. In 2015 and 2016 we expect to see pension expense increase, but to a lesser extent than previously anticipated.

I also caution you that when you project pension expense out a number of years there are a lot of assumptions you need to make, so please refer to our MD&A.

So let me wrap up -- Q4 2012 was a strong quarter for operations with CAD37 million in savings and momentum going into 2013. In 2013 we will continue to drive further efficiencies while improving service. Jane took you through the revenues and for 2013 we are modeling high-single-digit revenue growth.

With this growth and focus on controlling costs we are targeting an operating ratio in the low 70s which will be a record for CP. We also expect EPS to grow growth to be in excess of 40% over our normalized 2012. With that I would like to turn it back to Hunter.

Thanks, Brian and Jane. Let me conclude by making a couple of observations. I think what you have seen here is that the results of the third and fourth quarter of 2012 have established a platform or foundation that has positioned us well to be able to have a record setting 2013, I think probably even beyond my expectations.

And I often get this question of why that is happening and why could we even go further than we thought faster? And I would say it's -- I kind of characterize it by one thing and that is the disorganization. The employees and the leadership in this organization have embraced change better than any organization I have been associated with in my close to 50 years now and I think that is extremely important because the change is not over.

This plan is obviously producing significant results and I can -- I think those results will continue. And I want to give you one analogy to show you what -- that there are many other initiatives in the bucket here that we haven't even really scratched the surface on and that's our maintenance policy this year as far as our capital work.

Our engineering group, along with the transportation group, has been working very hard on -- we had typically in the past given five hour work blocks to go out lay rail and ties. And we work very hard and through the leverage of scheduling and put ourselves in a position now where we think that rather than given five hour work blocks to engineering we can give eight hour work blocks without having an adverse impact on service.

The worst case would be the eastbound schedules might get two or three hours, but we think through the other efficiencies that maybe we can pick most of that time up. So that will allow us then to do our capital work with potentially in the neighborhood of 400 people less and with the same dollars outlay put more ties in the ground and build our infrastructure particularly in the places where it needs it.

So this is a continuing process. This is a leg in the journey. I'm very pleased and with that I will be, along with the group, happy to answer questions you might have.

(Operator Instructions). Tom Wadewitz, JPMorgan.

Congratulations on the good results and the really strong outlook. I wanted to ask a little on the revenue side, I mean it seems like you are positioning to really be hitting on all cylinders in 2013.

Jane, your comments on potash seemed a little bit conservative maybe relative to the -- what we've seen the first couple weeks where we have seen potash I think up maybe 35% the first four weeks of the year on the volume side. I guess fertilizer volumes -- to correct that.

Do you -- is that a conservative view you have on potash and maybe there is some upside? And maybe also on the crude by rail, are you running actually at 70,000 carloads or maybe are you even ahead of that target today? Thanks.

Thanks, Tom. Well let me start with your first question. I mean obviously, you know me, I'm optimistic on potash. I believe the fundamentals are strong and that this is a product that certainly from a demand perspective is going to play out for us.

I think there is good potential for growth this year. I think though, as I said, the size and timing -- this is really a Canpotex decision -- is going to relate to the extent to which India and some of the other contracts get ramped up throughout the year. But I will say that I think that the signing of the Sinofert contract should pave the way for some of the others in 2013.

When I get to crude oil, the answer to your question is yes, we are at the 70,000 run rate. I do believe that we are tracking a little bit ahead of that given sort of what the January volumes look like. Tom, this is a highly competitive business, we have a very specific strategy that involves us working with customers that are investing for the long-term of the crude by rail model. So, yes, I do believe, just to reiterate, that our strategy remains intact and that I will see growth throughout 2013 in this sector.

Would you think that then your targets you're talking about maybe do leave some room for upside on those two segments?

I would say that, yes, as I say, that I said it in potash in my remarks that there is upside potential. And clearly when you look at our 70,000 carload run rate that we are ahead of that and that we are looking at the initiatives that would look at two to three times where we have line of sight. The answer to that question is yes as well.

