Canadian Pacific Kansas City Ltd (CP) 2013 Q4 法說會逐字稿

Good morning. My name is Aaron and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific's fourth-quarter 2013 conference call. The slides accompanying today's call are available at www.cpr.ca. 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). I'd now like to introduce Nadeem Velani, AVP Investor Relations, to begin the conference.

Thank you, Aaron. Good morning and thanks for joining us. I'm proud to have with me here today Hunter Harrison, our CEO; Keith Creel, President and Chief Operating Officer; Jane O'Hagan, EVP and Chief Marketing Officer; and Bart Demosky, our EVP and Chief Financial Officer.

Before we begin, I want to remind you 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 Canadian and US regulators. This presentation also contains non-GAAP measures outlined on slide 3. The formal remarks will be followed by Q&A. We would appreciate if you limited your questions to strategic items and if you could have any modeling questions, please follow up with Investor Relations after the conference call. It is now my pleasure to introduce our CEO, Mr. Hunter Harrison.

Thank you, Nadeem and welcome to everyone. We have got a lot of ground to cover today, so I'm not going to be redundant with the presentations that my colleagues are going to give you, but just suffice it to say that I was extremely pleased with the quarterly and annual results. I think we exceeded most expectations. I think that we've assembled now a team of railroaders that is second to none in the world. And I think that as we go through the presentations today and talk about [the items] in the future that it will give you even more confidence in what this team has got the ability to produce.

Let me just highlight one thing that I was extremely pleased with that took place right at the end of fourth quarter and right at the first of the year is we brought on a new executive vice president and chief financial officer, Bart Demosky, who came to us from Suncor. We did extensive searches all over North America for a longer period of time than I would have liked to have done, but it was worth the wait because I am convinced now that we could not have gotten a better candidate. It just so happened that he happened to be a neighbor here in Calgary. He has hit the ground running. He is a quick learner. As you will see by his presentation today, he is getting a grasp of the business and he has become an integral part of this team. So welcome, Bart, to the team. It's nice to have you and with that, let me turn it over to Keith to make a few comments on the operating results.

Okay, thanks, Hunter. I am just going to highlight some of the key points of the quarter, some of the things we are most proud of and save any expansionary questions for the Q&A time. Overall very impressed with the operating team's performance in the fourth quarter in spite of some pretty tough comparables that we did have to counter impact last year's fourth quarter 2012 with the hop yards and some of those things that you put into play, Hunter. So the bar was raised for us this year, but this team has met or exceeded those challenges. We drove additional improvements in train length, weight and fuel again in spite of the comparables and in spite of the weather challenges, which kicked in in spades in December.

Strong volumes in the first two months helped drive a lot of the operating leverage with RTMs up significantly, about 9%. Until Mother Nature started throwing some curveballs at us in December, we did have some headwinds there that we had to deal with, which limited some of the productivity gains and impacted the service offerings. So a little bit of impact on the operating efficiency side, as well as on the revenue side there in December. But in spite of that, closed the quarter very strongly, not losing any ground to our record performance in third quarter at 65.9%. It's something we are very proud of that this operating team produced.

Some of the leverage key highlights there, fuel continued to improve dramatically year-over-year by increasing our train lengths, extending these locomotives, faster and aggressive on the fuel conservation side, 7.8% improvement versus 2012. A little bit more excited that we closed the gap to fast becoming best in class. 2012, we are about 12%, behind best in class, third best in the industry. 2013, we closed the year out only 4% off of best in class and second best in the industry. Rest assured, we have got line of sight to be in best in class by the end of 2014.

On the safety side, another very encouraging story fourth quarter, best fourth quarter -- best quarter overall safety performance on the train accident side in the past three years, about a 20% improvement over 2012 and more importantly, as we told the market back at the end of the first half of the year, some of the challenges we had we were confident with our investments through technology, through our physical plant improvements, as well as our culture changes driving rules compliance in safety, we would see a benefit. We closed that gap. We finished the year just a little off, almost flat with 2012, which is a record year. So very encouraging, a lot driven by and we are carrying that momentum into 2014 having so far a very encouraging safety performance from a derailment standpoint, accident standpoint in 2014.

So with that said, 2014, another strong year, much still left to do, more to come. We have invested quite a bit in 2013 in sidings, which came on late in the year. We can be able to convert and expect this operating team to convert that in 2014 taking out additional train starts, driving some more velocity improvements and more locomotive productivity improvements, train weight and length improvements. And focusing in our yards, I'll remind you the whiteboard sessions we did last year, those kicked in certainly and stayed second half comparable-wise over first half. We did (technical difficulty) the benefit of those. We will realize the benefits of those operational improvements with train mile reductions and all the benefits of that the first half of 2014.

And as we look at 2014 from a capital investment standpoint, we are going to continue to strategically invest in our network, to increase the reliability, to increase the safety. We are investing in CTC, we are investing in additional steel, we are investing in an additional 11 sidings by the end of the year with a focus instead of bringing all the sidings on toward the end of the year, we are going to pick the ones strategically that give us the most bang for the buck from a velocity standpoint, from a service reliability standpoint and concentrate our assets and resources to bringing them online based on that sequence in priority through the year. So we will start to see some of those gains a little bit earlier than we would have otherwise.

So with that said, very, very excited about 2014, about the abilities and the opportunities that are out there. I'll turn it over to Jane to comment on how she is going to convert that in the marketplace.

Yes, good morning. I am pleased to announce that we delivered 8% revenue growth in 2013 and specifically on the quarter, we continued to improve the quality of revenue and to deliver on our growth initiatives giving us a record revenue performance with 7% growth over Q4 2012. Our average revenue per car was up 6% and our renewal pricing came in above our target range of 3% to 4%. Demand remained strong, but, as Keith indicated, volume softened toward the end of the quarter as the entire supply chain was impacted by poor weather conditions experienced across North America. For 2014, we are targeting 6% to 7% revenue growth.

As further guidance, I will note that a CAD0.01 drop in the value of the Canadian dollar versus the US dollar has a positive annualized revenue impact of about CAD35 million.

So turning to 2013 highlights of the business, I will report revenues on a currency-adjusted basis. So let's start with grain. Our Q4 results saw revenue up 5% with the exceptional Western Canadian crop estimated to be 79 million tons, or 27% higher than the previous record. We have a strong export program moving 12% more grain through Vancouver in Q4 2013 than in 2012. Our carload decline of 1% reflects lower demand in the US Midwest relative to Q4 2012 when we had a significant increase in the volume we shipped to domestic US markets we traditionally don't serve. Average revenue per car was up 9% as pricing gains were achieved in both Canada and the United States. Our outlook, we see a return to normal US conditions combined with a record crop and strong demand in Canada that will present upside opportunity through 2014 for our entire grain franchise.

Now turning to fertilizers and sulfur. In Q4, we were down 9% in revenue, but despite global market uncertainty, our export potash volume increased strongly against a relatively weak Q4 2012. Domestic fertilizer weakness resulting from a late harvest and a small application window offset gains in potash exports. The international potash market and prices began to stabilize at the end of the quarter. So as we look to the outlook, there are strong demand fundamentals for domestic fertilizer applications as both farm incomes and grain prices are up and because demand was constrained during the fourth quarter. The return of cooperation between Russian potash producers creates greater price certainty and this stability sets the stage for international buyers to purchase with a lot more confidence. We expect this development will drive a recovery in export volume similar to the experience in the first half of 2013.

