Canadian Pacific Kansas City Ltd (CP) 2014 Q1 法說會逐字稿

Good morning. My name is Mike and I will be your conference operator today. At this time I would like to welcome everyone to Canadian Pacific's first quarter 2014 conference call. (Operator Instructions). 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 would now like to turn the call over to introduce Nadeem Velani, AVP, Investor Relations. Please go ahead.

Thanks, Mike. Good morning and thanks for joining us today. I am proud to have with me here 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 two 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 three.

The formal remarks will be followed by Q&A. We would appreciate it if you limited your questions to strategic items and if you had any modeling questions, please follow up with myself or Megan in the investor relations after the call.

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

Thanks, Nadeem, and thanks for joining us this morning. I trust that you have seen the press release and I guess my comments are I am glad it is over. I have been in this business a long time and as most of you know, and this is probably the worst operating conditions that I have ever been through in that period of time. But despite that, this group of railroaders came through with some outstanding performance certainly in my view given the environment and the circumstances they were dealing with.

So we've got a lot of ground to cover today so I am going to confine my remarks and turn it over to Keith and Bart and Jane and then I am sure we will have plenty of questions this morning. So, Keith, over to you.

Thanks, Hunter. Let me start by saying and sort of echo your comments, one of the most challenging operating conditions I have ever experienced in over two decades of railroading. But I would be remiss not to say I am extremely proud of the CP team who worked tirelessly and I am talking all departments from headquarters, operations, finance, running trades employees, mechanical employees, engineering employees, craft and officers alike, 24/7 just to survive this winter and serve our customers.

We realize effectively our work is not done. I am not going to be satisfied myself until all of our customers' service needs have been met and we are doing it in the positive way that we were prior to what I would call a winter for the record books.

On a positive note, we are making progress operationally, rest assured we are seized with doing what we have got to do to restore normal service levels and fluidity across the network. I think it is appropriate -- let me provide a little bit of color to the challenge this winter represented.

For the naysayers who perhaps don't understand the gravity of this challenge this winter represented, let me start by saying yes, winter does happen every year. Let me provide a little color to how challenging this winter was. We prepared extensively for it but absolutely one of the worst not normal, not even close to a normal winter. To put it in more perspective, in Canada according to the Environment Canada, this is the coldest December and January since 1950. That is seven decades. The US specific to Chicago which is critical to our network between the months of December and February according to those that keep the records in the states, 67.4 inches of snow were recorded in Chicago, making it the third snowiest winter on record matched by the third coldest winter on record which is a very compelling point when it comes to operating a railway.

From December through February, if we go up to North Dakota, the 25th coldest on record; Minnesota the sixth coldest on record. So overall from December through February especially all modes of transportation not just railroads if you were flying in planes, if you were driving on the highways or trying to operate any kind of business with motor transportation, you were severely impacted by this extraordinary cold and severe winter.

So again, I would stress exceptional -- I would stress a few words like abnormal, creating operational headwinds that were -- I would say a headwind is probably an understatement. I can tell you now running a railway, snow in large volumes in short timeframes can be challenging but you dig out of it. The sustained frigid temperatures like we experienced is crippling to an operation.

Train length production at 50% is not uncommon to be able to run the railway safely. The key there is when you get to temperatures for a sustained period in Canada if we want to talk Celsius, negative 25 Celsius or lower; in the States, that is 16 below zero for those of you that don't know how to do the conversion. That is rough numbers where it is at. It is cold. You get to a point where you can't maintain your train brakes, you can't maintain air through the train system and the brakes set up or you cannot brake the train safely, the only way to mitigate it is to run shorter trains which means you consume crew assets, you consume locomotive assets, you put additional train starts out on the railway and it consumes capacity. And essentially everything slows down.

So all of your cycles in your locomotives as well as your car turns are prolonged and exaggerated which snaps capacity out of the network.

Let's talk a little bit about Chicago. I put a map in here to provide a little perspective because I know I have heard a lot of people probably will ask and are thinking, how does Chicago impact CP as much as it has impacted CP? Effectively the way our franchise works, some of the challenges we deal with of CP (inaudible) bill yard is on an island to a point. When I say an island on the mainline with Metro, you are talking a Metro that runs a tremendous amount of trains in Chicago alone between Metro and Amtrak, they operate over 1300 trains a day.

We are on a key corridor going into the city. Effectively we've got windows, four-hour windows in the morning, four-hour windows in the afternoon and then every hour they run a pair of faster trains we have to operate our freight in and around and through.

The preponderance of our business coming in Chicago and you see our two lines be they coming from Milwaukee or coming from the Kansas City area west of Chicago, goes to the Belt. The Belt is a bridge carrier. It is a switching carrier that all the railroads that operate in and around Chicago own part of but effectively run it to the benefit of all the railways. So they do and command and represents a tremendous amount of workload.

If the Belt gets backed up, if the Belt gets to the point where they are not able to process their traffic efficiently, then it is going to back up on the other roads and that is what happened to CP in states through the winter. As recently even to the point that winter is over as far as the weather, the challenges associated with it are not. Two weeks ago it was not uncommon to come into this railway on a daily basis and be holding about 12 trains which represents 12 trainloads of cars and 12 trainloads of locomotives in queue in line to get into the Belt and I'm not being critical of the Belt. That is just the operational challenges that we were facing.

We have done some pretty extraordinary things with some of our partner roads to clear that backlog up and I'm happy to say that it is the East, we've got a lot of the traffic that we had backed up all the way into Canada cleared out which is a positive sign but again on the car cycle standpoint on the locomotive standpoint, until we regain fluidity I think we are probably still about four weeks away. You won't see normal cycle turns or normal velocity, normal capacity restored in the US network until that time.

So it remains a challenge for us as we go forward.

You are going to ask the next question, is it a challenge long-term or is it an opportunity? I view it as an opportunity. If we continue to do the same thing we have always done and if you have another winter like we have had this past year, then you can expect similar results.

