Canadian Pacific Kansas City Ltd (CP) 2013 Q1 法說會逐字稿

Good morning. My name is Jonathan and I will be your conference operator today. At this time I would like to welcome everyone to the Canadian Pacific's first-quarter 2013 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.

Mr. Velani, you may begin your conference.

Thank you, Jonathan. Good morning and thanks for joining us. My name is Nadeem Velani, EVP Investor Relations at Canadian Pacific. I am proud to have with me here today Hunter Harrison, our Chief Executive Officer; Keith Creel, President and Chief Operating Officer; Jane O'Hagan, Executive Vice President 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 at www.CPR.ca.

I would like to 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 in the press release and in the MD&A filed with the 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 3. The presentation will be followed by Q&A. In fairness and courtesy to all participants, we would appreciate if you limited your questions to two.

It is now my pleasure to introduce our CEO, Mr. Hunter Harrison.

Thank you, Nadeem, and good morning to everyone. It is a beautiful sunshiny day in downtown Calgary certainly in more ways than one.

I trust you have read our press release and I am proud to be part of this team here reporting this morning record earnings for first-quarter performance and that is something that was achieved in some tough operating conditions with a seasonality factor and I think it gives some indication of the potential of this organization going forward.

I might just highlight a couple of points here before I turn it over to the people that are really going to take you through the quarter.

First of all, we saw a 430 basis point improvement in the OR and a 51% improvement in earnings year-over-year which is pretty outstanding. One thing of note probably by far the most important thing that took place and it happened the first quarter are some key personnel changes. And the first one is the announcement and the appointment of Keith Creel as president and Chief Operating Officer, which answers a lot of questions that were out in the market that people were wondering about and succession plan and Keith is recognized as one of if not the top operating minds in North America.

I have effectively worked most all of his career I have been along with him. I have seen his progress and he has hit the ground running here. He has already had significant impact on the operation. But the most encouraging thing is what he has got to bring is basically you haven't seen anything yet. So welcome, Keith. Nice to have you.

I should also bring to your attention also that Nadeem who introduced me this morning is a new addition about three weeks or so. Nadeem is our new Senior Vice President of Investor Relations. It is nice to have Nadeem along so we have made some really significant personnel changes.

Keith has brought on and he will probably talk about it, a new general manager in the east end new superintendant in Toronto so the team is coming together pretty well.

I think what this does more significantly is if you look back a year ago, lot of you on this call said this couldn't happen, that we couldn't have this type of performance, we couldn't have it over at this quick a time frame and I think that most important thing it does is lays a solid foundation for what is to come in the future.

And so with that, let me turn it over to Keith and Brian and Jane will add some additional color and then we will have a Q&A.

Thank you, Hunter. Let me start. I think it is only appropriate to publicly start my first call with CP by thanking you, Hunter, thanking our Board and also the colleagues here at CP for giving me the opportunity to be part of this exciting transformational journey that we are on at CP.

I am approaching three months on the job and I can tell those on the call as well as my colleagues here I am having a blast. I came here to CP knowing for certain the expectations were pretty high, the challenges are going to be many but at the same time what I didn't understand, what I didn't begin to imagine is how well I would be received by this team, by our team of proud railroaders and that is both officers and [craft] alike. They are embracing change at this company, not resisting it which is motivating and inspiring.

It is a team of proud railroaders that have tasted some success and they are hungry for more. It is a team of railroaders that are energized, they are seized with the goal of becoming the best railroader in North America both from a service and an operational efficiency standpoint and I am pleased to help lead to help us enable that opportunity.

So with that said (inaudible), like you said, Hunter, we had a very challenging winter. It is only befitting that our team closed out a record breaking first-quarter operating performance at CP in our history.

So let's spend a few moments -- I will provide some brief points on what contributed to that success. Again, there is no secret formulas here. There is no special plays, just a focus by our collective team on the key ingredient to railroad success that we call asset utilization. It is the theory that you can move more freight with a right sized fleet as opposed to the traditional it takes more to move more mindset which is gaining traction within this company and with our customers by sweating our assets. Keeping the pipeline fluid rather than clogged up with more cars and locomotives that it can actually sustain.

This mindset approach has allowed us to move record grain volumes to Vancouver in the first quarter, in fact about 13% more this year versus last with about 10% fewer cars which is even more impressive when you think again about the mild operating conditions that we enjoyed last year versus what we have just experienced this year. It is good for our customers, it is good for the ports and it is good for Canada's reputation as a reliable supply source worldwide for grain.

We experienced similar success on the coal side moving 12% more export coal to the western coast than in 2012 using our standardized 152 car coal set which we turn consistently mine to port.

As I noted in the presentation, the focus on turning assets not only provided a vastly improved service to our customers, it also allowed us to improve locomotive utilization in a meaningful way as well as it drove car velocity numbers among many others to record levels. In spite of the challenges winter presents, we were able to drive year-over-year record-setting improvements in a majority of our key operating metrics and we can created momentum that we carried into a strong start to our second quarter.

Let me shift my comments to the most important ingredient to our success here at CP which is our people, our team of railroaders, craft and officers again, alike. I am focused on building a strong team not only to sustain but to accelerate this journey to become the best North American railroad in the industry.

I have an inherited a pretty talented committee team of railroaders who are eager to learn, they are embracing changes as I said before but at the same time I am building the bench strength as well by bringing on some new members to the team, CP team, which you had mentioned, a general manager of operations in Eastern Canada, Guy Seguin. We've got a new superintendent in Eastern Canada, Jason Ross, and also new general manager of our US dispatching center in St. Paul as of a couple of weeks ago in Mike [Farrell].

Looking ahead, I am excited about the progress we have made so far on the service and operating front so I am even more energized knowing to your point that we are just getting started.

Many more opportunities to convert. In fact, our upcoming as I have noted on the presentation, the white boarding session which for those of you that don't know what I am talking about effectively, it is a roll your sleeves up marathon session where Hunter and I will go in with the operating team, we will effectively schedule every car, every train across the network. Two or three sessions to get this thing done but once we get that done we will be able to take another step in improving both our service performance as well as controlling costs for our shareholders.

So with that said, I am sure you can sense my enthusiasm. I will keep my comments brief but let me publicly state in closing and reaffirm a commitment that I made to Jane about three months ago when I started at this Company and that it is my number one objective to produce a vastly improved service offering for both our existing and our future customers that she nor any member of her team has to ever apologize for in the future, one that is going to create value for our customers and for our franchise.

Jane, this first quarter was a pretty significant step in that direction. Over to you to provide some color on how our team is converting at the market place.

Thank you, Keith. Again, we are very pleased to report the best Q1 revenue performance ever for CP and our seventh consecutive quarter of double-digit revenue growth in merchandise. I can tell you our team is in the market, we are visible, we are delivering on our growth plans and we are benefiting from the strong operating performance by a team who managed winter well. With that I want to turn to our revenue results.