Great, thank you.

Fadi Chamoun, BMO.

On the crude on rail, as you look into this two to three times higher going forward can you give us some idea of where do you see that primarily coming from? Whether it's heavy from Canada or Bakken, a little bit more color on that?

Well, Fadi, what I would say is that as we look at the volume and as we look at our strategy, which is to create origin destination diversity, the volume is going to grow as the market and the refinery demand for different crudes evolves and as spreads move.

The majority of our business right now moves into the Gulf, but these markets are continuing to develop very quickly. And the beauty of this product is that we work with producers, marketers and transloaders to basically make these markets. It is a likely over this period of time that the Eastern and Western markets will attract some of the light sweet crude and that the Gulf will attract the heavy, but it is really hard for me to predict how this market is going to evolve.

But the one thing that I do know is that the model that we have developed creates a consistency, the transit reliabilities, the type of supply chains that our customers are looking for, that they are investing in this model and that as we continue to -- and, as you know, we've made our announcements on the various markets such as Hardisty, Phillips 66, et cetera.

Obviously we are moving crude reliably into the Gulf, the Midwest, the US Northeast and Eastern Canada as well as the West Coast. So I think that that is kind of where the market is going to move for us. And that is how that growth is going to break down.

Okay, and maybe one follow-up on this as well. So as you look into 2013 it sounds like more of this crude is moving east. And I wonder whether the effect of the mix that we saw in 2012 could be even greater in 2013 as you move east?

I think that, as I said, what we try to do at CP is we are trying to create origin and destination diversity. Clearly as we look at the Bakken and as I just discussed about where those markets are likely to go we are seeing that dynamic emerge.

But I can assure you that my team is very focused on taking that diversity, making those markets come to life and to work with those customers who are making those investments. So I don't want to put myself in a place where I'm going to predict one market over another, I am just going to tell you that I am active in all the markets.

Okay, thank you. And maybe Hunter can give us some update on your efforts to get a CO in place -- COO I mean.

They are going well and I would expect hopefully in the next two to three weeks we would have an announcement there.

Okay, thank you.

William Greene, Morgan Stanley.

Hunter, one of the things you've talked about in the past is that as the service levels get better you would ultimately have some conversations with some of the customers on the pricing side. Now I know you are sort of sticking still with this inflation plus, but we did see some change in the intermodal business.

So maybe can you talk about the competitive landscape a little bit? Is everyone kind of playing ball here? If service levels get better for you is that -- obviously it is good, but if you lose business because you are trying to raise price that is not good. So maybe a little bit on puts and takes there.

Well, the service, Bill, does a couple things for you -- number one, it helps you lower your cost for the asset turns. And I think as we are delivering a more consistent product in the market we are seeing a different mix. Are we going to take increases there at the appropriate times where the market will allow? Certainly.

I can tell you this, we are not going to chase volume. I'm not -- I hadn't fallen in that trap in my career and I'm not. We've got a service we are proud of, we are going to put it on the shelf and we hope people buy it, but we are not going to chase business.

All right, fair enough. Just one little point of clarification. Brian, you mentioned land sales CAD10 million. But we are freeing up a lot of assets related to the yards. I would think land sale opportunity would be much bigger than CAD10 million.

Yes, absolutely, when I talked about at Investor Day is some of those larger developments will take a little while longer to develop. So when I sort of said CAD10 million to CAD15 million, those are smaller land sales. But anything that would be large would be over and beyond that. And we will update you as the year goes on on some of those opportunities.

All right, thank you for the time.

Ken Hoexter, Bank of America-Merrill Lynch.

Great. When you think about the yards, Hunter, where you have made changes and maybe even a few months now after Investor Day are there -- as you have shut some down and moved resources, are there still larger steps to be taken or is it now kind of incremental?

And then if I can just a follow-up, I guess a clarification on the pension. Can you split out the difference between the pension caps and the returns, what the difference between your math was there, Brian?