We are taking this momentum as an opportunity to create a desire working with our other roads to try to get traffic out of Chicago that does not need to be in Chicago. There is certain amounts of traffic and this is 25% of the entire industry's volume goes to this center. It is the largest interchange location in North America. Some of that business simply doesn't need to be there so it serves this industry's interest, it serves CP's interest, it serves all connecting carriers' interest for us to work together to identify that traffic and route it to alternate gateways to create additional capacity within this Chicago, Greater Chicago terminal so that when and if these kind of winters occur, we mitigate the impact and we don't have a repeat performance from this past year.

Moving to a couple of comments on legislative grain volumes, as Hunter mentioned or will mention and discuss I'm sure on this call in questions, the proposed legislative changes in Canada that we have dealt with are disappointing to say the least. The reality is this current grain supply chain of which rail is only one component just simply can't meet these extraordinary volumes over a short period of time.

To put it in perspective, this crop on the Canadian side is the largest grain harvest in Canadian history. It is 37% more than the five-year average. On an annual basis, normal demand for the two railroads to move in Canada to export is that about 34 million metric tons and this harvest represented about 20 million more or 50% more than the average on a five-year basis.

So the bottom line is the supply chain from the field elevators to the railway to the port terminals can't handle this kind of volume again in a short period of time. Even in spite of the winter, in spite of some of these operational challenges and supply chain challenges we have moved record grain volumes this last fall -- we were moving record grain volumes last fall which got impacted by the temperatures that came in December and January.

With the weather improving, we have regained momentum. We have moved 15% more Western grain in February even in some of the toughest winter challenges and 20% more in March than the previous year. We are currently exceeding the minimum thresholds as well that are outlined in Bill C-30, which the government has imposed upon us.

On the safety side, a couple of encouraging trends that are developing. I say this not to brag on the performance because I think one injury and one derailment is too much but more to specify and highlight that the safety culture that we are driving continues to evolve and improve. Train accident frequency improved in the toughest winter operational conditions this railroad has experienced, over 50% versus last year which is phenomenal.

We recorded less than one train accident per 1 million train mile so that is not only an industry best, it is a CP record as far as the first quarter, as far as any quarter in fact. On the same positive note on the injury side, our ratios improved 14% year-over-year. Again not to brag about this but to highlight that our focus on driving a culture of accountability leveraged with investment in technology in the physical plant is the way that we will continuously drive improvement on the safety front which is good for our business, it is good for the environment, it is more responsibility and something that we take very seriously at CP.

So that is it. I will turn it over to Jane to comment more on the commercial implications of this quarter and what the opportunities are on a go-forward basis.

Okay. Thanks, Keith. In the face of extreme cold weather and tough operating conditions, revenue increased by 1% in the quarter. The impact of weather cost us about CAD75 million in the quarter but we see upside in our growth initiatives and strong demand fundamentals across our portfolio. As network velocity continues to improve, we expect to make up this shortfall through 2014.

I remain confident in our revenue guidance of 6% to 7%. Renewal pricing came in above our target range of 3% to 4%. Average revenue per RTM was up 6% with our focus firmly on increasing revenue quality.

So turning to the lines of business, I will report Q1 2014 revenue highlights on a currency adjusted basis but I'm going to spend the majority of my time providing insight on Q2 expectations.

So starting with grain. In Q1, we were down 1% in revenue. In Canada, the record crop presented an unprecedented demand for grain movement at port terminals. Despite ongoing severe weather early in the quarter, strong export deliveries to Vancouver helped drive positive year-over-year Canadian grain volume and revenue.

Adverse weather hampered our US grain movement particularly through our (inaudible) in Chicago while more fluid corridors serving the Pacific Northwest market remained flat versus last year. Overall, Southbound challenges in our US portfolio offset gains in Canada with volumes down single digits year-over-year.

So the outlook for grain. Looking ahead to Q2, we have record levels of sustained grain demand across Canada and we expect performance similar to the record levels set during the peak September to November period last year. Strong demand in the US coupled with improved Chicago operating conditions will provide opportunities for strong year-over-year volume growth in Eastern US markets. So we expect high single-digit growth over last year in Q2.

Turning to fertilizers and sulfur. In Q1, we were down 16% in revenue. The revenues in the quarter were impacted due to lower fertilizer shipments as a result of high inventory following a late harvest and a narrow application window, sulfur production impact and challenging operating conditions that limited us from taking full advantage of volume following a recovery in the potash market. This led to a Q1 RTM decline of 12%.

As we look to the outlook, the demand for domestic fertilizer application remains very strong on excellent crop fundamentals in North America. We are optimistic we can take advantage of some of the upside through Q2 despite a compressed season. The fundamentals are expected to carry forward into the fall season with additional potential upside into the second half of 2014.

International potash prices began to stabilize and increase at the end of the quarter that created certainty for buyers. Volumes are expected to rebound in Q2 with more favorable operating conditions but are not likely to reach the record export levels we saw in Q2 2013.

Now turning to coal. In Q1, revenue was down 2%. Our Canadian met coal volumes increase strongly in the second half of Q1 as we overcame supply chain related challenges. Westbound volumes hit an all-time monthly record in March. Continued weakness in US originated domestic and export thermal coal demand combined with supply chain challenges due to a harsh winter operating condition, led to a decline in US coal. As a result, RTMs were down 4% in Q1.

For the outlook in Q2 despite some prevailing softness in seaborne met markets, we expect to see strong demand from Teck due to their diverse market base, their high quality products and competitive cost position.

US export thermal volumes are expected to fall off mid Q2 due to customer net backs no longer supporting those shipments. Domestic thermal volumes in the US are expected to return as supply chains get reset but the market dynamics continue to be challenged.

Q2 coal volume is expected to strengthen through the quarter due to easier year-over-year compares.

Now turning to intermodal, Q1 results revenue was down 3% but intermodal performance in the quarter was a highlight as we continued to improve the quality of revenue and grow our domestic business despite the volume impact from a contract we chose not to renew in international, the significant weather challenges, and the Vancouver truckers strike.