We reported a solid revenue gain of 9% on a currency adjusted basis where price, volume and mix accounted for 8% of the gain and fuel surcharge was 1%. Our RTM growth was 10% carload growth was flat driven by a significant increase in volume of long-haul crude oil traffic and potash exports. Just to let you know, we will begin reporting total RTMs weekly beginning in May.

Our average revenue per car was up 8% and we delivered on our price renewal target of 3% to 4% and expect to deliver inflation plus pricing through 2013.

In grain, as Keith said, we had our biggest Vancouver export program ever. We moved more grain than last year with fewer assets and we moved over 20% more than the previous three- and five-year cross averages.

We also adjusted to a reduced Canadian Eastern export program brought about by changes in the CWB and we remain nimble to increase each inbound corn and US soybean traffic. So with our improved strong service, improved asset utilization and good crop carry out on our territory, we expect year-over-year Q2 volume increases in the double digits for our grain franchise. Again it is too early to call the next crop year but we will keep you informed as we move along.

In terms of sulphur and fertilizers, the Canpotex export recovery ramped up much faster and stronger than we expected but our team worked hard to ensure the supply chain geared up efficiently to handle traffic as it came on. The higher volumes of export potash moving in private cars kept average revenue per car gains at a moderate level and decreased overall cents per RTM.

But as we look out at Q2, the ramp up of Canpotex volume signals the potential for a strong year but second-half upside remains uncertain with seasonal and market volatility. Our near-term focus is taking full advantage of strong ratable volumes throughout the balance of the first half.

In coal, our revenue was up 9% and units were up 4% from strong met coal supply chain management and overall performance. As Keith said, all our export trains are operating at 152, allowing us to move the same volume with an 18% reduction in train starts.

For the outlook, we have modeled to Teck forecasts and we are watching global markets carefully for certain signs of volatility. PRB traffic continues to be opportunistic and we are ready to capitalize should it continue and in Q2, tax volume unit growth could be offset by softness in the US thermal domestic and export traffic resulting in total coal volumes being flat year-over-year.

In Intermodal, I am pleased with the progress of our rebalancing and renewal as this continues and our progress is consistent with our expectations. The Q1 results reflect revenue and unit impact of international contracts we let go, purposeful decisions we made to exit select lower profit and low growth markets while focusing on improvement on the quality of our book. We are very pleased with the progress we are making. We are growing in the right lanes with the right customers aligned with our service capabilities and taking advantage of our service improvements by growing where we create competitive advantage, price for value and improve the operating income of the book.

In terms of the outlook, performance reflects focus on sustained profitable growth by creating value through service improvement and disciplined pricing but the service offerings made in 2012 and the ongoing house cleaning we continue could keep Q2 2013 units flat versus Q2 2012.

In merchandise, the strong growth story continues. Our RTMs were up 28% versus a carload growth of three. Again, strong gains made in long-haul crude oil. I will remind you the mix changes increased average revenue per car 12% and decreased cents per ton mile 10% as I have told you we expect this to continue as crude forms a larger part of our book.

Of course, a lot of the growth was driven by crude oil. RTMs in this segment were up 36% on gains in long-haul crude oil volumes. This growth momentum continues as loading network expands, our destination network diversifies and shippers commit to the crude by rail model.

We have clear line of sight to two to three times previously mentioned 70,000 carload run rate and we believe the two times target run rate can be likely reached 12 months earlier than our original 2016 prediction.

Fracs and shipments from new mines are ramping up in Q1 and other industrial products will trend with GDP growth. So overall for Q2, we expect another quarter of double-digit growth.

In the autos, revenues were down 8% and carloads were down 17% due to much of the decline being major customer downtime for a major new model conversion. But again, we will benefit as the new model volumes grow. We exited some low-margin short-haul markets to improve the book but we expect a recovery of the Q1 short-haul over the remainder of the year and the delayed model start up and the book improvements will temper the recovery of growth in Q2.

So in terms of summary, our strategic initiatives are delivering value and growth. We are pressing harder and faster on our work to strengthen our book of business. There is multiple opportunities for growth across the franchise with crude oil remaining the strongest opportunity and I reiterate my expectation of high single-digit revenue growth for 2013.

And with that, I'll turn it over to Brian.

Thanks, Jane, and good morning, everyone. I do not use superlatives very often but I have to say this Company and more specifically the operations group did an outstanding job this quarter. And our record results show it. The operations team continued to drive efficiency while improving service and dealing with a harsher winter. A job well done.

So let me get into the numbers. As Jane mentioned, revenues were up 9%, a record for Q1. Operating expenses were up only 3% despite an increase in RTMs of 10%. Earnings per share were a Q1 record, up 51% from last year. And finally, our operating ratio decreased 430 basis points to 75.8, another record for Q1.

Our effective tax rate came in just under our annual guidance of 25% to 27% due to a US tax credit recognized in the quarter. For the remainder of the year you can expect us to be closer to the higher end of this range. A great start to the year and the improvements we have seen this quarter give us greater confidence that 2013 will be a record-setting year for both operational and financial performance.

Turn to the next slide and I will give you details on our expense line items. Our workforce reductions are ahead of schedule. At our December investor day, we outlined a reduction of 4500 positions. To date we are at 3400, 75% of our target and we are looking at additional opportunities.

Overall, comp and benefits were up CAD11 million or 3%. Workforce reductions resulted in CAD40 million in savings due to fewer people, fewer yard starts, longer, heavier trains and lower new hire training all while moving 10% more RTMs and improving service.

Stock and incentive comp was up CAD21 million. This was driven by a CAD32 increase in our share price and a larger short-term bonus accrual than last year given our strong start to the year.

Consistent with the guidance I gave you last quarter, we also saw headwinds in the form of wage inflation costing CAD12 million and an increase in pension expense up CAD12 million. As a reminder, we guided to pension expense of CAD50 million to CAD60 million this year. You will recall that I told you Q1 would be an implementation period.

We had an expense of CAD21 million in the quarter so you can model pension expense to be roughly CAD10 million per quarter for the remainder of the year. Other of CAD6 million reflects a bunch of smaller items such as higher track maintenance for snow clearing, some management transition costs, and a change in how we smooth engineering vacation expense throughout the year.

Fuel was up CAD1 million versus last year. Fuel-efficiency saved us CAD25 million in the quarter and the savings were offset by higher volumes and a slightly higher fuel price.

The remaining expenses have some puts and takes. Materials were up CAD8 million or 13%. This increase was driven by a CAD10 million in car servicing costs mostly due to higher wheel set change outs. I should note that there is a partial offset to this number in purchase services which I will speak to shortly. This increase was partially offset by savings for locomotive servicing costs, a reflection of our reduced fleet size.