As we turn to coal Q4 results, revenue was flat year-over-year. As I advised last quarter, met coal exports drove an increase in our Canadian volume while a decline in US coal traffic related to continued weakness in electric utility demand presented. The decline in short-haul thermal traffic and the increase in longer-haul export met coal resulted in a 6% increase in the revenue per car.

As we look to the [outlook], [pet coke] has a strong position in the met export coke market both with respect to market diversity and in cost performance. And the increased capacity is expected to translate into volume growth for CP's Canadian franchise. US volume growth is uncertain as questions remain about turnaround in the domestic and export demand for thermal coal.

Now let's turn to intermodal. Q4 results, revenue was 3% lower year-over-year, but I consider 2013 intermodal performance to be a success as, by year-end, we had improved the quality of the revenue, closed the revenue gap created by facility closure, services continuance and book-of-business rebalancing. As I look towards the outlook for 2014, I want to reiterate that we are growing in the right lane with the right customers aligned to our service capability and our network strength. We are taking advantage of our service improvements by growing where we have competitive advantage, where we can price for value and improve the operating income of the business.

We expect intermodal revenues to be down for the year reflecting in part the old CL business that is shifting to CN, but we will meet the same intermodal challenge in 2014 that we successfully addressed in 2013 to continue to improve the operating income we generate from this business and to fill any revenue gaps that appear. The overall book of business will continue to change both as international contracts shift between carriers and as the composition of our domestic book changes. Our book will remain strong as we continue to focus on the segments and on the customers that drive the greatest value to both parties.

Now as I turn to industrial and consumer products, our Q4 results, we were up 18% in revenue. We moved 25,000 carloads of crude in Q4 for a total of 90,000 carloads for the year. Our Q4 RTMs were up 20% due to gains in crude oil and increases of frac sand originating from mines that continue to ramp up their volume. As I look to the outlook, our crude oil customers have confirmed they continue to value rail service and facility development and the expansion is evidence of their commitment. Our capacity buildouts are proceeding at a more measured pace and we continue to see increasing volumes of heavy crude moving with different economics and drivers of demand than the lighter Bakken crudes we predominantly move today.

We will continue to mitigate our risk by advancing growth in careful stages that accommodate investment, the market commitments of our customers and choose those that provide good margins. While we carefully build the capacity to handle consistent term volume, we also have the capability to move volume that responds to the movement of spreads. We have announced three new frac sand facilities on our network in Wisconsin. The new capacity will produce high-quality products and will be phased in throughout the year. Our other industrial products will trend with GDP growth.

So in conclusion, I am looking forward to 2014. Our operating team has set the table for us and we will now self-service with sustained profitability. While we have some revenue headwinds from intermodal and automotive contract shifts, I'm confident that we can deliver revenue growth of 6% to 7% in 2014. We are starting this year off with a new marketing and sales organization that we rolled out in Q4 and we are kicking off next week with a new incentive compensation program that will reward profitable growth. The team is focused, we are up to the challenge and with that, I'm going to turn it over to Bart.

Well, thank you, Jane and good morning, everyone. I thought I'd maybe just start off by reiterating a couple things and first and foremost just how excited I am to be on board here at CP. Hunter gave some very kind comments at the beginning there and I'm looking forward to being up to the challenge. It's a great opportunity and one I'm really looking forward to. I'm also excited to be here on the call with all of you today.

It is only day 18 for me, so I am going to keep my comments at a fairly high level and focus on three things. First, I'll just cover off a few of the key metrics for you. I did want to spend some time on operating expenses because that is such an important part of the story and the value contribution here and there is continued great work going on there and then I am going to touch on free cash flow. I know that is an area of interest for many of you, so I'll provide you with a few comments there.

So just to kick things off, it was a very, very strong quarter. Adjusting for significant items, our operating income was up a full 45%. Net income was up the full 51% resulting in EPS of CAD1.91 and we hit an all-time operating record of 65.9%, an improvement of a full 890 basis points year-over-year.

Now there were -- there are a couple of below-the-line items that I did want to draw your attention to. One is other charges. That typically has a run rate of about CAD3 million in a quarter. We were impacted by foreign exchange this quarter. So in the quarter, that cost us about an additional CAD3 million. And then if you look at CP's effective tax rate, it came in to just over 28% for the quarter and that was higher than our guidance that we provided previously of 25% to 27%. Two things happening there. One was the BC tax rate increase that occurred earlier in the year and then on a good news story, of course, we are seeing higher revenues in the United States, which is positive, but it does attract a higher tax rate.

Onto the operating expenses side, I am going to speak from the perspective of an FX-adjusted basis and just keep that in mind as you listen to my comments. In Q4, foreign exchange did have a positive impact on our revenues of about CAD43 million. Likewise, it increased our expenses by CAD29 million and a couple of metrics to leave with you. In total, for every CAD0.01 the Canadian dollar depreciates, it increases our annual revenues by about CAD35 million -- Jane had covered that earlier -- and our expenses by about CAD20 million. Another good rule of thumb is that for every CAD0.01 change in the exchange rate, that equates to about a CAD0.05 change in EPS for us and for reference, we have set our guidance for the year using a CAD1.05 exchange rate. So we do have a tailwind right now to start the year.

We saw continued improvement on the comp and benefits side this quarter and that is despite higher stock-based comp volumes, but that was more than offset by significant efficiencies that were delivered. Stock-based comp headwinds, to be frank, those are quality problems because that means all shareholders are winning. And year-over-year, it was only a CAD9 million headwind, but sequentially it was about a CAD25 million drag. Going forward, just to give you a guideline, you can expect our stock-based comp sensitivity to be about CAD850, 000 of additional expense for every CAD1 increase in the share price.

Now before I wrap up on comp and benefits, I should note that, as a result of a higher discount rate, but also very, very strong portfolio performance, we experienced a 15% return on a portfolio basis for our pension assets in the year and as a result, we are expecting pension income of CAD52 million in 2014 versus an expense of CAD45 million in 2013. As you all know, pension accounting, it is a complex -- it is complex. There is lots of variables, but, at this point in time, we would expect to be in an income position in 2015 as well and we are guiding right now to about CAD50 million in income.

In terms of the balance sheet and pension impact, you will note that we now have a pension asset report. That would be the first time in a long time for the Company I would expect. This represents an improvement or a movement, I should say, from an CAD800 million deficit position in 2012 to a surplus in 2013. A couple of factors driving that. One I mentioned already, which are the favorable discount rates and the very favorable portfolio returns, but also we did have some planned changes and there were significant prepayments made in previous years. We are just running the numbers right now from an actuarial basis, but, at this point, we believe that we no longer have a solvency deficit.

On the fuel front, the 7% fuel productivity improvement that Keith mentioned more than offset higher fuel prices that we saw and the higher volumes we experienced in the quarter. The increase in material expenses primarily was due to volume and there was some seasonal weather impact in there as well. Equipment rents continue to be a very positive story with productivity more than offsetting volumes that increased in the quarter and purchased services saw a significant decline this quarter. There are a couple things going on there. On the efficiency side, insourcing initiatives drove lower IT costs and we are going to continue to see benefits there, as well as third-party maintenance costs and we also benefited from a bit higher land sales than we would normally experience, but also lower casualty costs in the quarter.