Domestic led the way with a 5% RTM increase in the quarter reflecting our best in class transcontinental service and our express weight growth. Cents Per RTM and average revenue per car increased 2% demonstrating our plan to target the segments and customers that drive the most value is in fact working.

So for the outlook, we expect continued traffic gains in our domestic business as we sell our superior service and market capacity in high-volume corridors. The product consistency and reliability of our intermodal service will continue to generate interest from customers and segments who are looking for competitive alternatives and value a premium product.

We will continue to translate our service improvements to revenue growth where we have competitive advantage through pricing for value and improve the operating income of the business.

In industrial and consumer products, Q1 we were up 3% in revenue. Challenging winter conditions limited our crude volume growth in Q1 with carloads slightly lower than Q4 2013. The ramp up in frac sands delivered double-digit volume growth in the quarter. Average revenue per car and cents per RTM were driven by FX and changes in mix from increases in higher arc-sand and crude.

In terms of our outlook, the new Hardisty facility will start up in mid June and will ramp up through 2014. This is new capacity in the heavy crude market which will bring better balance to our franchise given it is less sensitive to crude spreads.

The crude by rail model continues to be valued by our customers and capacity build outs are on track. We expect double-digit sand growth in Q2 as the sand facilities on our network in Wisconsin continue to ramp up from 33,000 carloads in 2013. Our industrial products group will trend with GDP.

In automotive, in Q1 our revenues were down 13% as adverse weather impacted automotive production and supply chain. Chicago is a key hub for empties and connections to other carriers where congestion had a significant impact on shipments from Southern Ontario plants.

In terms of the outlook as service improves in and around Chicago, we expect to take advantage of improving velocity and car supply to handle backlog shipments. Our focus is on using our network and service to drive sustainable growth. We are aligned with strong automotive companies who are very competitive in their markets.

So in conclusion like Hunter, I'm glad to see the winter months behind us. Demand is strong across all of our lines of business. We are delivering on our initiatives and we are working and improving revenue quality. We have a sales organization who is highly motivated by a new incentive compensation program that rewards profitable growth. It is early stages and we should see solid results as the year rolls on.

And on that note, I would like to turn it over to Bart.

Okay. Thank you, Jane. Good morning, everyone. Suffice it to say that in spite of the significant challenges you have heard described by Keith and Jane already, this was a record Q1 for CP and I believe that does bode very well going forward.

Operating income and net income were both up 17%. The resulting earnings per share of CAD1.44 was up 16% and our OR of 72% was an improvement of 380 basis points year over year which I see as a testament to the efficiencies and strong cost control the team continues to demonstrate.

I didn't want to cover much in the way of the numbers but there are a couple of items from an operating expense standpoint that I thought would be worth noting. In particular, we saw strong continued improvement in the comp and benefits area this quarter. Efficiencies generated from both headcount reductions and lower pension expense more than offset the higher crew costs and overtime wages that we had to incur as a result of the harsh winter operating conditions.

Purchase services also saw some dramatic improvement in the quarter and in spite of headwinds that we saw through the higher land sales and a favorable CAD9 million legal settlement last year in the same quarter, we were able to reduce this line by 9% on an FX adjusted basis. The improvement was largely driven by in sourcing initiatives which have allowed us to reduce IT and third-party maintenance costs so that strategy is working very well.

We did see an uptick in materials expense this quarter. We received a few calls on this this morning. It was really primarily due to higher winter related freight car repairs but keep in mind that those costs are mostly recovered through higher AAR car buildings for those repairs. So we will see a better run rate going forward.

Let me just touch on one other thing and that is enhancing shareholder value. As you may recall I mentioned on our last call, my first call, that I don't believe in sitting on excess idle cash. I view it as something that can be a drag on shareholder returns if we could be deploying that cash effectively to drive higher shareholder returns overall.

So consistent with that thinking in March, we initiated a share buyback program which I believe reflects our confidence in the long-term profits of the Company and our fundamental belief that this is a value enhancing proposition for shareholders. In other words even with the share price where it is today, we see ourselves as undervalued.

In conjunction with that program, we have also put in place an automatic share repurchase plan which allows us to buy shares throughout our blackout period. So over the last few weeks while we have been in blackout, we have continued to purchase shares. We also announced as part of the program our intent to repurchase about 1.3 million shares through private agreements and simply those enable us to purchase shares at a discount to prevailing market prices.

For those of you who are familiar with those types of programs, you know that the counterparties tend to be Canadian financial institutions rather than institutional shareholders.

Lastly, I am also very pleased to highlight the ratings upgrade CP received from Standard & Poor's last week. They bumped us up from BBB- to BBB and we were also able to retain a positive outlook from Standard & Poor's. My view on it is this upgrade is really a reflection of our strong operating performance, the improved balance sheet that comes along with that and a commitment from the Company to financial discipline.

So to that end at the bottom of slide 12 you will see it there. I have highlighted a couple of financial metrics that we are focused on. You will see there the continuous improvement mode. It is obviously not a complete list. There are other metrics that we are stewards to but the intent simply is to show that we are committed to maximizing shareholder value while maintaining a strong financial discipline and the Company is certainly delivering on both those fronts.

So with that, I will conclude my remarks and I will hand it back over to Hunter. Thank you.

Thank you, Bart. Let me see if I can attempt to address some of the other issues that we were dealing with the first quarter that have got certainly potentially implications going forward and that is more some of the regulatory reactions that we have gotten from both Ottawa and Washington.

First, let me talk a little bit about the reaction in Canada. Taken all in, I am proud to report right now that in spite of the fact that all of the winter conditions and environment and unprecedented operating conditions, that we are carrying 12% more grain than we were last year and that was at record paces. So it is hard to prepare for a winter like this. But in spite of that, I think I could best describe it as we probably had a very knee-jerk reaction from Ottawa with due respect to the regulators. Once again, with due respect, I am not sure they understand really what they are dealing with.