Equipment rents were down CAD4 million or 8% versus last year. Our focus on asset utilization resulted in savings of CAD8 million. These savings were partially offset by higher lease rates and lower car hire receipts.

Depreciation rose by CAD14 million due to a higher depreciable asset base and accelerated depreciation of certain legacy IT assets as we continue to renew our IT infrastructure.

Purchase services were up CAD1 million versus last year but there were a lot of puts and takes. On the unfavorable side, our CAD12 million insurance recovery in 2012 was a headwind this quarter. As well, property and other taxes were up by CAD6 million.

And finally, we saw other miscellaneous increases in IT expense costs and costs associated with our head office relocation to Ogden.

On the positive front, we had a favorable one-time management transition settlement of CAD9 million. Wheel recoverables were up CAD6 million. This is the partial offset to material costs I just spoke to.

Land sales were up CAD6 million over last year. Casualty costs were favorable by CAD4 million and finally, we saw CAD3 million of efficiencies as a result of reduced debt heavy costs as we had fewer crew starts and as well, we saw third-party locomotive servicing costs lower.

Purchase services can be lumpy and it does have some seasonality. Land sale guidance remains unchanged at CAD10 million to CAD15 million for the year.

So to wrap up, Q1 was a record quarter and there is more to come. Our operational improvements are driving real savings while at the same time improving service. Our book of business is strong. We have great momentum and even greater confidence that 2013 will be a record year for CP.

With that I will turn it back to Hunter.

Thanks, Brian. Thanks, Jane and Keith. There is not much more to say except I would refer you back to our guidance that we gave six, eight months ago that talked about high single-digit revenue growth. We are obviously ahead of schedule there. The OR in the low 70s range, we are clearly ahead of schedule there if you take the seasonality factor into account. You can do the math.

We are way ahead of schedule with the 40% year-over-year earnings so that is something that we will keep an eye on and watch and keep you apprised as the year plays out.

So with that Jonathan, we would be glad to entertain questions as a group.

(Operator Instructions). Ken Hoexter, Bank of America Merrill Lynch.

Great. Good morning and congratulations and welcome, Keith and Nadeem. If I could just jump into, Keith, maybe now that you are on site and you've been there for a couple of months as well as Hunter, can you talk about maybe some of the projects you look to tackle, how the network was able to adjust so quickly through the rough winter, maybe just expand on that a little bit so we know what other projects may be coming down the pike?

As far as adjusting to the rough winter, I mean the key is the asset size. The fleets that we've reduced, the locomotives we have been taken out, the reliability we (inaudible) up in locomotives, the terminals, the hub terminals that before me Hunter effectively shut down five across the system, has allowed us to turn these assets faster. So effectively you get less fleet, turning faster, not congesting the terminals.

You deal with the snow, you deal with the winter, you deal with weather. All of those things when you have additional assets in the pipeline impede your ability to recover and they take out your resiliency that you have in a supply chain or in our pipeline for lack of a better term. So that said, the stage was set.

I tried to come in and effectively -- I've spent a lot of my time out on the ground. I spent the first couple of weeks out in Toronto. That is a place where we had already closed the hub but at the same time to get it to the next level, it took a little bit more fine tuning and emphasis on sweating the details and it means rolling your sleeves up, it means getting on the ground, it means understanding traffic flows, looking at the cars that are coming into the terminals, essentially for the lack of a better term again just to oversimplify this, if a car doesn't belong in Toronto and we are not going to service the customer out of Toronto with that particular car, why does it need to be there?

And if you take that approach and you cascade that across the property which is exactly what we are going to be doing in the future, you can generate and create some real synergies, both in car savings and crew savings, locomotive savings across the board. It hits on multiple expense levers there to accelerate your progress.

So there is more to come on that. We are going to focus on the terminals. We are continuing, we are coming out of winter. We have got an extreme intense focus on train speed. Again train speed, as you drive trains speed up you turn those assets quicker, you get more cycle turns, you reduce your cycle times, you effectively can move more business with fewer assets which again allows you to sustain positive service even in the face of some diversities like weather and/or even like some of the water weather, the floods we can have been dealing with over the past week.

Effectively in the past I would probably say and suggest that that would have had a meaningful impact to the operation. Certainly it is not anything that I enjoy doing or that Doug and his team have enjoyed dealing with but it has not had a meaningful impact to this business. We still have been able to provide consistent, reliable and a cost controlled service to our customers.

So more to come. I could talk about this all day long, probably more time than you have but we are just scratching the surface. That is no doubt in my mind about that at all.

Wonderful. If I could get my follow up on -- Brian, maybe just talk on the efficiencies. In the workforce number, I mean Hunter has mentioned maybe even up to 6500 employees. Does that come out faster, should we see an acceleration on the -- I am talking more specifically on the comp and benefit line? Thanks for the time.

Ken, first of all, I don't think I said 65. I might have said six [employees]. But look, the 4500 is not the top, that is not the ceiling, that is a number that we at that point in time when we gave it to you we felt comfortable with. There are some buckets for an example particularly with contractors for an example. We've got with IT, we have got contractual obligations that says we've got about 300 or 400 people that will not come out on the IT side until the end of 2014. So that is 300 or 400 right there.

There are some other initiatives so will we exceed 4500? I think so, yes. Will we get to 6000? Could be but I mean I don't quite have line of sight on all that yet. Brian, do you want to add any more?

No, I think you covered it well.

Tom Wadewitz, JPMorgan.

Yes, good morning and congratulations on the great results and also on the joining the team, Keith and Nadeem. Great to see you guys on board.

Keith, you mentioned the exercise, the process you are going to go through in scheduling the cars and spending time on that. Can you give a sense of when you plan to do that and just the timing of that which presumably would have a material impact?

Yes, we are going to start the first sessions in Chicago in a couple of weeks and then we we'll have to -- you can't do it all at one time. It is a pretty large task so we will spend three days, pretty long days in Chicago to start this process and I would envision four to five sessions to get the entire railway done. So you will do one one week, you will wait two or three weeks, digest the changes, tweak it a little bit. You will go to the next steps. So the process is going to take about two months I would say to get it all done.

And then after that we have got to get people to start executing it and a little bit of sense of urgency and accountability and discipline and the results are going to follow. So I would look more to third quarter, fourth quarter to start seeing some of the impact of those changes.

Okay, so financial impact in the second half of the year probably?

Yes.

Great. And then Brian, in terms of the comp and benefits, there were a lot of moving parts in the comp and benefits this quarter. It seemed -- I guess when I looked at some of the options expense, it was up a fair bit. I am not sure how that relates to the incentive comp you identified but how do we think about the step up in comp on a per worker basis this quarter and what that might look like going forward? Is it a lot more moderate going forward or it is it still a pretty high pace of increasing comp and benefits on a per worker basis looking forward?