I am going to close out with a comment on free cash. In 2013, we generated CAD530 million of free cash after dividends and that is in spite of our CapEx ending the year just slightly higher than the CAD1.2 billion we guided to. The Company is clearly in the strongest cash position and free cash generation position in its history, which makes me feel pretty good as the CFO about my timing on joining and for anybody who knows my background, I'm not a fan of sitting on idle cash. So while I am not in a position today to guide you on our use of cash plans beyond those already outlined, I can say that we are taking a very close look at our options and I'll be discussing those with Hunter and Keith and the Board in very short order. So we should be back relatively soon with some plans there.

With that, thank you very much. Great to be on the call. Looking forward to meeting as many of you personally as I can and with that, I will hand it back over to Hunter.

Thanks, Bart. Good start here. So let me kind of put all this together and talk about a little (inaudible) for 2014 and I trust you have seen the numbers, but, on the revenue front, we are talking about 6% to 7% year-over-year revenue increase and I know there is going to be a little probably discussions on that whether that could be described by some as maybe a little conservative, but I think there is a lot of moving parts right now that we don't really have our hands wrapped around very good. One is what the Canadian dollar is going to do. Bart described to you some of the volatility associated there, what is going to happen in China. Although I think that will have -- if there is negative impact there, it won't impact us as it does others.

On the cost front, we expect to break through 65% from an operating ratio standpoint that effectively a full two years plus ahead of the full-year plan and I think that we look for earnings growth in excess of 30%, which makes me even more enthusiastic about where I am with the organization and just looks like it's going to be a long good run and I hate to leave in the middle of it. But that will be determined as Keith makes faces at me in the background here.

But I think that's a couple other things that you'll probably get questions about so I wanted to talk a little bit about them. Clearly we, as Keith mentioned, we had impact from the winter conditions here in Canada on a year-over-year basis and really was the last three weeks of December that caused the major part of that issue, but I would hasten to add that that -- those issues continue into January and they are in a location -- basically it is central Canada and the Midwest. So we kind of cut the network right in two, but, in spite of that, we have made some changes in the operating plan and I think Keith and his team are dealing with that very well.

On the headcount front, the number stands today at about 4750 or thereabouts. I would certainly expect by year-end 2014 we will clearly break through 5000 plus and there are some questions there, but that will be a very positive hit. And then we are having some challenges, but you always do with some SAP cutovers, but when we get those issues resolved, that's got some very positive impacts to us additionally on cost control efforts.

So with that, we'd be glad to address questions you might have.

(Operator Instructions). Tom Wadewitz, JPMorgan.

Yes, good morning and congratulations on the strong results and the good outlook. I wanted to see if you could give a little commentary around the target, I guess the 65% OR target. You had alluded to that in the third quarter Q&A session that you thought you would maybe be at 65% or a little better in 2014. And you are sticking with that, but now you have got a swing of CAD95 million or roughly year-over-year in pension. I'm guessing on third quarter you didn't have quite the same visibility to how helpful that swing would be. So what are maybe some of the puts and takes around that 65% and do you think that maybe that is conservative given the pension tailwind that you have?

Yes, Tom, I think if you looked at the release, it actually says 65% or lower. Do I expect to do better than 65%? Yes. What is the probability of it? We could debate that, but if somebody says, look, I think you are going to do 63%, I wouldn't argue with that a whole lot, but, at the same time, as I've described earlier, we have still got some issues out there. I don't know how bad this winter is going to be. I know if this first quarter continues like it is, and I hope it is not, we are going to have some catch-up to do in the next three quarters.

So I guess the best thing I can say to you is, as Keith described, all the operating metrics are falling in place. We have one significant labor contract to resolve this year that expires year-end with the Teamsters for the running trades here in Canada. I can tell you that we are in some informal negotiations with the running trades in the US and it's hard for me to put a probability on. Maybe we can make some breakthroughs there.

So if you characterize the guidance as conservative, I wouldn't debate that. I mean if we go back two years, people said we couldn't get there and now we are conservative. So in the future, sometime we are going to get this right; we will get this balanced up.

Okay, great. And then the second question, I guess either for you, Hunter, or for Keith. Can you maybe run through the timing of some of the bigger initiatives, what is going to have a bigger impact on the operating improvement? I know, Keith, you mentioned that you had some sidings that came on pretty late in 2013 and you have got some that are maybe pulled forward in 2014. Maybe how big that is in terms of driving operating improvement and cost side and then maybe some of the other big drivers. I'm sure there are a lot, but if you could highlight a couple of the biggest ones and maybe the timing when they really have an effect, that would be helpful. Thank you.

The short answer to that question, I would say that the things, the capital investments we made in the network last year that we got on late in the year, of course, that is going to have a meaningful impact in our ability to get to that mid-60% number, so we will start converting that immediately. After weather -- I mean that is the challenge, Tom. When it is 40 below zero, it's hard to run long trains and long trains are what you build the network for. So once we get out of some of these challenges Mother Nature has given us, you will start to see us make hay.

Now will we have quantum leaps like we had last year versus the previous? I would suggest no, but still steady consistent gains on train length and train weight and taking out additional crew starts will help us on the headcount issue and help us on the productivity and help us convert that revenue opportunity that is out there, especially on the bulk side.

And then the other things we are going to do to invest money, I mean the real gains from that, they will come second half and they will come in pieces. There are not going to be any big, again, quantum leaps, but steady, slow progress that keep helping us drive improvements in the metrics and sustaining the story towards that mid-60%s number.

Tom, I guess the one thing I would add to that is that, and I know it is difficult for you to (inaudible) put it in your model, but a lot of what we are seeing right now is we are going through learning curves here. We are going through culture shock and culture change. If I look around this table of the senior team that effectively reports to me, all of us effectively, with the exception of Jane and Peter Edwards, all of us have been here less than two years, in Bart's case 18 days. So we are going to gain a lot more knowledge. As we gain that knowledge, we are going to be able to impact change more out with the operating officers in the field. So there is a lot of runway left here going forward, but I think that is the big one that gets overlooked and I happen to think that the real successful businesses are the people and this team is getting, as I've said earlier, better and better, stronger and stronger. I expect that we will be -- this is just a little internal goal of ours. I think by the year-end, we will be out in the lead as far as efficiency from an OR or low-cost carrier, however you want to describe it. So there is a lot of runway left here barring any issues that we can't predict.

Great. Thank you for the time.

Okay, Tom. Thank you.

Fadi Chamoun, BMO Capital Markets.

Good morning and congratulations on the good results and the outlook. Hunter, you have said in the past consistently that once you have better service, you get a shot at more volume. And now that you have had sort of some time to go to market with improved service, can you share with us a little bit about some of the opportunities you see out there in some of segments and how quickly you think you can convert that service into growth in the next couple of years?

Yes, I think there is several things there, Fadi. Number one, as I've talked before, people are resistant to change, number one. So you really have got to differentiate yourself from the competition and give people a real reason to make a change. And I think we are on pretty solid ground with our bulk book of business. That's all about efficiencies and the more efficient we get, the more we can haul of it, but our real focus -- and so we are going to focus on being very efficient with bulk, but the real opportunities that I see are domestic intermodal and the non-bulk business or what we refer to as merchandise.

In my previous experiences, you have got to go out there and prove yourself in the marketplace for a year and a half or two years before you start to really gain momentum with some of those changes. So I think we will see some of that kicking in in 2014, but I think out years of 2015 and 2016 will really see about the ability. Now some of that is restricted to some degree because people have contracts and I think we are going to be probably -- in the areas that I just described of domestic and merchandise, we will be moving away from anything of what might be described as a longer-term contract. I mean anything -- number one, I don't know that we will do that many contracts, but if the customer wants to do a year contract, that's fine.