If you think about the interswitching, to put in interswitching, extend it to 160 km, then you take it North and not South, so a US carrier can come into Canada but a Canadian carrier cannot go into the US. And it only covers three provinces, makes very little sense to me. It has political syrup all over it and I am not sure what impact it's going to have.

Number one, if you look at those three provinces, the only road other carrier that could come into our territory would be Burlington Northern and I talked to them several times and they have got their hands full trying to handle US grain and it will be a long time before they reach into our territories.

If you look at interswitching and the history of it and see how much interswitching is used, I think you would be amazed that the numbers are very, very small. Will it be less efficient? Yes. Do the regulators understand that? No. But once again, we had very little if any, dialogue or feedback or interplay as far as suggestions of if anything should have been done to fine tune the system.

Now am I an opponent of interswitching? No. If you want to have interswitching, that is fine. If you think interswitching encourages competitions, maybe so. That is fine. But I can tell you this that in those kind of conditions when the strong really stand out and so I'm not concerned. The main issue I have with interswitching is the rates. If it is a regulated rate and it is a fair assessment of the cost to provide that switching, then I have no trouble with the background of interswitching.

But just think about what is going to happen. I mean here we have a situation where it is set up for a US carrier to come into Canada, not for a Canadian carrier to go into the US. They are going to come up and take Canadian grain and take it south to the US, put it on a US road, non-regulated by the way, take it to Western markets, use -- that Canadian grain to US ports, take Canadian jobs away, I just in the long run don't think it is going to fly.

So I think -- do those things concern me? Well, I have a little concern. Do I lay awake at night about it? Absolutely not. You are going to see us perform in spite of what reaction the regulators have taken.

And the same situation exists to a degree in Washington. There was some issues raised about service issues in Chicago. I think Keith has covered that very well. That look, when you come to the end of the line, it is as far as you can go. If people won't take the traffic further there is not a lot we can do about it and with due respect, the regulator's reaction is to hold a public hearing and people get up and really there is not any positive feedback.

But I will tell you this, some of you are aware and remember that before I retired the first time, I promoted a type of commercial arrangement with other roads that was called routing protocol, that was to route cars the most efficient route -- I'm over simplifying -- but the most efficient route which will provide the best service to the customer and the lowest cost to the railroads. And our challenge would be [everybody] to split the pie up that was created.

So with some of these conditions that have existed in Chicago, we have had some -- I think it is fair to say some encouraging dialogue with the other carriers. I've said to you many, many times in fact it wasn't seven months ago or eight on one of these calls that I told you I was concerned about Chicago, that Chicago was fragile at best. Is this the last time Chicago is going to get in this situation? No, probably not. In fact, we felt so strong about it that my former employer that we tried to buy their Chicago Belt Railway. They wouldn't sell it. We tried to buy the Indiana Harbor Belt, they wouldn't sell it. We tried to encourage a merger of the two in Chicago. They wouldn't buy it.

So as a result at that point in time, we bought a railroad that went around Chicago which I think has probably put our competitor from the east in better conditions to operate through Chicago as a result of recognizing those issues.

But all in, the ship is righted. It is -- the sun is shining in Calgary and in spite of a little rugged start here, I am very comfortable going forward with the guidance that we have provided to you and I don't see any need to change that. In fact I am more encouraged all the time.

So with that little political byplay, I will turn it over to Mike to see if there are questions from the group which I am sure there might be.

(Operator Instructions). Brandon Oglenski, Barclays.

Good morning, everyone and congratulations on what was a pretty difficult period. Hunter or Keith, I just want to come back to the idea that there is some concern from investors that maybe the cost reductions have been too fast, too quick. Has that in any way impacted the recoverability of the network or are you reducing volatility for CP looking forward?

Let me comment and then Keith can kick in. This is in no way created any more volatility. The cost reductions that we have made have been made in a very appropriate manner. There has been no slash and burn, no obsession with headcount. It has been done through the basic model that we have -- provide service and control the costs and asset utilization and we have followed the same model now.

Those that are trying to find a crack in the mortar here are absolutely wrong and I think what it really does is it says even more that here is an organization that has maybe been accused of going a little too far to be able to produce the kind of results that this team produced in the first quarter in spite of what we have been through. So no, I think that just bodes more strongly for the model than ever before.

The only thing I would add to that is I would add emphasis to it actually has shortened the impact or minimized the impact of what this winter would have done to this railway. If you get back a year or two years ago when we had 30,000 more cars out on line or road, we had more locomotives on line or road, we had the kind of conditions we have had, we wouldn't have been adversely impacted, we would have been crippled. We would have been paralyzed.

So I would suggest this isn't about cost reduction, it is about asset turns, it is about rightsizing the level of assets you have against the business demands and it has allowed us to maintain fluidity in those corridors where in the past we wouldn't have been and it's mitigated even in those that we have been adversely impacted by. So it is accelerating the recovery, it is not impeding the recovery.

I am sure a lot of folks will remember a pretty nasty winter a couple of years ago this Company faced.

Speaking to Chicago though, what can proactively be done here to clear some of this interchange traffic issues that seem to come up every year?

Proactively to Hunter's point, routing protocol. We just don't need to have industry cars in Chicago that don't belong in Chicago. I will give you a case in point. We got engaged pretty heavily and early with our customers warning them what was going to happen in Chicago. Some listened and I'm not being critical for whatever reason, some listened and some didn't. I can give you two energy customers and I talked about this at the STB last week, two different results. One worked with us and we routed around Chicago to their end destination. One didn't.

The one that did even in the face of this winter across this network moved comparable year-over-year volumes. The one that didn't, we are dealing with potential plant shutdowns and having to curtailing their end production. I would make a case that one made the right decision, one didn't make the right decision.

So cases like that when you multiply them, you get an opportunity to do something different that will give you a different outcome. So again, we are seized with looking at all of our traffic, car by car, lane by lane. We have challenged the marketing team. I'm not interested in the long haul if it takes me into Chicago and it is going to adversely impact the operations. So if we have done that selfishly, shame on us but shame on our competitors as well. We need to work with them and figure out how to create synergies for the customers for car cycles, for locomotives cycles.