Tom, I gave you in my remarks stock and incentive comp were up CAD21 million. Let me just give you a bit more color. Of that CAD21 million, about CAD15 million is related to our CAD32 price increase. The sensitivity is a bit less than I have given you in the past but you could use about CAD600,000 per dollar change.

The balance of that CAD21 million is roughly CAD6 million and it relates to our short-term incentive accrual that again I talked to is -- last year we accrued the first quarter at 100%. We have increased that accrual from a percentage point of view given the strong start, given our outlook for the year so those are the two main components.

So the first component will move with our stock price. The second component is as we execute to our plan and look to exceed it should remain for the balance of the quarters.

Okay, great. Thank you.

Jacob Bout, CIBC.

Good morning. Hunter, maybe just a question here on the crude by rail and strategically how you are looking at this, specifically longer term in the amount of capital you are willing to commit to this crude by rail?

Most of the crude by rail new opportunities are online segments that we would not have described in the past as our main lines. So there is clearly some catch-up to do there. We are doing that very cautiously, but there will probably be -- which is in a book already -- but probably CAD50 million related directly to infrastructure for the crude on rail; not only for the crude on rail but driven by that predominately which is effectively sidings, the signal systems and some upgrade to the existing heavier rail. So that gives you a little feel for it, hopefully.

And maybe just a follow-on, a question on fuel-efficiency. Pretty impressive improvement there year-over-year, given the tough winter, but how aggressive should we be thinking about fuel efficiency and improvements over the next year?

Well, I think you will -- I think we have taken some big steps. I don't know that there is that much in another block, if you will, but I think we will see continual improvement. I mean, I think it has jumped up to about, Brian, the 7% range?

8% year-over-year.

Year-over-year. I think that probably there is some initiative that Keith has going about closing some service stations as a result of running longer miles before we have to fuel. We are doing some modeling there. It will help with working capital. We have obviously probably got too much fuel in inventory, and I think that we will probably hit through 10%, so maybe 10%, 9% to 10% year-over-year.

Excellent. Thank you.

Fadi Chamoun, BMO Capital Markets.

Good morning. My question is to Keith. You have worked with two CEOs which from we sit sort of have a slightly different approach to growth in the supply chain in general. So I was wondering whether, first, you think that the kind of approach at CN we see on the supply-chain side would bring similar benefit at CP, and how far is CP from CN on that front, from a supply-chain integrated approach that we see at CN?

With all due respect, I think it is inappropriate for me to comment on CN, given that I'm not at CN anymore. Let me focus on the opportunities at CP. And I can say right now that this supply-chain pipeline, whatever you want to call it, management that is becoming ingrained in some of the success and the way we are moving forward at CP. So it is not about just cutting assets to drive operating improvements. It is about rightsizing assets to drive operating improvements that at the end of the day create a reliable and a sustainable pipeline (technical difficulty) whatever you want to call it, whatever semantics you want to use. So huge opportunities.

This is a new front, turning assets and managing, rightsizing, it is something that is gaining momentum at CP and I am going to expect to see similar results in our customers and those are the most important sounding boards so to speak of proof points I think they would tell you in large part. And listen, we are not perfect. It is an operating world. We went through a tough winter. We didn't get it all right but we certainly got a heck of a lot more right than wrong and we are exceeding our customers' expectations on service offerings.

So with all of that said, it is ingrained here to becoming more and more part of our DNA of our fiber and it will be part of our -- and an integral part of our success on a go forward basis at CP both from a service front as well as operational and a financial success front.

Okay. One question to Jane on the crude on rail, I suppose the bigger portion of the opportunity going forward is probably heavy crude from Canada. Can you talk a little bit about some of the larger opportunity you are seeing, the timing of realization? I know you said that you think this could go -- basically increase quite meaningfully in the next three years. But do you see some of these opportunities for terminal being built happening this year or is this more like 2014 opportunity?

I think just to go back to what I said earlier, I think that when we look at our 2012 crude volume growth we remain on track and we remain where we would like to be in terms of that growth. And as we told you in January, we hit our 70,000 carload run rate and obviously we are building off that.

Our future view on this volume is really based on the probability of landing some kind of specific and near-term as well as long-term prospects. They are at various stages of negotiation. I'm sure as you can appreciate, many of these are competitive as well and this also includes some perspective additional opportunities.

In terms of looking at this on a go- forward basis, I think that what we feel is that judging the appropriate risk, sticking to the basics of our model which are again around mitigating risk by ensuring that those we partner with are investing for the long term in crude by rail and managing our investments appropriately. This is where we see certainly the long-term aspect of that business and how we intend to grow it.

I think it is safe to say as you did that the future growth that we see given the current volume that we have that certainly moves to the Bakken to various locations is a big part of today's portfolio. But as we move forward obviously the heavy crude is the real opportunity for us in the near term.

Okay, thank you.

Chris Wetherbee, Citi.

Good morning. Maybe just a follow-up question. When we think about the high single-digit revenue guidance for the year, you have kind of easier comps as you move forward and certainly it looks like the grain business is going very well for you and crude clearly as well. You have the RTM growth there.

I guess I just want to make sure I understand maybe what some puts or takes are around that high single-digit revenue target. Seems like it could potentially be exceeded at least in the next quarter or two. Just want to get a sense of how you think about that?

Thanks, Chris. It is safe to say as you indicated that I am expecting some ramp up in volumes as the year progresses both on the crude side and the other commodities such as potash and frac sand. Some of the traffic is coming on a little sooner than we expected but we did have some slower growth in some of the other sectors that we look at.

As you said, we are going into Q2 with some good carryout in the grain and we have excellent asset utilization cycles so it will help propel that growth. And if we see a gradual improvement certainly in the US economy, this will help us in the industrial products.

But on a net basis, we are on course to meet our 2013 guidance and I think that there is still some uncertainty in the economy. Grain is always a wild card because as I said it is too early to comment on where the crop is. The big part of this story obviously is a cost take-out story and back to where we are, I feel that our challenge again is to meet that head on and to beat it but I don't feel that we are at a place where the economic picture or some of the puts and takes I talk about really merit a reconsideration of my guidance at this point in time.

So all I can say is watch our carloads and know that we are working it hard.

Okay, that certainly makes sense. Just a follow up just back to Hunter and Keith maybe just quickly on the headcount. I know you kind of talked about maybe what you could potentially get and there are some things that could come in the later period. Just when we think about this year you guys are so far along on the path to the guidance you had given us. Can you just give us a rough sense of maybe how headcount reduction looks for the next couple of quarters. Is it going to slow down a little bit or is there still a steady pace left to go here?