So I think the opportunities are still there and I think, to some degree, we are all going to be meeting and I think it is next week, there is a sales meeting where -- the easiest way I can describe this is a little bit of a shift away from a marketing-driven organization to a sales-driven organization where we hope we are going to go to commission sales where that book of business I've described of the domestic intermodal and merchandise -- to my knowledge, no railroad has ever done that really, so we are going to give people opportunities to go out and sell. In real successful organizations, the people who make the most money are the salespeople if you give them a product to sell. So all those things being said, I think that this is not just a cost take-out story.

Okay. Just to be clear, these new services, particularly on the intermodal side, have you seen marketshare improvement as a result of these services directly yet or you are basically saying that this is early-stage still?

Well, probably all of the above. We have seen some marketshare shift, particularly domestically and we have focused on that. That is much better margins. I think the international is going to be pretty soft this year for the industry. The markets are not as good and there is going to be more pressures on it given if there is issues in China and Asia. But I think also that we are going through a period where some big names are putting us through what they call a trial period and Keith has spent a lot of time hands-on with that, he and Jane and Matt.

So I think we are seeing the opportunity if we can produce and do what we think we are going to do that we are going to see gains there rather quickly. Now, we are not going to go out there and buy business. It is going to be quality revenue and people that want quality service and are willing to pay a fair price for it, that is what we are going to go after.

Okay, that's helpful. Maybe one on the top line also for Jane. So you said 6% to 7% this year. You seem to be sort of confident with this outlook. Can you share sort of where do you see the opportunities to do better than that coming from in terms of sector specific and also there is sort of area (inaudible) in that outlook. Where do you feel that the biggest opportunities and the biggest risks are going to be like in the next 12 months?

Well, I think that, obviously, the fundamentals that we have involved with the record Canadian crop and the fact that potash is back and that we expect that with the depressed pricing that this is going to drive our sales is a key part. But I think to Hunter's point, we are also using service to drive growth in our bulk book and driving greenfield development as we have done in grain and as we have done in potash.

I think in merchandise, obviously, we are ramping up our frac sand. We have seen that impact come into Q4. We are online with our expansions in crude, but, at the same time, I'd say that we are not going to be going as quickly. I think that, to Hunter's point, there is lots of things that we need to watch in that marketplace around risk, around cars and so we are going to be choosing those opportunities. We feel we have got good line of sight for our guidance, but choosing those that create good sustained profitable returns.

And I think that the other thing to add to Hunter's point about our salesforce, we have also added a regional component to our sales plan and I think that is going to give us the additional coverage that we need to continue to build that merchandise side.

So with the economy at this point in time and our line of sight to our initiatives, new sales organization, focusing on selling and getting at that profitable growth, our challenge is to go as hard as we can so we feel that we have pretty good visibility to where we need to go with that guidance.

Okay, that's helpful. Thank you.

Let me add something before we go to the next question. I made a mistake a while ago and I was trying to be humorous and I've already gotten a couple of calls that some people had misunderstood my comment. My plans are not changing about when I'm going to leave the organization. The plan is still like we have always said that some time in the 2016 timeframe and not locked into that number, but that I would -- that would be probably when we would look at the exit strategy of me leaving and Keith taking over. So don't misinterpret my enthusiasm earlier that I'm walking out tomorrow because I've got all I need. That is not the case. So I am going to be here for a while. Next question.

Bill Greene, Morgan Stanley.

Hey, thanks for taking the question. Hunter, something that you touched on in some of your remarks is just as it relates to labor. I am wondering if you can offer a little bit of a framework in terms of what is the scope for change there. Can we see something like you achieved at Illinois Central? Is that not even up for discussion? What sort of opportunities do we have to kind of have another stepchange function in productivity there?

Well, I mean, first of all, I think that we are talking with the organizations in the US and it's no secret and I think they have -- I think it's fair to say that they approached us and were interested. We have entered a dialogue with them very similar to the type of agreement that most of you have been aware of in the past that we have made a breakthrough at Illinois Central now. Keep in mind that the US is a much smaller portion of our operation, so to the degree that let's just say we hit that then we could get an improvement of maybe 30%, 35% on the US P&E front. Now is that a big breakthrough? Yes.

I think maybe bigger even, Bill, is that we have already started to try and attempt to enter a dialogue right now for the negotiations that end year-end because -- like we wait till midnight, the last day until anybody really gets down to business and so we want to avoid disruption, we want to avoid anxiety on the employees' part, on the shippers' part. And so one of the things that we are doing, and Keith is leading this effort and he might want to add to these comments, but we are trying to enter a dialogue with the employees and talk to the employees, tell them what we are trying to accomplish, why we are trying to do it, what we would like to be able to do, what do they want and so we are trying to do this in a refreshing, different way than a typical rail contract. So Keith, do you -- if you've got --.

Yes, I will just add to that that it is more of a grassroots type approach. We are certainly trying to engage the senior leadership of our running trades unions and conversations ahead of time prior to negotiations normally opening, which would be toward the end of the year. At the same time, we are going to do a very good job of getting out on the ground with our employees, with our members explaining what is important to us and digesting and taking back in two-way communication what is important to them with an idea that if they understand what we need and we understand what they need, there is a happy medium to be made.

So we are going to be focused on that. I have got some cautious optimism. I think it is important that we do understand our employees and our employees understand us. So hopefully, a more favorable agreement will come out of it and if nothing else, a more positive morale environment will come out of it.

Okay, that makes sense. That's helpful. Thank you. Hunter, I also have a follow-up on something else you said before. So we will see where the OR ends up in 2014, but I think everybody would acknowledge that the pace of change has been just breathtaking. So when you think about achieving ultimately, whenever that happens, whether it is 2014 or early 2015, sort of industry-leading OR and cost structure, what's sort of the next ramp for the organization from there? Is it just more OR or do you really just have to start driving the growth using that low cost structure to drive the revenue to industry-leading growth rates as well? How do you think about that shift from once you have sort of achieved that goal?

Well, as I've said many times over my career, I mean the objective is not to get to 58% in a high-pitched cost capital-intensive business. If somebody comes in here with CAD2 billion worth of business, but the OR is going to be 66%, I am surely not going to turn that down. So we are going to, in a mature way, try to develop what we call controlled sustainable profitable growth and grow the business appropriately, but at the same time be as cost-conscious and as aggressive as we have always been. And if we are successful, which I have every reason to believe we will be, in converting this service and going to the market, then we will be rewarded with that growth and that could even open up other opportunities for us.

Okay, that's great. Thank you so much for the time and insights.

Keith Schoonmaker, Morningstar.

Yes, thanks. Continuing on rightsizing, but maybe switching to assets, could you update us on your thoughts on magnitude and timing of the CAD2 billion or so of the real estate portfolio you now may consider superfluous?

Keith, I think that we are working very hard on the approach we should take there and the right model and I would -- my guidance would be that I don't think we will see significant movement in 2014 with that CAD2 billion that we've described or in that kind if range. I do think there will be opportunities for a little line [fail] here or there, but I think it will probably be at least into 2015 and maybe 2016 gaining full momentum until we convert that and monetize those assets.