We have the low-cost operation both us and our competing and partner carriers and we figure out commercially how to split the revenue. There's cost savings to be split up, to be realized. There is revenue implications that we all should be mature about and realize. The end result is the customer is more satisfied they get to move more freight, and you don't have the impact of winter the way that it impacted us this past year.

So it is something that we will continue to work on going forward. There is no silver bullet to Hunter's point. This is about singles and doubles to keep winning the game and that is exactly what we are going to do.

Thanks, Keith. At least we are thawing out here.

Steve Hansen, Raymond James.

Good morning. Just hoping you could provide some added color on this domestic intermodal franchise that you are now growing and some new service offerings in place and I guess specifically how long do you think it will take to back fill some of the international business that you've strategically seeded?

At the run rate now the way it looks, Steve, we are talking -- the revenues on domestic will lap what we have lost in international by the end of 2015 if not exceeding them. In the quality of book because the contribution and the quality of the revenue is so much more positive in domestic versus international, it is going to be a much greater success story bottom line for the Company.

Okay, great. That is awful. Just turning to crude by rail quickly if I may. Hunter, I think in the past you have mentioned that the economics associated with some of the early stage contracts in crude by rail were not maybe as favorable as you would have liked but presumably there has been a learning curve. You have got a new large-scale unit train facility coming on in short order here. Just trying to get a sense for how the economics might have changed for the business or if they have changed or how that learning curve has evolved?

They have changed in those two ways. We continue to get -- have growth with crude. Look, people have misunderstood me to some degree. Look, I love to haul crude just like anything else. It is just a fact that if you looked at the margins, they didn't qualify in my book of being the right quality. Now Jane and team have worked very hard and going forward I think you will see the quality revenue improve there and once again if the regulators stay out of it and let us that know how to railroad -- railroad, then those issues will be behind us.

Okay, very good. Thank you.

Scott Group, Wolfe Research.

Thanks. Good morning, guys. So first, just want to ask just a couple of follow-ups on the guidance for the year. Jane, the 6% to 7% revenue growth, what is the FX rate you are assuming and just maybe the implications of the rate being at 110 right now.

Hunter, last quarter you suggested that maybe it could be as good as a 63 OR. I am guessing that is tougher now after 1Q but maybe just kind of your latest thoughts on how good it could be this year.

I think I can answer your question on the FX pretty quickly. We are assuming an FX of 105 and as we move forward and look at the book, we are hoping that this Canadian dollar stabilizes, our export oriented traffic and we will assume that we will see some additional traffic that will move in the merchandise sector to various points within North America.

So Hunter, I will turn it back over to you then.

Look, I hesitate to even put out numbers anymore. The staff beats me up as soon as I walk out of the room about being optimistic and you can color my questions with optimism. Look, there is a lot of positive things going on here.

Did we have a little setback with winter but did we learn? Absolutely we learned. So somebody asked the other day is the potential there "potential" for a 63? Yes, the potential is there. You don't always pull through your potential but yes, the potential is there. Yes, it is a matter of timing. Yes, there is a lot of moving parts but so far so good. I have been doing this a long time and I haven't missed too many numbers so I know I have got a short track going here but I don't plan on missing any more.

Okay. That is helpful. Maybe just strategically just on the Chicago issue so obviously the EJ&E has been bought by CN but Hunter you talked about some other acquisitions you tried to do in the past. Do you think those could open up again and I know you have been one of the few proponents about more major consolidation in the industry. Does this issue in Chicago you think in your mind make that more likely or you more interested in bigger transactions?

No, I think it does make it more likely. This is not something that I am some Johnny-come-lately here. I have been saying this for 10 or 15 years. Someday the whole industry is going to wake up about Chicago. If you go back in time before previous mergers by the way, Chicago was not a big interchange locale. It was far behind St. Louis and Kansas City.

What created all of the business at Chicago? Well, it is just a shift of the business away from Kansas City and St. Louis and the other points on the Mississippi and created a lot of business in Chicago because of the mergers. Railroads still have this "what I call long-haul mentality". And we saw some -- as we were getting into with the commercial side of the business, we saw a lot of business being routed through Chicago that should have never gone through Chicago. That it is out of route, that it is more cost, that it is worse service, that it is less asset turns. But people that have this grew up in this industry, this long-haul division mentality are one day going to learn.

As you get further growth in Chicago, as the economy further picks up, Chicago does not have the infrastructure to handle the business going forward particularly if you start talking about regulatory issues as far as hazardous commodities and those type things, there has got to be another place on the Mississippi to interchange traffic East-West.

Now if you look at the amount of traffic that is interchanged East-West and you look at the various gateways up and down the Mississippi, I mean I haven't seen recent numbers but Chicago is probably 10 to 1 over any other gateway on the Mississippi and is more than all of the rest of them put together of St. Louis and Memphis and New Orleans and those type things.

So yes, do I think there is going to be a point where people are going to need, have to look at other issues which might be a merger? Absolutely. Because through a merger you can still maintain competition and have a much better flow of traffic and if everybody wouldn't worry about the long-haul, they wouldn't have it all routed through Chicago.

So, yes, Chicago is going to get fixed. It is just a matter of time. For some reason, we got to get battered and bruised in this industry before we wake up.

Thanks for the color, Hunter. Appreciate it, guys.

Bill Greene, Morgan Stanley.

Good morning. Thanks for taking the question. Can I ask you to talk a little bit about how we should think about baselining traffic? We know that you lost some business by design here but how should we think about the recovery? What freight didn't move in the first quarter that we can expect to move in the second and maybe third?

And also how much of the business is left that you may want to reset if you will? So I think, Hunter, in the past you have talked about maybe 20 contracts or so that you didn't like the margins on. Maybe having a sense for what that means on a net growth basis whether you want to talk RTMs or traffic would be helpful.