Well, first, Ken, to the terminals. You know, I think the large blocks of cost are mostly taken out. Is there still more to do? Certainly. I think the thing that we are at now is the fine tuning and continuing to lower the dwell time and provide the service and don't let the rationalization of the yards have an impact on the terminals.

And I think to add to that, the biggest block that we have seen right now, which has been resolved with the good terminal's work, is that we are significantly improving train size and improving train size both weight and length to the degree that we can lower train starts and that is one of the big issues you are seeing. So, yes, there is not going to be -- I think we've probably gotten 60% to 70% of the savings out of the terminals, but there is still more to do.

So, Ken, let me just jump in on your pension question. I have separated 2013 and 2014 versus 2015 and 2016. Coming out of the arbitration award there was a cap put on pensions, it was very important for us and from a -- it just makes our pension plan more competitive than it was in the past and it's a key plank going forward.

But with the cap on the maximum amount of pension that can be achieved there will be a reduction of the liability of just over CAD100 million. And the accounting of that is you would in fact take that and divide it by two years, which is the two years remaining in the contract. So that is why 2013 and 2014 are going to be lower.

Some of those provisions will only be implemented in Q1, so you are going to see us have a slightly higher pension expense in Q1 and then it will drop for the balance of the year. When I look out beyond in terms of further down the road, we do see a continuing benefit from the cap on the pensions as well as with we are going harder on the headcount reduction, so that provides a benefit, as well as better returns.

This was a very strong year, a lot of it came in the fourth quarter for our pension plan, we had a return of over 10% and that helps the future pension expense. So those are some of the drivers behind what's changed the guidance around pension.

Great, I appreciate the run through. But, Hunter, just a clarification. Has there been any step back in the progress at the yards or have you only seen I guess progress? Is there anything that surprised you I guess on the -- through the process?

No, there is no surprises except the only surprise is they've gotten ahead of my schedule and ahead of me a little bit.

Appreciate the time, thank you.

Cherilyn Radbourne, TD Securities.

I just wanted to ask whether the pension curtailments that you were successful with have any impact on your cash funding as it relates to the pension? And whether that does anything to bring us forward to a time where you could think about share buy backs?

Cherilyn, no, I think for the foreseeable future I have guided to [100] to [125] for the next number of years and that is really a function of the pension prepayments that you have been -- that we have done. I think we all hope for interest rates to go up over time.

But as I mentioned at Investor Day my -- our intent is to build cash, strengthen the balance sheet, invest in the Company. And then anything, whether it is in share buy backs or other things, we can talk about in the future. But it is not something we are going to talk about now.

Okay. And is there any update on your processes, taking expressions of interest on the DM&E West? And can you just clarify if that is more likely to be sort of a lease arrangement or a cash and sale of that property?

We have had a lot of interest in -- from an expression point of view and we haven't landed in terms of whether it is going to be a sale or it is going to be a partnership, it's going to be a lease. So we are in active dialogue and it will be something we will update you when we make a decision.

Thank you. That's all my questions.

Benoit Poirier, Desjardins Capital Markets.

Just want to know if you -- Jane, if you could provide more details about your coal business and the new capacity expansion announced in Vancouver and what we should expect on your coal franchise in the upcoming years?

Well, I think that, as I said earlier, that we really have three distinct franchises. And again, the US side is certainly more volatile and it is generated by power demand. We have some US on the export side that I talked about that was PRB related. And then the Canadian metallurgical side is, again, the majority of the business that we have at CP.

I would say that as we look forward certainly we feel that Teck has made the required investments in their facilities. I think that we are well-positioned and have the capacity that we need to move the volume that Teck will produce and that we are also seeing at the terminals on the (technical difficulty) West Coast but even necessary investments so that we can truly would run an efficient world-class supply chain.

Again, our Canadian volumes are driven by Teck's forecast and that I am really not in a position where I can talk about 2013. You are best to refer to that demand. And as I said, our PRB market is expected to be -- again, it's opportunistic, but at this point in time we certainly expect that that volume will be there.