And I guess, Hunter, Nadeem mentioned a preference for strategic questions, so let me ask a big one. Do you think more mergers will take place in North America and what would it take for this to happen?

Well, let me qualify it by saying I'm probably on an island by myself when I give this answer. I do think there will be consolidations in the future. I'm not suggesting it's going to be in the next two or three years, but I do think given capacity issues, pinch points, environmental concerns, you're not going to build any more railroads. That really if you looked at the US for an example, it's split up east and west. You have got two in the East and you have got two in the West and a merger across the Mississippi River is not going to impact the competitive environment.

I think there is a model that if presented appropriately would suggest to the shippers that they could get -- there could be more efficiencies that way, they could have lower cost, the carriers could do better. If mergers were allowed, I think there is a model that we had that said if somebody thinks they are captive and they don't think that we are giving them the right service or the right price, then you would have to allow brand X to come in to provide that. So I do think there will be consolidations in the future and to try to talk about the timing, but I think -- I don't think we will go another five or six years without some consolidation.

Thank you.

Benoit Poirier, Desjardins Securities.

Yes, thank you very much and congratulations again for the very good quarter. Keith, maybe the question is for you. You previously expected RTM kind of in the mid-single digits for Q1. Obviously, it is going through a rough start. What is your expectation right now for Q1 and is the softness only due to weather issues?

Hello, Benoit. Absolutely, the cost is 100% due to weather. It is not because of opportunities; it's because of the challenges. And I am going to be optimistic on this. We have got some catch-up to Hunter's point. I don't expect that January and February -- if February is like January, then we are going to have a pretty challenging March to do it, but I am very confident in this team's ability to deliver that single-digit RTM growth -- mid-single digit RTM growth. So unless March is similar to January and February, we have got an opportunity in March to play catch-up and I think we are going to finish strong.

Okay, very good and would it be possible, guys -- my second question is related to crude by rail -- just to provide an update on the guidance? I think the latest one was either to double or triple the number of carloads from a base of 70,000 by the end of 2015. And obviously, we have heard very positive comments from NSC, KCS with respect to the heavy oil. So I just want to know where it is going on your side.

Yes, I think that if we talk about crude by rail, as I indicated, we moved 90,000 carloads and our guidance was for 140,000 to 210,000 by the end of 2015. At this point we don't see a reason to revise our guidance, but there really are a lot of factors as I said that can impact us along the way. We continue to watch those factors that could influence the development and the pace of that business, including pipelines, including the impact on tank cars, infrastructure at origin, at destination. But the expansions that we have line of sight to that we have announced are going as planned.

So we feel confident, but again, I just want to put it in context that crude is about 4% of our book. So again, it is an important thing for us to just watch all the risks.

Okay. And I know that you are not happy from a pricing standpoint, so should we expect better profitability as you ramp up volume and you negotiate better contracts?

Absolutely. I think that we are going to be looking for all opportunities to obviously upgrade the quality of the book, but also looking for ways to incent and ensure that in the crude product that we are incenting the use of safer cars and newer cars as well in that process.

Okay, perfect. Thanks for the time.

Ken Hoexter, Bank of America.

Great, good morning and thanks for the comments and insight so far. But Keith, can you talk a bit about you mentioned the sidings, and you talked a bit about CapEx. Maybe some thoughts on future CapEx; are you looking for more growth investments? Is there still any catch-up in terms of the way some of the network was structured; any thoughts on the capital spending side?

I would say we'll take catch-up. Not the same challenges that we had in 2013 and 2014. It is more about optimizing the network, it is more about strategic investments in sidings where we are not congested, but we are pushing up against opportunities to actually run longer trains, more longer trains and take out train starts. So that is pretty much what the game plan is.

As far as quantum of capital, I don't see much of a change. It is going to stay in the range of where it is at now on a go-forward basis, maybe a little of uptick, somewhere between 1.2, 1.3. 2 to 4, I mean that is the range. Nothing huge or no big opportunities or things that is going to be driving that. We are going to be focused on TTC on the capital investment side. Operation-wise, we are going to focus on siding investment and some tweaks to some of the yards, finishing out multiyear plans. Some money we are going to spend in St. Paul, as well as a little bit in Chicago. And it is all just incremental investment; it is not anything that's monumental.

Wonderful. And then --.

The biggest call on capital right now, and I think that will continue for the next year or two, is that we have a few weak links in the network that we are going to get the basic physical plant in totality where it ought to be and so rail ties and ballast investment, which worst case is you buy a little early, that is going to be the focus. We are going to have kind of a recess here with needs on the mechanical side and with the exception of these few other projects like SAP a little and then Keith mentioned other siding extensions and those things, that pretty well represents where we will be capitalized going forward.

Great, thanks. And just a follow-up. I guess on, Jane, on two of the commodities, on grain, just down last quarter and just understanding with the record crop, how do you see it building? And similarly, on intermodal, just given the lost business you mentioned and your focus on a domestic push, any concept on profitability of that shift from the international more toward a domestic push and what that does in terms of shifting lanes?

Well, I think that -- let me attack the grain first. I think that when we look at the focus of this organization and what we have been doing, this record crop presents us lots of opportunities to basically move grain more efficiently. What we are doing out there is we are obviously offering as many multiple destinations as we possibly can. We have run a very robust program to Thunder Bay and we are continuing to create diversity for our grain shippers across the entire franchise.

I think that what we have demonstrated in the last year is that we can be nimble in making those markets because last year, the impact that we had with our drogue situation was we moved a lot of grain to markets that we didn't traditionally move. So I think when I look at the outlook, I think that we are going to move grain more consistently. I think this is going to be one of the crop years where we don't have that [peekiness] that we have had in the past. We will probably have some large carryover and with an average crop, we are going to see strong movements of grain throughout the entire year.

I think as we talk about intermodal, as we look at the intermodal business and we think about the margin, we have been clear before that domestic has a much better place for us in this business. The beauty of the service that we are providing is our operations team has created something for us that is really second to none in the industry. And what this is doing as these contracts open up and as these opportunities open up in place, it gives us the ability to go in and price for that value knowing that that service is something that no one else can touch. So again that is part of the strategy for 2014.

Great, thank you.

Steve Hansen, Raymond James.

Yes, good morning, everyone. Just a follow-on question to the crude barrel question asked earlier. I was just curious whether or not you could give us a sense or an indication for whether there is any other large crude barrel terminals being contemplated here in Canada? There have obviously been some large announcements over the past two or three months that change the outlook quite dramatically and there has been a lot of suggestion that there might be more coming. I am just wondering whether or not you can confirm or not you have been discussing the concepts with some of the majors in Canada here on the E&P side?

Steve, just to give you some color on that, as you know, the pace at which this developed with the lights in the Bakken was much faster. As we look to develop the terminals in Canada, clearly, we are dealing with producers, we are dealing with refiners. So I can indicate that there is interest largely on our network, but, again, because this business is competitive, what I encourage you to do is to watch our carloads. The format that we have used in the past is to continue to work with those players that are investing in their cars, investing in their terminals, investing for the long term. So I would just tell you to stay tuned.

Okay. Fair enough. And just a follow-on question to the previous grain question as well. Can you help us understand what the pinch points might be in the system to move some of this grain that is still lying across the prairie? Again, monster crop, much of it still stranded in the prairies. The expected carryover is also going to be at mammoth levels. I think it is going to reach -- the carryover would be bigger than the last since 1979. So I am just trying to understand as we move through the nontraditional grain moving pattern how the limitations might shape up. Is it carloads, is it port capacity, is it locomotives? Where are the pinch points in the system to move the grain?