Bill, let me make these comments and Jane and Keith might want in here. But if you look, clearly it is going to be a strong grain year throughout the year of the rest of the year. There is a huge amount of carryover so there is going to be pick up there. Most of our other bulk commodities look positive -- not with a big carrier of like grain but when you look at autos, forest products particularly lumber, most of that softness is the result of car turns. Cars get stuck in other carriers and they were making 15 and 20 day turns, we saw 40 and 50 day turns with the assets.

So I think pretty well if you look across the book, intermodal is not affected as much and typically what we think of is that the intermodal business you lost, you have lost. You don't carry it. But I think the product that Keith and Jane have put together, the domestic intermodal is very encouraging. Their staffs just got back from Asia and Jane I think was with them and some very encouraging signs there related around something that is unique in this industry called service. And I think people -- some people that had left said have you got room for me to come back?

So I think we will see some resetting -- this is my view -- of some intermodal business. So if you look throughout the year and one of the reasons that I am as bullish as I am on the guidance is that I think there is going to be plenty of revenue out there if we continue to execute the way we have been executing.

The only part I would add is that over the last year or so, Hunter has really had a focus on ripping apart the book of business and really looking at ways to improve the revenue quality, attacking the profitability by customer, profitability by lane. And as Keith indicated, part of our work will be to continue to look at that to optimize how we can move more moving them onto the most efficient corridors.

But the one thing I will say is that to your question around contracts and those that Hunter has indicated that they are not quite the way that we would like them to look, we have included that in our guidance. That is included in that overall view.

Okay, that is helpful. Thanks. Bart, maybe I can just follow up with you on one question. When we look at the target leverage ratio you sort of talk about, it kind of suggest some very large opportunities to increase the buyback significantly particularly when we consider some of the things Hunter has mentioned on asset sale potential.

So can you just talk a little bit about how you would envision the scope or the capacity? Is it measured in the multiple billions here? Is that how we should think about the opportunity? Maybe some color there would be helpful. Thank you.

Bill, it sounds like you are pretty excited about the buybacks in the future. I think we are too. The way I would maybe characterize it is I looked at -- given the way the business and the operations side of CP has continued to improve and will continue to improve going forward, we started to not only repair the balance sheet but get it to a place where we are ultimately maybe adding some leverage down the road makes sense. But we are talking about using truly free cash and excess cash to repurchase shares.

Now I think what that does tell us is going beyond the current CAD1 billion program once we have fully executed that and my view is we will of course fully execute it, we will be in a position to have lots of opportunity to continue to repurchase shares going forward beyond that program. And it comes with being able to put leverage on the balance sheet but it comes more from the great operating performance of the Company and the cash that that produces.

So I can't give you any specifics today. This is a journey. We just got to this point but it looks very, very promising.

This is kind of a matter of an issue that we have dealt with called confidence. So we have developed some confidence with the rating agencies. We have developed some confidence with the Board, developed some confidence with people internally that thought this was unachievable and I told them it was going to have to be a leap of faith.

So to Bart's point if we continue to have the operating performance that we have been having, I think you will certainly see in the future step two and three to a buyback program.

Very helpful, thank you.

Bill, let me add one comment of color, something-- looking at the way the business is flowing right now as well. Grain, grain and more grain is the story on the Canadian side, it's the story on the US side. From an RTM standpoint even though winter has ended and we are making progress, it is sort of a tale of two stories. You're getting a lot of fluidity, you are getting train speed back, you are getting cycle turns back on the Canadian side but we still have a drag with the impact of Chicago and sort of the ripple effect. What goes in has got to come back out.

So we've got the backlog cleared up but it is not normal states yet. Train speed in the states and the worst of things is off about 35% to 40% compared to last year. Now we are down to about 25%. So it is getting better, day by day getting better, but we still have to mitigate our expectation.

So I would expect over the next month probably flattish type RTM growth. You start to see towards the second quarter an increased RTM growth year over year and then strong third and fourth quarter based on the base demand across other business groups that Hunter spoke to so it is solid demand across all business groups and that is what gives me confidence.

That is what has given us confidence to maintain our year-end earnings guidance in spite of this adverse first quarter that we have had.

Excellent. Very helpful. Thank you.

Turan Quettawala, Scotiabank.

Good morning. My question is back on the regulation side I guess. Hunter, you talked quite a bit about the regulators here. Are you concerned that maybe there will be some other customers who will start to knock on the regulator's doors considering bad degree and (inaudible) met with some success here?

And also is the government becoming a little bit more conversational now or is it still much more of a one-sided approach?

Well, I don't think there is a lot of customers that are going to be knocking on regulator's doors depending on where you are talking about. Look, some of us that lived through regulation know that is not the answer to this. I hope the customers know and understand.

To some degree, it has been an educational issue with the customers and we have seen cars routed out of Wyoming going through Toronto for example that are go into Chicago that go to another carrier and that just doesn't make sense. I think this you might describe as a perfect storm as some of this came together and there was a lot of pressure from customers and reaction from the regulators. But I think that particularly in Canada, all of this has to go through a CPA review once this legislation is passed.

Where you have some people that with due respect understand the business a little better and then we will go through this five-year process of review that the transportation system goes through and I think we have a lot of case to be made that don't overreact, don't have some (inaudible) knee-jerk reaction. Think about what you are doing, it just doesn't make a lot of sense. Why do it in three provinces but not the other. Why is it just three provinces?

Why is it they can come in -- the US can come into Canada but we can't go -- it makes no sense. If you sat somebody down and said here is what they have done, they would say why and then you ask them why and they don't have real good answers. So I think a lot of the rhetoric is going to calm down. I think we have talked all morning about the weather being behind us and operating performance gets better and this too shall pass.

Let me add a little color to that as well. I think there have been some customers knocking on the regulator's doors specifically in Canada expressing concern about some of the legislation and some of the things that have been done because of the unintended consequences that they could transpire. If you are a potash shipper, if you are a coal shipper and you are a world supplier, you want to make sure that what is happening in Canada is not in your first interest. You want it to be in your best interest and sometimes these things happen.