No, I think it is a steady pace. If you want to put a number on it I think my guess is by year end we will probably be at 4000. There is a lot of things going on there because for an example, we had two shops that were effectively leased out that were run by Progress Rail but they were CP employees. They were CP employees from a pension obligation standpoint but they weren't in our headcount if you will.

Well, we have taken those shops back in because net net it is the best thing to do to operate it. As we bring those two shops in, that is a plus on the headcount side. It is really not any additions but if you looked at the count and where you start with it, so there is some additions that you have to take into consideration.

I think by year end, 4000 is probably a safe number to use. Am I still comfortable with the 4500? Yes. Do I think we are going to exceed it? Yes. That takes into consideration what Keith has talked about. I mean this white board exercise is going to bring another level of opportunity so there is a lot of initiatives that we have on the drawing board that haven't kicked in yet which is the reason why to some degree I am extremely excited about the future and some of our guidance and so forth.

So I think for the year 4000 is going to be not far off for your modeling purposes.

Okay, that is great. Thanks for the time. I appreciate it.

Bill Green, Morgan Stanley.

Hi there, good morning. Jane, I was wondering if I could ask or actually maybe even, Hunter, you may want to weigh in on this as well. But as we look at the improvements in service levels, how long does it take to translate that into a better pricing opportunity?

Well, it takes a while. My experience in the past as we have gone through transformational changes like this is it doesn't happen overnight. We don't expect that overnight. We have to prove it is one thing to say it, it is another thing to do it.

So I think that once we see 12 to 18 months that we accomplish these service commitments we have shown the market we can do it that then we will start to see some impact on price beyond what we have talked about.

Now at the same time, Bill, if you start to try to fine tune a number, there is some discipline we are going to impose and we have imposed for example. As I've said to you, we are not chasing business for chasing business. We've got a certain hurdle rate that has got to be met. We are proud of this service and nobody will take our service and make it a commodity, not as long as I am around.

But I think to answer your question I think at least a year to 18 months generally kind of before you can really start to see a real impact there.

Okay, makes sense. And then, Hunter, on the labor side, you have I guess a couple of deals you are still working on but maybe you could just give an update there about what do we have to think about, do we have to worry about any work stoppages? I know one of the unions gave you a gift when you arrived so can you just talk a little bit about just the tactical side of the labor agreements?

Well, we had the unfortunate -- right before I arrived -- work stoppage that was settled through effectively arbitration. We have signed five agreements with various collective bargaining units and I think I'm correct here, there is only one left which is effectively the CAW. I think it is comfortable to say that Keith and I both have established a pretty good relationship with that group. They are very demanding and they are tough and they should be but I think there is some mutual respect there.

And so the CAW is coming up. We just sat down with them about three or four weeks ago with their committees kind of exchanged some ideas on what we saw coming in the future, talked to them about some opportunities of insourcing. So it was a positive dialogue so I don't see any bumps in the road looking out over the next three or four years with labor.

Okay, that is great. Thank you for the time.

Thank you, Bill.

Steve Hansen, Raymond James.

Good morning. The crude by rail opportunity continues to be pretty dynamic here and strong momentum shaping up in terms of Canadian loading infrastructure. Jane, I was just hoping you could provide us some context around the growth from your current run rate of business and out to your future line of sight goal post and really what that means in terms of revenue per carload growth or just length of haul over time and trying to get a sense for how the business will transition aside --just from the carload count itself?

I think what you need to do is you need to follow in terms of the information that we have provided about where the markets are. I think that certainly the volume is going to change, it is going to move around as the market and (technical difficulty) demand for different crude evolves. And there is some sort of impact as well in terms of the spread.

The majority of the volume right now goes to the Gulf but the other markets continue to develop pretty quickly and our approach where we started off working with primarily marketers, we have now expanded that to producers and transloaders to make those markets.

So it is likely that in the Eastern markets and the Western markets they will start to attract the light and the Gulf will attract the heavy but it is really hard for me to predict in terms of where that market is going to go over the long term.

We do know that in terms of what we have seen so far is that we have been able to obviously establish and build that market out into the US Northeast and obviously we are going to start to move that as we think about that expansion to the Gulf. So you are going to see movement around in the average revenue per car. I think that again when we look at that overall with the model in terms of modeling that, what you are going to have to do is basically we will give you certainly reliance on how the volumes will move. We will provide you visibility in terms of what the next major parts are working with our customers on how it evolves and that will give you a better representation in terms of how you can start to model those distances and basically how average revenue per car will move in each of the markets.

Okay, that is helpful. Just as a follow-up to that, it seems conspicuously absent at least thus far that the Canadian majors or the large Canadian heavy oil producers have not really fully embraced the model as yet. There have been indications in the press and by one of your competitors they seem to be evaluating the model pretty seriously. Just wanted to get a sense whether or not you can provide any color on just the broader sort of large cap universe in Canada and whether or not they are starting to embrace this model?

What I would say to you is that I think it is fair to say that obviously the marketers and the transloaders came faster to the market than the major producers. But when you look at the dynamics of heavy crude and how important it is to get that product either to a point at export which I expect will evolve over time because getting it to tidewater obviously gets you the global price. I think the other thing that we are really having obviously intense dialogue a lot of it being confidential is that producers are obviously looking for end markets because refiners need this product.

So I expect that you need to kind of watch our progress as we move forward. But I think it is safe to say that the next generation of development which you are going to see will be dealing with producers and refiners as we expand that marketing opportunity beyond the points at which we started, (inaudible) around the resource that was in the market.

Okay, very helpful. Thank you.

Scott Group, Wolfe Trahan.

Thanks, good morning guys. I want to start just a couple of things on the cash flow side. CapEx was down 13% year-over-year. Maybe if you just have some updated thoughts on CapEx for the year. And then along with that if you have any updates in terms of timing and magnitude of some asset sales you have talked about? And Brian, anything in terms of updated thoughts on when we should start thinking about returning some cash?

Was that one or three questions? Scott, let me take them first. CapEx down 13%. Q1 last year we did take delivery of locomotives in the range of 71% so we have guided to CapEx of CAD1 billion for the year and over the longer term, CAD1.1 billion -- sorry we are guided to CAD1.1 billion. So that is just a reflection of the locomotives we purchased Q1 last year.

In terms of asset sales, I did on routine sort of smaller transactions, I did mention 10 million to 15 million from my comments. Part of what Keith and Hunter are going to be doing in the white board session is really looking at the yards as well and so that is something that over time will give you more color in terms of sort of the larger surplus land sales that we have talked about.

And I guess finally returning cash. Our first priority and Hunter and I have both said it, is investing in the core franchise. Second priority is strengthening the balance sheet, improving the credit metrics, moving to mid-investment-grade. And then finally, we are looking forward to the discussion with the Board on other possibilities in terms of returning cash to shareholders around dividends, share buybacks, all that.