So I think that when you look overall I feel optimistic certainly about coal and our ability to meet the demand. And again, while Q1 is flat, I hope that there is some potential upside for us in 2013.

Okay. And just with a quick one -- any time frame on your crude by rail goal to double or triple the number of carloads?

As I said, this is a dynamic and it is a competitive market. I think that my best thing that I can tell you is that we will keep you informed as each and every deal comes to fruition. But I think you should watch the carloads and, as I said in my guidance for the quarter, that I expect double-digit revenue growth in Q1. So that is about as close as I'm going to get; giving you more than that would be tough.

Okay, thanks for the time.

David Newman, Cormark Securities.

Just, Hunter, maybe looking at the initiatives that you have underway -- never mind what you have in the bucket -- but if you had to take a look at all the initiatives and assume that they were all done at the beginning of January, what do you think the OR could have been for 2013 if they were all done just on January 1? And we could get a sense of even what 2014 might look like.

So, let me be sure I understand here. I think it is a leading question.

A little bit, but just trying to get a sense of all the initiatives that you've got -- you already have underway currently and if they were all done immediately what that OR impact might be.

Oh, if they were done all immediately?

Yes.

Ahead of the ones that are continuing now, it is probably a couple of points in the OR. So what that says -- I mean, you can do the math -- that just gets us to our target quicker than we had first assumed. Now given that you have speeded it up a little bit here.

But no, we are still -- look, I still feel extremely comfortable, even more so -- every time I see results I feel more comfortable with the targets that we have set for 2016. And is there a possibility of exceeding those? Sure.

And the ones that you have in your bucket, any timing on those and what the impact might be for sort of early 2014 views?

Well, I think some of this is kind of a learning curve that we are going through. I mean, I am learning the organization, they are learning me, there is a lot of change going on. But as I have said, there have been no hurdles that we couldn't get over and I feel very positive about all the guidance that we have given you.

That's great. And just maybe one for Jane. Jane, obviously the crude markets are working well, housing is coming back, automotive looking much better. Outside of that though, the freight markets have been relatively tepid. Is there any sort of timing that you guys would have? Do you think it's going to be just on the general freight markets? Will it be more of a half two recovery or what is your sense on the timing this year?

Well, I guess from my perspective, I am expecting that there is going to be some ramp up in the volume as the year progresses. I talked about the crude, obviously that is an area where we are working that strategy and I think in other commodities such as potash and frac sand we are also going to see that ramp up.

We are going into the year, as I discussed, with strength in our grain that will carry us at least through this crop year. I'm not certainly going to be predictor or clairvoyant on what the crop might do for the coming up crop year. But I also think that as we experience a gradual improvement in the US economy it will also show up in some of our industrial numbers.

So I think that I feel, as I said before, optimistic about where we are going and optimistic about our high-single-digit revenue guidance.

Chris Wetherbee, Citi.

Maybe just a question on kind of the (technical difficulty) 2013, you have given us some guidance for the first quarter and I think previously you had mentioned a good chunk of those 4,500 heads (technical difficulty) the second half of 2013. Just wanted to get a sense if you have a little more granular (technical difficulty) for (technical difficulty) as far as the headcount reduction is concerned?

Oh, I would think that by the end of 2013 we will be -- we will exceed 3,000 at that point for sure, or I will be extremely disappointed.

Okay, so about 70% is probably the right number to think about. And (technical difficulty) follow up just on the CapEx side. Now that you have had a number another couple of months post-Investor Day to take a look at kind of the network and see how operations have progressed through at least part of the winter. Are there any -- is there anywhere on the network that maybe feels like it needs a little bit more investment just from a capacity standpoint or a recoverability standpoint or is everything kind of in line with what you are expecting?

Well, I think that there is a lot of rationalization going with the surplus miles of track, with the terminal rationalizations and a lot of things that we have done there. But having said that, there are some areas of our -- what I would call our branch lines or secondary lines that are 85 pound rail that we need to catch up on. But that is just kind of a redeployment of the guidance we have given you for overall capital spend.