From a capacity standpoint, I am not concerned about the commercial implications of interswitching. I am concerned about the capacity implications and if your objective is to increase capacity to move grain which is what the rallying cry was for this legislation, then you really need to do things that could impede your ability in [stack] capacity. If you start trying to put a 100 car unit trains through 20 and 30 car interchange tracks at designated interchange locations specific to CN and CP in this country, you are going to have an adverse impact not only on grain movements but also on the existing business that moves through existing interswitch interchanges.

So to me you've got to think about unintended consequences. I don't think there was enough consultation. I don't think there is enough understanding and as I have in the past and I will continue to express concerns to the regulators that make these decisions, they need to vet them and they need to think a little deep and hard before they do something that creates overall adverse impact to the Canadian marketplace.

Thank you. That is very helpful. If I may ask one quick one. Keith, you talked about the second half being obviously a lot stronger here. Is there any specific risk that comes to mind off the top as to what might change that in any way?

I think the only thing that would change it is world economic meltdown. I just don't think it is in the cards. Even with that, we've got a lot of grain to move, a tremendous amount of grain alone. If we were to move all the pent-up demand that is out there and really hit on all cylinders and cross all i's and dot all t's, that is a compelling opportunity for this Company.

There will be significant carryover of the crop this year as well to the tune of over 20 million metric tons so when you factor that in, we will be moving grain for some period.

Great. Thank you very much.

Chris Wetherbee, Citi.

Thanks. Good morning. Keith, maybe just talking a little bit on the cost side. So when you think about the CAD0.30 to CAD0.35 of weather that impacted the first quarter maybe is about half of that coming from the expense side as you look to get the service ramped up over the course of the next four weeks or so?

Should we be thinking about anything meaningful from a cost perspective being added into the second quarter? I guess I'm just roughly trying to get a sense for the cadence of [costs] ticking back up toward some of those longer-term 2014 targets.

No, I would say that there is no homeruns there. I think it is the railroad and as we have experienced, train lengths are going up, train loads going up, train speeds going up. Cycle turns are occurring, costs are coming down, overtime is coming down, terminal dwell is coming down. As those things happen they will reverse and account for some of the downfall that we had in the first quarter, especially considering if you remember year over year, we did our whiteboard sessions midyear last year.

So the first half, the comparables if it had been a normal winter would be compelling. We will realize those synergies in the second quarter. I am already seeing it in the numbers and we will regain, to the extent that we've chewed into or overshot I guess in the first quarter.

Okay, that is helpful. (multiple speakers). When you think about resources --.

Sorry, Chris, maybe I could add just a couple of words. The insurance expense in the quarter related to the weather was about CAD25 million, so that is a number you can use to come out on a run rate going forward.

CAD25 million of expense. That is helpful. And then, Keith, when you think about resources, forgetting about headcount for the time being, maybe thinking about capital resources, locomotives, etc., or actual sort of hard infrastructure assets. When you think about what this winter has taught us, is there anything that you feel like you need to go to Bart to ask for as you look forward to the rest of the year, as far as capital is concerned? Or do you guys feel relatively good about the plans that you have talked about in the past?

I would say if I went back and I had a crystal ball, I wouldn't add any more resources when it comes to locomotives, crews and people. I mean effectively, we maintain a fluid railroad overall in Canada. The place that really hurt us was Chicago and like I said, if you have 12 trains daily waiting to get into Chicago, am I really doing anybody any good having 15, 16, 17 in line to get in Chicago? That is just more additional locomotives, more people, more assets, more costs that once things normalize, that is a going out of business sale as far as I am concerned.

So the short answer is no, we've got a very robust capital plan this year. We've got some strategic investments we are making to increase capacity over the long run that will allow us to drive train velocity, take out additional train starts, train lengths and absorb incremental business at low incremental cost. I think we are right sized and I think we are on target and I wouldn't suggest that we need to change anything.

That is great. Thanks for the time. Appreciate it.

Ken Hoexter, Bank of America Merrill Lynch.

Great. Good morning. Hunter, you had mentioned in your previous position that it wasn't about the operating ratio and at some point you want to start growing revenues but now that you have been here for a little while and seen the landscape change in the cost side, you mentioned kind of getting to sub 60. Is there kind of a -- I know you didn't want to set a hard number before of a target but do you still see that on the path given all of the bulk traffic on this network compared to what you moved before?

Then do you still see the outlook of at some point switching over to a stronger revenue growth and a less focus on the ramp up on the cost side?

Ken, you're going to get me abused by the staff here. Let me say this. I think that you are exactly right about what I said previously, I still believe that. I haven't changed it. And I think we are probably seeing the light at the end of the tunnel with that strategy, that shift. I would suggest to you that we are going to talk about that a great deal at the Analyst Day or days in New York in October I think.

So I think we are approaching and to some degree the industry is approaching the point where I think you are going to see growth kick in if the economy stays stable and I think you are going to see some growth further for a lot of reasons, reasons that I've talked about before.

So yes, I think we are maybe a year or two away from that shift where there will be a point that it is probably not in our interest to go necessarily lower. Now that will be a low point, it won't be 63, it will be -- it will break through that barrier. But yes, I think that we are looking to the point where the real opportunity particularly for a business that is capital intensive and high fixed cost as this one is, there is a point that growth can really kick in and give us a real boost to the next stratosphere.

When you said break through the barrier, you mean a 60 or do you mean the 63 that you had mentioned?

63, let's start with that. If we get through that then look, you can say 59, that's just 1 point less than 60 or 4 points less than 63 but it is some kind of mental issue with certain people. So look, we have been involved, I have been involved with carriers before that have had operating ratios starting with 5s that are clean quarters and weren't some aberration.

So could I see a day in the future -- and we are going to talk about more that we will get to some of these artificial barriers? Absolutely. When we wring all the costs out of this operation and get operating as effectively and as efficiently as this team would like to have, I think there is going to be opportunity, a lot of opportunity for growth on the upside which will maybe be the next wave of the future for us.