I think we are looking forward to that conversation but our first two priorities are investing in the franchise and improving our balance sheet strength.

Brian, you might comment on just where we are with the DM&E and the expressions of interest and so forth there. I am sure --

I think from DM&E, we have received -- there has been strong interest. We have received preliminary expressions of interest and we are presently going over them and then in short order we are going to be deciding next steps and narrowing down the number of people we are going to be talking to. So again on that front, I will be able to give you more updates as the year unfolds.

That is really helpful. Then just maybe a bigger picture question. We've talked over the past year at length about kind of structural differences between CP and some of the other rails. And Hunter, we've gotten your thoughts over the past few quarters but haven't really heard from Keith on this discussion.

So maybe Keith, if you can give us your thoughts on that and, Hunter, if you do have anything to add now that you have been through your first winter at CP just in terms of some structural differences.

I guess I can bottom line that there are puts and takes at every railroad, we all have our challenges. It is an outdoor sport. But I see nothing of any meaningful structural difference that should have an adverse impact on our performance. In fact I see some structural opportunities on some assets, some particular rail lines that previous management in my mind have not utilized properly.

Case in point, we have got a north line that runs up to Edmonton, you can take that route, go west to Edmonton, come south to Calgary and to the coast and it is about 200 miles shorter than the current or previous route we were running with some of those potash assets and grain assets and eventually will be oil assets. So as we convert that structural opportunity, we are going to see cycle times reduced. We are going to see crew savings and we are going to see fleets turn and revenue go to the bottom line.

So I'm pretty excited about the structural opportunities, not very concerned at all about the structural challenges.

My position has not changed at all. This is a strong franchise. I think over time you are going to see the seasonality factor level even more and more and we are always going to have it, we are always going to have winter to deal with. Sometimes they are going to be worse than others. That is part of our job. We will deal with it, we will deal with it more effectively. And I guess to get best case in point is to produce the OR that was produced this first quarter.

And I'm not making excuses for weather but the winter was a little harsher than normal this year and if we could produce those kind of operating results that gives you some indication of what the potential is on the other three quarters when you don't have that factor involved.

So I love the franchise. I don't see any structural issues that we can't deal with.

Okay. Great to hear it. Thanks, guys.

Chris Ceraso, Credit Suisse.

Thank you. Good morning. I wanted to come back for a second to the discussion about crude and Jane, you mentioned how as the business evolves and more of the growth in coming years is going to be the heavy crude in Western Canada and you start to think about destinations for that, how do you feel that CP is positioned in terms of the share of that business over time?

I think currently maybe you are doing a little bit more crude than the other Canadian rail but if we look out over the next two or three years as the origin and destination payers shift, how do you think the market share is going to shake out?

I think that first of all, where we come from is we think about heavy crude and how we evolve our market is obviously in two ways. I mean first of all you build on the model that you have in terms of manifest and building that into unit train opportunities and you use that to expand your footprint.

Secondly, I think there is obviously -- there will probably be some inherent advantage that CN may have that gets them up into the North but the models that we are developing now and that we talked about as we roll our volume have been basically working with producers, working with marketers where we are pulling volumes off of pipelines.

I think I've spoken to this before. It is one thing to build a manifest facility. It is a next step to build the infrastructure that puts in place loop tracks and other efficiencies that builds just unit trains but there is also a great opportunity to work with customers on a supply-chain basis, develop very, very core and important objectives that they are investing in -- certainly our announcement that we had in Hardesty is one that substantiates the ability to work with the customers to find options where you can build into the pipelines and use that as the ability to drive unit train volume on a daily, weekly basis.

So when I look at that opportunity I think that we have a great franchise. I think that we have got certainly, to Keith's point, some excellent opportunities with respect to our north main line. We have excellent connections and we have proven the quality of our crude by rail model in terms of its consistency and reliability into some of these core markets. And I think at the end of the day those are the things that are going to be able to allow us to build the game plan that we have set for ourselves.

Let me comment on that. Let me tell you what bodes well for us. We get to certain markets, competition gets to certain markets -- this is a competitive world. In the final analysis, it is the people that produce the best service and create the best cycle times. That is who is going to win as we approach [crossover day]. That is the group that is going to win.

The suppliers today are starting to understand and appreciate the cost of rail cars because they are buying them and they understand the power of cycle times and it is the provider that provides the quickest, fastest cycle time and turns on assets that is going to win the business which is a game that we like to be in.

Okay. And I guess just a follow-up really on same subject. You have shown that the revenue per unit in this business is very strong. As you go forward, do you think more of the business that you pick up will be competitive where maybe the revenue per unit won't be as strong because it is a competitive bid?

I think really it boils down to really kind of a combination of what Hunter just indicated. We make our opportunities in this market. We pursue those that make the most sense. Again, we price for the value of the service that we put into the market and the value of rail to these customers. Again, we partner with customers that are investing in the crude by rail model and those who are investing in their own infrastructure to grow it.

And so the way that we look at it is that there is many varied factors that cause a customer to think about crude by rail and our focus is basically to make sure that we are commanding the value for the service we provide. We mitigate the risk by managing the investment and that we do this in a judicious way where we see other benefit and lift for other business that what we want to operate on those corridors.

So for me it is all about sticking to the game plan. We feel we have a good one but it is all about pricing for value, and as Hunter said, showing those customers we not only build consistent ratable supply chains but we do it in an efficient way where they can manage their assets.

Okay, great. Thank you very much.

Jason Seidl, Cowen Securities.

Good morning everyone. I wanted to focus a little bit on coal. You obviously had a decent quarter here in 1Q. You are calling for flat 2Q, yet it looks like your comps are a little bit easier. I think in your commentary you mentioned something about some weak thermal numbers in the US. Can you give us a little more color behind that and more color behind what we should expect out of your met exports in 2Q?

Well, I see on the met side, obviously, we have really three franchises. The first one that we have is obviously our export one. We have a smaller portion that is made up of our US thermal market, and then we have the opportunistic side which we would call our PRV traffic that we move out of Ridley Terminals up at Prince Rupert on a joint line basis.

When I look overall and I look at the performance of our team on our supply chain on export, obviously we model to Teck's forecasts. There is always volatility, but when we look at that market, we perform and manage the supply chain very, very well. I think obviously on the US thermal side, there is always some volatility or that there could be some softness there given those markets, because they are subject to change.

And I think that the PRB market is going to depend on the economics. Largely, we are available to move that. So when I look overall, I think our export is going to be strong. I'm just signaling that I feel for it to be flat, we ought to anticipate perhaps some weakness that we would see in the US markets on the thermal side and on the thermal export PRB.

Okay, thanks. That is all I had for today. I appreciate the time as always.

Cherilyn Radbourne, TD Securities.