Okay, so nothing really incremental to what you have already said?

No.

Okay, thank you very much for the time. I appreciate it.

Brandon Oglenski, Barclays Capital.

Jane, I was hoping we could follow up on the crude oil discussion here. What are some of the constraints over the next, I don't know, year or two in the marketplace? Is it really production or do we have limitations on the tank car fleet? We're hearing that rental rates and there are increasing pretty significantly. Can you talk to some of those aspects and where you can overcome some of those hurdles?

Well, I think that -- certainly in the crude by rail market I think that the tank car producers, and I talked about this in the previous quarter -- as you see an emerging market like this industry has a very unique way of addressing each and every one of the bottlenecks as they emerge.

The one that we talked about probably six months ago was cars and certainly the tank car producers have stepped up. And those that are interested in the crude by rail markets are certainly getting that demand in place.

I think that the rail areas that we can help in is that basically the concept and the model that we have built shows the consistency and reliability in terms of origin destinations that customers can use to make decisions in their investments.

I think that by and large one of the key areas obviously that needs to be addressed is certainly West Coast capacity, industry is working that. But I think that we are well positioned and I think it is really the proof of concept that positions us well for growth in this particular market.

Okay, thank you.

Walter Spracklin, RBC Capital Markets.

Just a quick question on the intermodal business if you could give us an update on the competitive environment there. I know CN has been talking about winning market share in that category, pointing to APL, MOL and it looks like they got the Target business as well.

I know you have been providing an improved service offering in that area. Just curious, is this a pricing win that CN is getting or is there something else going on? Perhaps, Jane, you could give us an update there.

Walter, why don't I tell you that as you look at each -- and I will just build on Hunter's comment that obviously we are not chasing market share. A big part of our intermodal story is about rebalancing, renewal and taking out cost.

In the case of APL and MOL, individual contract renewals -- decisions really turn on the number of factors and it is never usually just one single factor. And I can tell you that service was not a significant factor in any part, because our intermodal service is second to none. And there isn't really an intermodal market that we can't reach.

Again, we have got to make (technical difficulty) tough decisions on the sustainable growth opportunity and price, be disciplined in our pricing and, as Hunter said, we simply will not price to keep the market. So our product has value, the value that we put in our product we need to get it encased in our pricing. And I would add that while there is some mention on Target, Target is not a single carrier play. We will be a significant participant in the Target business as well.

Right, okay. And just a follow-up to Brian on the pension expense. I know you managed to bring that down CAD90 million for next year versus where you are expecting, so that is quite an achievement there. And I'm just curious, if I were to break it out I think you I heard you say CAD50 million of that CAD90 million is due to the cap.

If you were to break out the other CAD40 million, I'm just curious, were there any changes to your actuarial accounting assumptions? And was there any changes to your -- I know you had already had an idea of your labor force reductions, but was there additional labor force reductions above what you were communicating on your Investor Day or were you just truing up for those workforce adjustments that were already detailed?

I think, Walter, in terms of -- the reduction in the liability, as I mentioned, is just over CAD100 million and you amortize that over two years remaining in the contract. And again, not in Q1 that but that will be in the balance of the year in 2014. But you nailed it in terms of our assumptions have been changed, we ended up at a discount rate of about [430], which was close to where we thought we were going to be.

But no, what is driving the lower is our returns were better, very strong fourth quarter, but as well as the headcount as we are looking out down the year we are modeling that as well as there will be an ongoing savings from the fact that we have a cap on the pension, so that's part of going forward the reduction. So those would be the main components of why in the out years I am coming off of pension expense.

Okay, thanks for the time.

Jacob Bout, CIBC.

Good morning. I had a question on your operating ratio guidance. So you are guiding to a low 70% operating ratio in 2013. And can you just put it into buckets for the year-over-year improvement looking at it from a comp or a fuel efficiency or rents and materials, how you expect that to play out?