I would say right now the immediate answer to that -- the largest pinch point is weather. That is certainly impeding the supply chain's ability to run as efficiently as we were before. Locomotives and cars, if you don't have weather rights, you can't optimize that. Then you are going to be bumping up against port capacity. You have got to match elevated capacity to railroad capacity to port capacity. I mean that is it. You can only ship as much as you can load up onto a ship. The ports have spent money, invested time and effort. They are working with partners in the supply chain to increase their capacity and as we do that with the weather on our side, you will see us matching railway capacity, locomotive and car capacity against that port capacity.

Very good. Much appreciated. Congrats on a good quarter.

Thanks, Steve.

Allison Landry, Credit Suisse.

Good morning. Thanks for taking my question. On the pension side, so given your comments that CP is no longer in a pension deficit position, I was wondering if you could give us an update on the cash contributions that you'd previously outlined, which I believe were in a range of CAD100 million to CAD125 million for 2014 and 2015 and then stepping up from that in 2016. Do they go to zero from here or are they significantly reduced? How do we think about that?

Allison, feel free. We can follow up with this after the call, if you would like, but, overall, I would say nothing changes at this point. We will continue at -- you have to look at it over a three-year basis. So at this point, we would continue with the contribution.

Okay. And in terms of cash flow, free cash flow conversion tripled basically to just over 50% in 2013 and as we think about continued margin improvement and sort of flattish CapEx, it seems that this number could easily rise to north of 70% in 2014. And I was wondering if that is a fair way to think about it and what does that imply for the magnitude of a potential buyback or dividend hike?

Yes, Allison, it's Bart here. So we don't guide on cash flow, but one of the things I can tell you is looking at some of the analyst reports that are out there, they are kind of calling for that CAD1 billion to CAD1.1 billion range of cash flow for us in -- that is before dividends -- in 2014. I wouldn't argue with that very much. When it comes to dividend growth or buybacks, we are factoring in the future improvement of the business, the margin growth and the better operations when we look at our future cash flow projections. That will be part of the input into what I will be talking about with Hunter and Keith and the Board here on short order. It will impact our decision-making around how we utilize some of that excess cash, but I can't tell you today exactly what that is going to look like.

Right. That makes sense. Okay, thank you very much for the time.

Chris Wetherbee, Citi.

Great, thanks. Good morning. A question, Keith, you mentioned sort of where you stand relative to fuel efficiency and the progress you've made so far. When you think about sort of train length and weight, where do you feel like you are in the process and how much more do you think you can improve? Sort of what inning are we in in those two metrics specifically?

You know what? I think there is probably, when we get all these sidings done and it is going to take a couple years to get it done, but there is still another 10% or 15% improvement on both those measures to be driven by converting DP and long sidings and longer trains.

Okay. That's helpful. And then, Hunter, just when you think about some of the longer-term targets that you guys laid out back in December of 2012, clearly closing in on that on a much earlier pace, do you give sort of new updated targets at some point in 2014? Do we just sort of think about the lower end of your previous OR range? I guess I just want to put some context around how we should be thinking about sort of the longer-term opportunity beyond 2014 and into 2015, 2016 and beyond.

We are very sensitive to what you are saying and we have run over this plan and so I think the plans right now, and somebody can correct me here if I get out of line, but we plan on having an analyst meeting in September of this year in the New York area, I think and my sense is that we will develop at that point a new plan and probably come out with a five-year plan, which updates everything and makes it easier for you to look at the future.

Okay. So we should be looking for that in the third quarter. That's helpful. I appreciate it. Thanks very much.

Sure.

Brandon Oglenski, Barclays.

Yes, good morning, everyone and congrats on the solid 2013 outcome. Keith, I wanted to follow up with you on the volatility in the business inherent with winter. Obviously you had some challenges in December, but it looked like you guys have a little bit more robust operating plan that allowed you to have a pretty good outcome even with those challenges. So as we look forward, should we look for less earnings volatility in the fourth and first quarter? What are some of the steps you are doing to mitigate those impacts?

Well, I mean when it comes to winter, the impact essentially is train length. That is what really hurts you or that's what your headwind is, so to speak. So you have just got to try to railroad smarter. You can't push the envelope. You have got to make sure you optimize the use of the DP. You have got the right configuration, you have got the right distance between the locomotives, you have got the right blocking and tackling going on in the terminals and I am not going to suggest we are perfect. We are far from perfect. I see mistakes and we learn from mistakes on a daily basis, but we are getting better, we are trying to mitigate the impact.

And part of the other key to this is not flooding the network with cars and locomotives that you can't move because it goes to the analogy you think more is better, but actually less is better when you get to these kind of situations because if you have got more equipment out there that you are trying to move and you are trying to force and you have got more than you can really effectively process through your terminals and on your main lines with these challenges, you are just going to drag the whole network down and mess everything up. So that is the focus. It is all about blocking and tackling and that is how you mitigate or minimize the impact to the bottom line.

I appreciate that. And Bart, I know you are new on the job here, but looking at the leverage profile of the Company and given the changes in FX rates and interest rates right now, how do you think about the credit profile of CP and what you'd like to do with the balance sheet from a debt perspective?

Yes, sure, Brandon. I'm actually in the middle of looking at all that right now. What I'd say from the early indications are that clearly the quality of the balance sheet is better than the current ratings of the Company, so I just talked with all the rating agencies yesterday to get a sense of what their needs are and sort of timing around when their reviews would be, but I suspect it's quite positive. Leverage targets are something else that we are looking at, but -- and so I can't give you full details. I think as we come through this quarter, I am going to get those plans in place and be able to start talking about it more fully. But as the operations continue to improve and we pay down debt and we have just recently bought out a long-term capital lease as an example of debt paydown. We may have opportunities to manage leverage, whether that be a debt issuance and taking advantage of the current low rates or doing something else, but it will be in conjunction with the whole operations and business plan rather than something that is unique or off on its own.

All right. Well, I appreciate it. We will look for more to come.

Okay, thank you.

Scott Group, Wolfe Research.

Hey, thanks. Good morning, guys. So someone asked earlier about better service leading to marketshare and I want to ask about better service leading to better pricing and wondering if that is something that is starting to happen. So I think, Jane, you mentioned that renewals came in above the 3% to 4% target, which I think is a change and wondering if we are kind of finally at that catch-up point where we can start seeing some better pricing. Some thoughts along there would be great.

Scott, I think what I would start off by saying is that, given what Hunter said about change in culture, the last year we spent time just ripping apart our book of business and addressing the quality of revenue. We made some tough choices, but again this is a journey. It doesn't happen overnight for us. I think that we are never going to be finished because this is something that we are going to be looking at as the quality of service improves and as that service drives us to be able to offer different products to different customers.

We have upgraded accounts, we have upgraded lanes that needed to be addressed. To Hunter's point, we have transformed many of our pricing mechanisms to move ourselves away from contracts and to get the tariff where we can give ourselves some more flexibility to go after all the various components of price. And I think the other thing that we have taken a really strong effort at in pricing is that there is all the other components that go in as well around supplementals and demurrage and we have been standardizing that and forcing those terms. So when you couple that with the approach that we have to get people out selling service and not price, backstopping what we have done with higher renewals above our 3% to 4%, we feel we are on the journey, but we are never going to be done.