Good morning. If I looked at your expenses in the quarter, it seemed to me that labor expense was a little bit higher than I would have expected and the purchase services was a little bit lower than I would have expected. And I know you have talked about insourcing jobs as sort of a philosophy. So I just wondered to what extent we were already seeing that kind of a shift in your numbers this quarter?

Yes, you are seeing that -- a parcel shift. I mean we did outsource or insource -- Hunter talked to it. So there is a small shift from that. Part of that shift would also actually be into materials as well as -- because part of it is insourcing the work we do around wheel.

So -- but it was affected during the quarter so it would have been sort of a full quarter impact. But yes, you are seeing that.

Going down the road, you will also see the shift that we talked about from an IT consulting point of view and bringing stuff in house so that is really where you almost have to look at two lines in unison as opposed to just trying to model them separately.

Okay. Second one I suppose if someone wanted to kind of poke holes in the quarter your safety metrics did compare unfavorably on a year-over-year basis. So I just wondered if you could give us a bit of perspective on severity there?

When you say severity as far as just overall raw numbers?

I am just alluding to the fact that statistics can be misleading so --

I can tell you round numbers year-over-year I think we have had two more reportable (inaudible) than we had last year. Severity is actually less than it was last year so costs are down. I can tell you that operating safely has been and always will be priority number one at CP. It is our moral obligation and a commitment to our employees, the customers, communities we operate in and through and that focus is not going to change.

We are going to focus on rules compliance. There is a level of opportunity there that I am convinced we haven't seized yet so as we do that and as we continue to change this culture and this evolution, not only are we going to perform well from a service side, we are going to perform well on the safety side so there is more progress there to be made.

Okay, thank you. That is all my questions.

Walter Spracklin, RBC.

Thanks very much. Good morning, everyone. Just wanted to ask you, Hunter, you had mentioned car ownership and how the incentive is put in the right place when you have some of your customers owning more of your cars. And I know that with a lot of your customers certainly your larger ones you do own your own cars -- you own their cars or the cars that you use for them.

Are you considering at all or is there an opportunity here for a major switch on some of your larger customers to their own car ownership and drive some of that incentive?

I think in our view that is more up to the customer. We are willing to own railcars and we get rewarded for that to some degree and there is obviously an upfront cost. At the same time if they would prefer and most of them appear to today, and I'm not sure I understand that, but prefer to own their own fleets and control them and so forth so we are happy to do that. It is just one price if you furnish the equipment, it is another price if we furnish the equipment and we are effectively indifferent they are.

Okay, so it is not part of your asset sale kind of --?

No, no, not at all.

Second question here is more toward Jane I guess. Yields, you have often guided us on kind of same-store pricing trends of around the 3%, 3.5% mark. Average yield is down this quarter and I'm just curious to what extent mix effect of that is the reason? I know you have got a lot of moving parts with crude and certainly on potash varying quite a bit quarter to quarter.

If when we look for the rest of the year based on the volumetrics you have kind of been pointing us towards, should we be modeling therefore negative average yields despite your same-store sales in the 3%, 3.5% range?

First of all, I think we should go back to just talk about the quarter for a second. [ARC] was up 8% and our cents per RTM was down 1% and I think the question is is this weakening? I think first of all is that these aggregate price measures not go out of variation that we see including some of the mix change.

So as I indicated at a high-level, a large increase in the long-haul volume of traffic such as crude and export potash basically kind of get us consistent with those two messages. I think that those were obviously the dominant gains in the quarter and expect some of the differences really explain that.

I think overall as I have said when we look at ARC, I have signaled that the growth and certainly double-digit growth that we are expecting in the IP portfolio specifically from crude is going to move that around but I think that obviously as we look at cents per RTM, when we look at that substitution or that movement into the longer haul markets, we are going to see some fluctuations that are largely as a result of unit trains, ship release cars moving in long-term lanes.

But I think when you look at overall price, our focus is number one, to achieve our price strategy and again deliver to that 3% to 4%. And per Hunter's comment, is to continuously work on improving the quality of the book which we have underway so I would not be concerned about that.

So on a revenue per revenue per ton mile basis at the end of the year do you expect to be up or down generally?

I think we expect to be up but again it is certainly an impact as we go through as we bring our crude on. As I said before, it comes on faster, I think certainly as I talked about, if there is some outside on the export potash side, obviously if it is ratable and it's something that we can see as sustainable profitable growth, we are going to pursue that. But I would say yes, you could expect it to be up.

Great, thank you very much.

Brandon Oglenski, Barclays.

Good morning, everyone, and thanks for squeezing us in here at the end. Congrats, Keith, on joining the team here. And Hunter, with Keith now in place and running the operations just wanted to ask you a longer-term strategy question. As you realize these efficiencies and cost improvements you are obviously going to have what supposedly will be better free cash flow in the future.

So what are the capital priorities going forward? Are there any acquisitions that could be additive to the network or potentially open you up to new market exposures that you are looking at down the road? Or does it just become a story about increased repurchases, higher end? Where are your priorities looking ahead?

Well, I think the priorities are this. Number one, is to be low cost carrier and provide the best service and if you do that you are going to have a lot of opportunities open up for you. You are going to have opportunities for M&A activity if you so desire. You are going to be something that others are looking at and learning from. So those opportunities potentially will present theirself to us.

At the same time, there is not those opportunities here. This is pretty exciting doing what we are doing here making money and rewarding shareholders and paying dividends and if we get into that mode, buying stock back and all the things.

I think the key is is that we don't go in with a booked plan and get locked into it and we maintain our flexibility. And always what we are going to focus on is being the low-cost carrier, providing the best service and as long as we do that all of these other opportunities will be in a better position as a result of that.

Thank you. It has been a long call, I will keep it to that.

Thanks.

Keith Schoonmaker, Morningstar.

Thanks. Longer-term question about Intermodal. Historically your largest and still second-highest revenue segment. Broadly Canadian US markets were up 4% to 5%. Intermodal, your quarterly units and revenue declined about 4%. Balancing this higher selectivity of sensible business of your new faster service, can you share current thinking on sort of addressable attractive Intermodal market growth, please?

Yes, I think that what we have been doing and I think it has been pretty clear is that we have basically made some pretty clear choices about needing to tighten up our Intermodal network basically taking out some of the higher costs, low growth segments. And within that mix, there was also some contractual adjustments that we needed to make on the international side.

When we look at growing that business, the one thing that makes me very pleased about where we are and the direction that we are heading is that we are seeing growth on the domestic side. Clearly our plans are to grow with market leaders. We have a new retail reality coming into place into Canada and I think that overall when we look at the US and the cross-border, there is obviously some opportunities to target new customers. And certainly in many respects, this is really about going out to the market place with an improved competitive service where quite frankly we weren't competitive before and showing and demonstrating our consistency and reliability to grow with customers that represent solid prospects that are making choices around obviously service.