And then how that mix changes as you move through to 2016? And then maybe just a follow-up here. So we are targeting a 65% OR in 2016. If you move from a mileage to an hourly based comp how does that change your outlook for the OR in 2016?

Well, it's a big question. The biggest bucket by far in the -- as we are experiencing today is the -- our train and engine men transportation expense related to the terminal reductions and productivity increases and the one that's overlooked and missed is the reduction in train starts, which is savings day one every day.

So our train starts are down pretty significantly and going forward, I mean is there -- you can only go so far there, yes, but we've probably got 30% more to go in that regard. So right now in the bucket that is what is there.

Now the question on the hourly, it's, number one, I would have to characterize that the potential for doing an hourly agreement appears at this point in time, and things change, but the more likelihood is right now in the US where we have a smaller level of expense.

But if you carved out the train and engine men expense in the US and converted to an hourly agreement that we were the architect of, that agreement, it would take approximately 30% to 35% of the expense out of that component, that part of that US expense and it would be a number that might be marginally higher in Canada but not over two or three points.

But keep in mind also the dynamics are different because it gets involved with fringe benefits. Our fringe benefits are significantly obviously higher in the US, they are in Canada. So the dynamics of what you can pay on an hourly agreement as opposed to the old mileages are different once you cross the border. But that gives you some -- a little better feel for it, hopefully.

Chris Ceraso, Credit Suisse.

A question on the guidance and a follow-up on the pension. I was wondering if, Jane, if you could give us a little bit of color by category on what the outlook is for Q1 in terms of RTMs? There has been such a big difference between carloads and RTMs and you gave us some good color on what you expect carload growth to be in Q1. Can you give us similar numbers on an RTM basis particularly in categories like grain and potash and coal?

You know, I think that, as I indicated to you, we talked briefly about where we thought in terms of the coal I talked to Q1 would be flat. So I think that as I look at it overall, certainly our export coal should drive good RTM growth in the quarter.

I think that as we look at potash, again, this is one of those inverse relationships where RTMs are related to certainly our other lines of business versus where we would be with an export potash. But I think overall I feel very optimistic that we would see some positive upside on that.

I think that the grain markets right now, when I look at those particular areas I would not want to call specifically given the fact that we see so much dynamic movement as we think about the grain markets and how they have changed in the Post CWB.

But I will say that from certainly an RTM perspective on the long haul our team is really set up well to move as much grain as we possibly can to those export corridors. So I think that the guidance I gave around mid-single-digits certainly on the RTM side I would say for Q1 would be in line on that side.

Okay. And then the follow-up on the pension, now that you have more clarity on the caps and the contract have you thought about steps that you might take from here to de-risk the pension whether it is offering buyouts or changing the asset allocation to try to minimize the volatility relative to either discount rates or asset returns?

Chris, suffice to say we are looking at all things and it is a file that we manage very closely. And so, we are looking at all aspects. I do want to say the prepayments give us some stability out into the future. But there will not be any buyouts that you are referring to. But it is a file that we actively manage.

Okay, thank you.

It's Janet, and I'm just going to jump in here and recognize we are about an hour into the call now and would encourage everyone to please limit their questions to one so we can get as many people on the call as possible.

Scott Group, Wolfe Trahan.

So, Hunter, historically we have seen a bigger sequential drop off in the margin at CP relative to CM. I'm wondering kind of with the things you're implementing how you think that might change.

And then I guess with that, within the guidance for 40% plus earnings growth this year, given kind of tougher weather comps and slower volume growth beginning of the year, do you think it is fair to think about being below that trend in the first quarter and then ramping above 40% earnings growth in the back half of the year?

Well, I hadn't looked at it as it relates directly to earnings. But I can tell you that we do have a seasonality factor in Canada and first quarter is probably your toughest from an operational standpoint. Second and third really mop up and break records. And then depending on what happens in the fourth quarter there is sometimes some noise there.

But I think one of the things that I've tried through my career and will try to do there is kind of as much as we can of a leveling of the volatility between quarters which, once again, goes back to our -- on the maintenance away side, the stabilizing and level workforce.