Do you feel like you are in some ways priced at a discount right now? I mean should we be expecting the renewals to kind of stay above this 3% to 4% range or are you sticking with 3% to 4% as the realistic target?

At this point, I think what we do is stay with the 3% to 4%. I mean obviously what we need to do each and every time is understand how the business offering that the ops team has set the table for us with commands value in that customer's supply chain and extract that value accordingly. So I think that, as Hunter indicated, this is not something that you accomplish overnight, but it is something that -- we have renewed our focus. We have done a tremendous amount of work over the last year and we are going to keep pushing on the same front.

Let be just give you an example and this is what fits with our strategy. I mean as we lower our price, our cost -- excuse me -- and if our price let's just say stays at 3% or 4%, if the margins continue to improve, we can't turn that kind of business down, but, at the same time, we are going to extract the value out of it. That is one of the reasons that we are more domestic-oriented from an intermodal standpoint. Number one, the price for domestic is significantly better than international, number one, and it is also lower cost. So we don't have to build big facilities, you don't see domestic trailers or containers sitting in hubs for six and seven and eight days. That is an international scheme and domestic want to turn them over quickly, turn the asset, move it and that is a high-quality customer and it is a different style customer that happens to fit with us. So we are going to try to hopefully play to our strengths. Now I'd like to do everything we can internationally, but right now it just doesn't fit given where the market is.

That makes sense. And just one other for you, Hunter. Just what is your latest thoughts on where the headcount can go from here and how much of the purchase service savings that you talked about a year ago, how much of that do you think you have realized yet and how much more to go?

On a gross basis, I think we are probably -- on purchase services, we are probably 60% of where we could be. The headcount issue, and I don't like the term and I don't want to lock us into a number that says -- we are not going to make a bad business decision to get to some number. But having said that, everything in, if things play out going forward as we think they will without tremendous growth, the number can, and as I have talked about before, can approach 6000. Now -- and once again we are positioned there to be able to handle that probably 85% or 90% through attrition. We have got a lot of people I think around the organization that were waiting for buyouts. Well, I am not a buyouter, okay? So some people learned that they were waiting for something that wasn't going to come, so they decided to move on.

So we are going to get this organization rightsized. We still have productivity gains to be made. Just to Keith's point a while ago about 15% with train starts and fewer locomotives and all those things. So there is a lot more runway in every one of these metrics. I don't know of any of them that we have run out of.

Got you. Okay, great. Thanks, guys.

David Newman, Cormark Securities.

Hi, good morning. Congratulations on the quarter and welcome, Bart.

Thank you.

Just looking once again just on the pricing side, it would seem to me by sort of segment that the biggest opportunity would be in the domestic intermodal mixed merchandise and given what is going on on the trucking side of the regulations and hours of service rules, etc., is that going to be the area with the biggest bang for the buck I guess on pricing? And if you look at the bulk side, getting down to annual contracts, is that going to be more flexibility on the pricing overall?

So I guess if you look at it segment by segment where do you think the pricing could be the most meaningful?

Well, I think, to the point that Hunter made previously, I think that if when you look at the merchandise sector and you look at the domestic intermodal the margins are there. There is truck competitive business that when you look at the service offering that we put into the marketplace, when we can compete against other rail and we compete against truck we have an opportunity to tap into that margin. And that is exactly what our strategy is.

I think that when you go forward on the merchandise site and you look at over the years the fact that in some areas we are not getting our fair share of the wallet of some of our customers. We have the opportunity to sell them a broader range of service, but we do that as that service improves.

I think with grain, you know there was always a portion of the book of business that is going to be regulated, which in Canada is about 60%, but there is 40% that we have here that is commercial. And our US franchise is commercial as well. I think that one of the things that we have seen post-CWB is an opportunity to see grain moving in different corridors. And we have the opportunities to work with different companies to find ways to get that grain to market and where we can extract some price for that value of service.

So I think overall, again, it is a journey, but I would say that that would sort of directionally be correct in those areas.

And just a quick add-on. So the revenue caps that you have on the grain side, there has been some discussion about potentially removing those. Is that just wishful thinking or do you think that will -- that could actually happen at some point here?

I mean I think that there was a long time that none of us who had been in the business ever thought that we would see the single-desk selling go away or the monopsony of the CWB. I mean, my view would be is that a fully commercial network when you look at having a record crop, you start to look at some of the efficiencies you want to build in. It would make some sense, given the fact that grain is becoming a much more global market.

But I think at the end of the day that this is a regulated sector of the business. Government will have a key part in determining what that framework would be, but I think that when we start to see our ability to respond there certainly are, given the fact that our US franchise is right across from many of the high throughput elevators we have in Western Canada, that there could be some benefits to looking at that certainly. And we have had some discussions of same.

And final one. Just the receptivity of your bolt customers to moving towards annual contracts, is that something that they are welcoming as well? It obviously would give you a bit more flexibility on your pricing, I would imagine, as well.

Well, I think it depends. I think that when you look at our potash business, we have been pretty clear, and in our coal business, that we have long-term contracts that basically provide escalations that covers us certainly to get those -- to get the pricing in market. But also the fact that we have productivity that where we spend or we create benefits we keep that.

I think the grain business has always worked on a tariff basis. I think that some of the opportunities we have on the fully commercial piece to tune up those tariffs and have them responsive to what the supply demand is are opportunities for us as well.

Excellent, thank you.

Turan Quettawala, Scotia.

Yes, hello, good afternoon and my congratulations on the great quarter here. Maybe I will ask one for Bart just on the free cash flow here. Bart, obviously, message understood on not (inaudible) cash here, but I am just wondering if you can give us any sense on maybe a balance between buybacks in dividends, especially considering where the stock is at today? Thank you.

Yes, good morning. I hate to sound a little bit like a broken record, but it's a bit early to comment on that. We are getting our hands around how much there is going to be and then we will have a good discussion internally and make decisions on that. I have to sit down with Hunter and Keith and the Board on it.

It is a little unfair to Bart, but I think I have said to you, and I think the Board is very sensitive to these issues, they are very sensitive to the fact that we have far exceeded the plan and we are way ahead of schedule. I would think that by -- at this next call at the end of next quarter, we will have some pretty definitive responses to what we are going to do and how. Now there are some tricky issues here with our ownership shift. For example, right now, when the proxy [contest], the ownership between the US and Canada was 50/50, now it is about 80/20. Well, people in the US aren't crazy about dividends because of the tax treatment. People in Canada like dividends. So we have got to take all of that and put it in the blender, but I feel pretty confident that we are going to come back to you with something of a positive nature there and how aggressive it is and what size and all that has yet to be determined as Bart is modeling and going through some of that now, but I think it's something that will be positive in the future.

That's great. And maybe I can ask one for Keith quickly here just on the weather. Keith, just if you look at the whole network here, is the weather a bigger challenge in January than it was in December or was December worse? I know it is not good, but just kind of wondering on a relative basis. Thank you.

I would say it is equal; it is about the same. I mean across the whole network, we were impacted the last two weeks of December, but that's two weeks versus I guess four weeks in January. And I have got it across probably two-thirds of the network. I mean go down to Chicago -- I was in Chicago earlier this week and I have lived there for seven years, it has never been that cold, snow all over the place. St. Paul same story. We are not short on challenges, but I am not going to be long on excuses either. We are going to execute and we are going to make up.