I think there is other lanes that obviously we are working on as pertains to trucks I think as we get more competitive and we have renewed our product that we put into the market on our Expressway product between Toronto and Montreal and we have seen that product build up.

So I think we have got lots of strategic initiatives but again it is kind of a dual balancing act for us internally around making sure that we are growing with the right customers, that we are improving the operating income of the book and that the prospects we bring on represent sustainable profitable growth.

Thank you.

We have got five more questions in the queue and we will take those five questions and I don't want to cut anybody off and then we will close out.

Benoit Poirier, Desjardins Capital.

Thank you very much. I will try to be quick. Jane, just wondering about the spread between RTM and carload going forward. I understand you will provide more numbers starting in May. But given the outlook provided on the call, should we expect the spread to maintain at the high level in the next few quarters?

I think that -- I mean I'm not going to predict obviously given the fact that we don't have our grain crop in and a number of other things for the rest of the year but I can say given some of the growth that we are expecting certainly on our merchandise portfolio that we should expect that given the fact that we are indicating double-digit growth. So that would be a pretty safe assumption.

Okay, quickly given we are entering into the spring season, any color about any potential flood especially close to your DM&E network?

We are currently as I mentioned earlier, last week I guess it was this past weekend, we lost the railroad at Davenport, Iowa, have or the rivers dropped down and we are literally pumping right now and we expect to be back in service tonight. So maybe there is something on the horizon I'm not aware of but at this point that was our immediate concern. We have dealt with it quite well, quite aggressively and I am pleased with the response and I don't see any material impact to our service at this time.

Okay. Thanks for the time.

Thanks, Benoit.

Jeff Kauffman, Sterne, Agee.

Thank you very much. Congratulations, everybody, and my question has largely been asked so I will be brief. Brian, following up on Scott Group's question, you are now two quarters in with better than expected results. As we look at the free cash flow and the free cash flow opportunities, is there a general level of cash that you just kind of want to have in the box before you start considering alternatives or is it more based on the white paper session and kind of where we go this fall?

Jeff, that is the same question you asked me in December but -- .

Good memory.

I am very pleased with the progress. I mean from a free cash flow point of view, the first quarter is always lower just in terms of we build up inventories for the track season. We also insourced some inventories. Again, we talked about insourcing some work as well as a good news story is our receivables are up so that is a draw. That is why you see in our free cash flow the increase in uses of working capital.

But I am very pleased. We have got CAD350 million or close to CAD350 million cash on the balance sheet and Hunter will before he jumps in, we will not have a lazy balance sheet. But as I mentioned to you, we have given you our priorities and I'm looking to have that discussion first with the Board and then we will share that with you either later this year or early the beginning of the next year.

Let me add to that. This is a relatively new issue to deal with at CP. We have a Board that has had a tremendous amount of turnover. We have I think three or four members now, maybe five left from this time last year. So we are trying to develop -- the Board is looking, they are looking at constant -- can we produce this on a consistent basis? And I think when they see that we can consistently do this and perform this way and can produce these levels of free cash flow, we will be in a position to do the appropriate thing as Brian has described earlier.

I am wishing you more of these high quality problems. Congratulations.

Steven Paget, FirstEnergy.

Good morning and thank you. My first question is on service improvement. Can you talk about car order fulfillment or switch window compliance for us to put these improvements into perspective?

Yes, car fulfillment through the first quarter neighborhood of 92%, 93%. It depends on the (inaudible). There was some squeezing or some tightening of available capacity on for instance, the pulp, some of the pulp customers. We had huge demand ramp up. We had winter affect us a little bit. But we pretty much worked through that so that is not an issue anymore. So those are the neighborhood of the numbers and what was the other question?

Switch window compliance but it was either one of the other was fine.

Yes, yes. Switch window compliance is not a measure that we've enacted here at CP. We've got a lot more to get at before we get to that level of granularity. Right now as long as we get these trains scheduled as we talked about with this white board exercise, those assets will turn into -- those terminal dwell is going down, we will be meeting our customers' expectation on the switch windows on a day-to-day basis.

Thank you. Second if I may, when Tier 4 locomotives come mandatory, the fuel efficiency of these new locomotives might slip. Are you looking at stocking up on I guess Tier 3 locomotives prior to the changeover?

I can tell you now we've got enough locomotives to carry us through 2017 which are grandfathered for the Tier 4 application that comes into effect in 2015. And to your point about efficiency, we listen very closely with the OEMs to push them and lead them and work with them and partner with them to create locomotives that are Tier 4 compliant that at the same time don't cause us to lose any fuel efficiencies. And that is what the objective is, the leading indicators now are they going to give us locomotives when we do get back in the market that maintain their level of fuel efficiency that we enjoy today.

Thank you very much and those are my questions.

David Tyerman, Canaccord Genuity.

My question is on purchase services. They did come in lower in Q1 and especially relative to the second half of last year. I was wondering if you could shed some light on what we should be thinking in terms of modeling going forward on this line?

I think in terms of purchasers as I mentioned can be lumpy so if you look at this quarter, there were some favorable items that we do not expect. There was the 9 million one-time management transition settlement. Land sales were a bit higher in Q1. So I would factor out those and -- but at the same time, you can get some lumpiness in terms of we do have a locomotive overhaul program or whatever but clearly I would factor out those items and use a higher number for the coming quarters.

Does that translate into something like CAD220 million to CAD230 million is a better kind of run rate to think about?

I think I've given you a lot. I'm not going to do your models for you but there are some items that took it down this quarters so it will trend up in future quarters. Thanks.

Can I ask then what would be the net unusual in Q1 then?

So if I looked at the sort of one-time -- so I would say I guess you are pinning me down to an answer here. But in my comments I gave you that but we had -- in terms of the one-time, the CAD9 million, the wheel recoverables were in there, the land sales. So all added, you are looking at around CAD20 million.

CAD20 million. Okay, thank you.

(inaudible) Scotia Bank.

Hello, good afternoon. Just one quick question here for Keith. I was just wondering, Keith, now that you have looked at the network and you looked at the CapEx forecast over the long-term about 14% to 16% of revenue, do you think that is enough with the requirement to maintain the network as well as looking at the book of business growth here over the longer term? Thank you.

Short answer I would say, yes, but at the same time if we have compelling book of business opportunities that present themselves that require capital, we won't hesitate to make the right business decision and use our cash to invest in that.

Okay, great. That is all. Thank you very much.

Thank you very much for joining us. I look forward to talking to you with the second-quarter results and talking about hopefully a record performance again and we appreciate your patience. This was a little longer than normal but we didn't want to cut anybody off and wanted to give respect and let everybody have their moment. So thanks for joining us and have a good safe day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.