So I think from any sequential -- I mean I think this is not -- this is certainly not linear, there are a lot of moving parts. But we have jumped ahead. Will we hit a point where we are not at this pace for a moment or two? We could. It has been a clear track and a high [grain] so far and I just look forward to more of that (technical difficulty).

Okay, that makes sense. All right, thanks.

Keith Schoonmaker, Morningstar.

I think at the Investor Day you mentioned you have removed 195 locomotive since July 1. This moving to lower cost headquarters and reducing the locomotive fleet seemed like sort of classic Harrison playbook moves that is a spotlight on asset utilization. Could you elaborate a bit on how you can remove a tranche of even problematic locomotives even without compromising service?

Well, those locomotives have not been in service for some years. I think -- I don't really know the history of the -- but they are SD90s. I think the only locomotives just about that were bought by anyone was by CP. They didn't work, they have been in storage, they have been -- if you have got a locomotive that doesn't have reliability it is worse than -- you would rather have nothing because to get out there with a train and had a failure it is problematic.

We have got effectively, if you look at the stored locomotives and the ones that we have turned back or scrapped or whatever, we are working with about 400 less locomotives today than we have been. Will that number -- with business levels at these tight business levels get better? Yes. But there is a point where if things start to pick up in the world of economy and the US and Canada and we see growth we'll be in a position to be able to and that handle that business and we will not get caught short.

So it sounds like discontinuing the non-use of locomotives won't compromise service. But would you share thinking on the financial benefit of removing a typical locomotive?

Well, there are a lot of benefits. I mean, you are talking about from an operating expense standpoint?

Yes, I think so.

Well, you know, if you don't have a locomotive in service you don't have to have anybody to maintain it. And there is some kind of ratio that people would argue about, but there is 1.3 or 1.4 people per locomotive for an example. You don't have to have parts and material for the locomotive if and when it fails. You don't have to have fuel in the locomotive just sitting in the tanks when it is being -- not being utilized.

So -- and the biggest factor is you need to get to a point, and I have learned this early in my career, of what you can -- how much tonnage can you move with X number of locomotives? Because the bad thing is when you get too many locomotives they are there, you use them and then when you start to replace them you replace the numbers in kind and that is why there has been such huge movements in some carriers that I've been associated with the reduction of locomotives.

Thank you.

Steve Hansen, Raymond James.

Jane, the crude opportunity continues to impress here. I'm just wondering if you could give us a sense for what kind of planning horizon most of the prospective customers are thinking in these days, really in the context of some prospective pipe coming down the road over time?

Well, I think that we have been pretty clear on our strategy that we expect that all the pipelines will go ahead as planned. Obviously we see a place for crude by rail where the primary mechanism that we offer to them is optionality.

In terms of planning, this is a rapidly growing, fast-paced market. I will tell you that the customers do act quickly. I mean, a big part of what we do with them is working on creating very highly efficient consistent supply chains.

But I think that when we look at the model that we've built and the strategy that we believe in, the customers are purchasing the assets which gives us some lead time certainly. They are also looking at leasing where they can pick up to get into the market quickly and we can develop our models and move them from say a manifest to a unit trained service.

And I think the other is the customers that are also investing in terminals and in origin capacity, those are also tending to move quite rapidly. So I think that in that marketplace it's a highly competitive business, but the constant and consistent dialogue about learning about the rail model and us syndicating our know-how is a big part of how we participate and actively grow this market fairly quickly.

Okay, helpful. Thank you.

Thomas Kim, Goldman Sachs.

Thank you, I had a couple questions. One, can you just tell us what your forecast is for rail inflation in 2013?

Tom, as I said in my remarks, we are expecting around 3% -- 2% to 3% when you put it all in.

Okay, thank you. And then a separate question just with regard to safety. We noticed that the fourth quarter showed some slippage in terms of the overall improvements during the course of the year and I was just wondering if you could provide a little bit of an update in terms of what was going on and what should we be thinking about looking ahead in 2013 in terms of the overall gains that we have been seeing?