Great. I know it is minus 30 here today as well. Thank you.

Jeff Kauffman, Buckingham Research.

Thank you very much and again, congratulations, everyone. Keith, can you talk a little bit about where you are on a capacity basis at Vancouver and the port's ability to handle your growth in intermodal or wheat or potash and what role CP plays in terms of helping to build that growth?

Well, you have got a couple different destinations there and a couple different stories. Deltaport, which is CSI, which is where intermodal, the preponderance of the intermodal is coming in and going out, CP is not the same size player as CN, but I can tell you now they have their challenges and those challenges are compounded by what the shipping companies do. When they are slow-boating across the ocean to save fuel and they don't hit schedules and they have five ships that show up on a two-day span that should have been over a five-day span, then you are going to get bunching and you are going to create capacity and take away needed capacity to be fluid. So I would say they are not long on capacity at Deltaport. So some impact there.

If you ship to the inland, if you go up to Vancouver and you talk about potash, Neptune, they have spent some money at Neptune to expand capacity. So potash and coal there, I think as long as weather cooperates and as long as our partners, we are not the only ones using the facility, they remain fluid, we remain fluid, I think we are okay at capacity. As you go to the grain side for the export terminals, they too have spent money, invested, some of the challenges. They are still subject to wind, rain; they are trying to mitigate that. So from a growth standpoint, I think that they are getting better. I think that as we get better, we can match up and we will consume that capacity and there is some room to grow on both sides both for the railways, as well as for the farmers, as well as the potash shippers and the coal shippers.

Okay, thank you. And Jane, a follow-up. Given all the improvements in service, I know you don't always play nice in the sandbox, but I was a little surprised to hear about some big contract losses on intermodal and auto. Can you talk a little bit about the competitive environment and with your service product improving, what is the primary reason for those customers switching?

Well, I would say the rail business at the outset is a competitive business and we are obviously going to be pricing at a level and with that value of the service we provide. And by and large, I expect railroads of others to do the same thing. I think that basically when we look overall, I think it boils down to price. Some people are focused on the value, others are focused on the cost and I can't give you a specific example, but I can tell you that with respect to the service that we have provided to the major contracts that we have discussed that we chose not to price to, this was not a service issue; this was a pricing issue. And at the end of the day, we are going to work with those customers that see the value and where we can earn a fair and reasonable return.

Okay, thank you and congratulations.

Donald Broughton, Avondale Partners.

Congratulations on a good quarter. My questions have been answered. Thank you.

Thomas Kim, Goldman Sachs.

Thanks. If I could just follow on the comment on price, just given that CN still has an OR advantage, are you beginning to see them use that a little bit more aggressively even outside of intermodal?

I mean I can't talk to a specific example. I mean that is a question you are going to have to ask CN. I think that we have our own game plan. We price for value. We need to look at what we do to increase the operating income in the book and build quality revenue.

Okay. And then just with regard to the new incentive scheme for the salesforce, now there seems to be a general tendency for sales to focus on revenue and obviously, there can come the sort of risk that they push volumes over freight rates. I am just wondering to what extent the new scheme has measures in place to protect pricing integrity and for example, do you incorporate a margin as part of the overall incentive as well? Thanks.

Well, the answer is yes. Number one, if the carload doesn't show a sufficient margin that we have determined, you don't even get counted for it. So the first criteria has got to be profitable at this level, number one. And then there are some issues about it's effectively only new business; it's not business that we have had before. And then if it meets that criteria of profitability and move with some qualification for prevailing conditions, both up and down windfalls and so forth, then they will receive a percentage of profitability of that unit. And again, it is a pretty simple method for people to go out and sell price -- I mean sell service under a disciplined environment.

Okay, that's helpful. Thank you.

Jason Seidl, Cowen & Company.

Yes, thanks, guys. When I am looking at sort of your revenue per carload on the grain side, I know there is a lot of moving parts, especially with what could go export. What should we be looking for on that line item on a year-over-year basis?

I think that it is difficult to predict and I had indicated last quarter that I would have expected that the revenue per carload would have been impacted by some of the regulated grain because of the fact that we do work to a maximum revenue entitlement in that segment. But I think the fact that we have two different grain franchises, that there is a commercial component in and that we have been nimble in the market, we have been providing options, I would be inclined to think that we are going to probably see yields in and around that same area.

Okay. That's fair enough. And Hunter, going back to sort of the new sales structure, how is that going to impact maybe sales and the relationships with operations because sometimes those two sort of bang heads in the past in the rail industry?

Well, that is our job. I mean this is a team; everybody has got a part to play. The operating guys provide the service, Jane and her team sell the service and we make a buck and everybody is happy. And anybody that can't be a team player, then they have got to find another team to play on.

Sounds good. Sounds like you guys made a little bit more than a buck though. Take care, guys. I appreciate the time.

Thanks.

Walter Spracklin, RBC.

Thanks very much. Thanks for taking my call. A question on the revenue guidance, 6% to 7%. I'd like to decompose that a little bit. I think I heard Keith mention mid-single digit RTM growth and my question I guess is to Jane with regards to mix because hearing you on the renewals coming in above the 3% to 4%, when I look at yield, and this is on a revenue-per-revenue ton mile basis just noting that it was 0.9% in the year and 1.8% in the quarter, just curious whether mix is at play here? I know you have got a lot of moving parts with regards to significant increases in grain, some declines in intermodal and so on. How should we look at mix playing itself out in 2014 in kind of an order of magnitude on a revenue-per-revenue per ton mile basis?

Well, I think if you look at Q4 when we talked about mix, we had a lot of moving parts and I flagged them to the extent that I can over each and every quarter in 2013 to remark on the impact of long-haul crude volume, when we have any shift that takes place in the short-haul thermal volume. And I think that the other area that we always have impact, given what we saw over the last year, given the fact that we were in the [node] of the potash business, these are all things that impact our cents per RTM.

I think that when you look at it on a go-forward basis and think about that mix, again, what we are going to see is, if our plans come to fruition, which we fully expect that they will, crude oil is going to continue to pay an important part of the book. That is obviously going to impact the RTMs given that length of haul. I think that grain -- we are seeing that positive on an [ARC] basis given all the various outlets we have. So it is really hard to predict, but I think that is where we are going to see it, Walter.

Okay. And then my second question is on a little bit of a disconnect between operating income implied by your guidance and then the EPS growth. So if I take your revenue growth and I grow it at 7%, put a 65% OR, the EPS growth is somewhere lower and I'm wondering if you have built in into your estimate any significant change in your capital structure through debt repayment. Is it a US dollar phenomenon where you are paying less US -- impact of higher Canadian dollar debt refinancing or is it -- is there a share buyback at all built into your guidance for 2014?

Walter, I think you have to look at the variability in those numbers. We are saying the OR is at 65%, but it could be lower. At the same time, we are looking at the revenue and it could be lower or higher. Well, you pick different numbers in there of the likelihood and the probability and you can get several different answers on the EPS given what value you give each one of those. But I think they all fit within an appropriate range.

Okay. Perhaps I will follow-up with Nadeem on that after the call. Thank you very much. That is all my questions.

Thanks a lot.

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

Okay. I'm sorry about the duration. We took too long on the call, but we had a lot of questions and I wanted to try to address all of them. So we look forward to the next opportunity to visit with you and hopefully the weather conditions will be a little better and we will have even better results. Thanks.

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