In the safety-related area?

Yes.

Well, there are a lot of initiatives going on right now as we speak. There is a lot of different training and development and -- but we continue our emphasis on safety, both personal injury side and derailment side. And I would -- we will certainly see those efforts continue and to mainstream the wonderful track record that CP has developed over the years.

I was -- if you could maybe specifically address sort of the injuries per employee per hour -- sorry, employee hour sort of deteriorating about 11% in the fourth quarter year on year and then just in general the train accidents per million miles. We saw a really good improvements during the full year on 2012, but in the fourth quarter we just had seen some slippage. And I was just wondering if you might be able to provide a little bit of color surrounding some of those stats? Thanks.

Well, the color I would add is this, one of the things that I have talked about before and my concern with the weakness of some of the measurements is it doesn't measure any severity. So if you have someone exposed to the weather and they it get a little frostbite it's a personal injury or if you have a fatality it is the same thing.

So we have really emphasized that. The same way with derailments; there is a threshold from the FRA that so much -- if an accident is right below the CAD10,000 threshold, I believe it is, it's non-reportable and if it is CAD11,000 it is. So I don't think that there is anything that we have done or intend to do that will in any way, shape or form compromise safety or derailment records.

So, it's Janet; I'm going to jump in -- we are going to take two more calls and then we are going to wrap it up.

Steven Paget, FirstEnergy Capital

Could you please comment on capital expenditures in 2013? Did you see expenses? And whether the CAD80 million in rail infrastructure for crude oil is going to be complete this year?

Steven, I've guided to about our capital expenditures will be roughly between CAD1 billion to CAD1.1 billion. We also -- part of that is PTC and I think it will be in the range of CAD30 million to CAD40 million. We're also working on some re-man, we are remanufacturing locomotives which is actually going to improve reliability and also will lower our maintenance costs. And as well we are building our new headquarters in Ogden.

So overall we are going to be between CAD1 billion and CAD1.1 billion. From a crude oil point of view, there aren't specific items. There are certain parts of the network that we are looking at, but it is not going to be a large item.

Okay, thank you.

Jeff Kauffman, Sterne, Agee.

Congratulations and thank you for getting me on the call. Two points for Brian. This change in pension impact that you mentioned, is it going to have any effect on taxes? And you mentioned build cash; is there a particular cash target at which you would say, okay, now, we have enough cash?

So in terms of -- Jeff, your first question is -- pension expense has no impact really on taxation, it's really what you put in the pension plan, so none of that will change from a tax point of view. And the second question I'm trying to remember, Jeff?

Well, I just think it's (multiple speakers) sitting on cash is bad for return on capital. So I was just wondering if you had a threshold at which you would say, okay, this should be enough cash.

I do have a threshold, but at Investor Day I didn't want to answer it. And all I'd say is, Jeff, towards the end of this year, early next year when we reach that threshold we will be updating you in terms of our thoughts going down the road. But it is critical from this point of view -- I mean pension is still a big issue. You have also got the economy with its ebbs and flows. So I think it is prudent for this Company to have a good cash balance and once we get there then we will have the conversation, Jeff.

Jeff, I think I could add to that, as Brian has said before, the first thing we are doing -- and this is early on in the plan and there is some competence being developed, we are going to strengthen the balance sheet first. We were very sensitive to your question of sitting on capital.

If there are not places to spend it internally that generate the kind of returns that are justified or that we need we will certainly look and I'm sure the Board will be addressing what we do with cash whether it is buyback, increase the dividends or what those other things might be. But I can rest assured that as long as I have got a vote we're not going to sit on capital.

All right, thank you.

Mr. Harrison, there are no further questions at this time. Please continue.

Well, I am worn out. But, thanks so much for joining us and we look forward to seeing you, if not before second quarter, with some more of the same results. Thanks.

This concludes today's conference call. You may now disconnect.