Appreciate that. And then just you had mentioned before you wanted to talk about Ottawa and Washington and I know you talked about Ottawa for a while. I am not sure if you ever kind of moved it over to Washington and your thoughts on maybe the switching proposal or the returns proposal that have now come before the STB. Can you switch over to that side a little bit and maybe throw out your thoughts there?

Yes, I think if you look back first of all, the STB went for a good period where they only had two sitting on the Board. Now they've got the third party but I think that if you look back at history, if you look back at the numbers that they are pretty compelling. If you look back since [staggers] at 1980 until today and you look at railroads' financial performance, service performance or whatever the case might be and you say we are going to go back to the old days or mess with that model, you need to be very, very careful.

We have talked about interswitching in Canada. I remember the old days of reciprocal switching. Was it good for service? No. Was it good for cost? No. What was it good for? I couldn't figure it out. So I think that once again like a lot of things, we have a headline for a couple of days, service has fallen back in shape and I think that I don't have and maybe I'm reading this wrong, I don't have concerns that Washington is going to do something that is not smart and appropriate for the railroads and if they do, if they think about it or approach it, I think there will be a lot more dialogue and input from people that know a little something about the industry rather than once again snapping off and putting some legislation in that makes not very much sense.

Wonderful. Appreciate the insight. Thank you.

Allison Landry, Credit Suisse.

Thanks for taking my question. Hunter, referring back to your comments on there still being a potential to achieve a 63 OR this year, could you talk about some of the key levers that you could pull to make up for some of the setbacks in the first quarter? I know that you mentioned a little while ago that there is plenty of revenue out there. So do you think that the top line will have more of an impact than you initially expected or will it be a combination of that along with continued execution on the cost improvements that were already in place?

I think that it is going to be more of the same. We got a little setback here with the snow drifts that were higher than locomotives but all of the initiatives that Keith has put in place, some that are just getting kicked in, are going to get kicked in fully the rest of the year. Jane -- forget new revenue for a minute, we got old revenue out there that we can bring back.

I don't think there is no magic wand or no secret. Are there some other things going well? Yes, there is some very encouraging dialogue for example in the US on labor agreements. Very encouraging. I don't know where it is going to end but I think we will be better off that way. I think there is some dialogue going on in Canada.

So I think it is just more of, if you look at our metrics and see the trends that have been created, I think you will see more of that and so I think you will see some similar combination to the setback in the first quarter and going positive in the next three quarters. I think we will see once we get car cycles back in some type of rhythm or tempo if you will, that we will see some pickup in the merchandise side, the auto side, and at the same time, we will get back to the trends that we are tracking as far as the operating initiatives that Keith and his team have put in.

So I think it will be a combination but this is not a model that reacts just to the market and changes every quarter. Look, we've got a model, we've got what we think are the values that make this thing tick and they have worked pretty well over the test of time and we have a level playing field here and a little snow melt and we will get back on the same trends and track that you saw for some period of time until the point to Ken's earlier question, to the point where I think we will be talking about at the meeting in fourth quarter about what is the shift that we see out in the future in the next three, four, five year plan if you will.

Okay. Thank you for that comprehensive answer. I have a follow-up question for Jane. Just given the news this weekend regarding the Obama Administration pushing back the Keystone decision again, has your outlook changed at all on your crude by rail growth trajectory particularly as we look out to 2015, could there be some additional room or upside to your two to three times growth target?

I would say, Allison, that we have always built into our crude target our guidance around 140,000 to 210,000 carloads that we believed was aggressive. But as I've said many times, our forecast is not dependent on pipelines not going ahead or in terms of pipelines moving forward. We believe we have a unique proposition that provides optionality, provides a clear alternative to get oil to market for customers who want to move it.

So I think we feel our guidance is on track for that number. As I said before, our capacity build outs are moving on plan. We continue to make headway but again, we believe that the pipelines are complementary to what we want to do as well and so we are focused on our unique space, creating value. And as Hunter said, really focusing on getting the right combination of facilities and movements into our (technical difficulty) business and identifying where we can grow profitably.

Okay. Thank you so much.

Thomas Kim, Goldman Sachs.

Thanks. I wanted to ask a couple of questions. The first one on the pricing side. To what extent were the pricing gains in grain, industrials and forestry during the quarter from core versus mix and then to what extent did FX impact the average ARPUs?

I would say that each of the groups are different but I would say that when you look at our grain pricing, clearly when you look at the corridors that we move, grain pricing was very strong. We took advantage of our opportunities to where grain wanted to flow and as I indicated last quarter, we expected that our yields in grain would be strong.

Certainly as I indicated before on the crude side, there was some impact, some impact from FX but largely a good degree of this book now originates from the Bakken and moves in US denominated currency.

When we look overall at what we are doing in terms of the pricing side, I've been very clear that pricing is a journey for us. It is a combination of two things. Number one, it is achieving our renewal targets of 3% to 4% which we have delivered on in this quarter, about that range. And it is also really on taking a look and developing what is the right book of business for this network. And as Keith indicated, certainly our work is not finished in this area. We continue to work on core pricing, improving that opportunity.

But again, a lot of what we are going to be doing in the future is not only assessing just that profitability but also working on the routing options that will create the best efficiency that we can to continue to grow the business.

Okay. Just in terms of setting our expectation for the second quarter, the momentum of pricing growth that we saw last quarter -- is that do you think sustainable for Q2 and should we anticipate that decelerating a little bit off of a higher base into the second half of the year?

I think that certainly on the grain side we use seasonal pricing so we might see a little movement on grain pricing as we move toward our regulated corridor. But I think overall, we are very pleased with the momentum that we have had on the pricing side. I would reiterate our guidance for 3% to 4% on our renewals. And as I said, the work that we have been doing on book of business to get that right combination of yield and movement I think that I would suggest that that would be in line.

Thanks, Jane. Bart, can I squeeze in one question just with regard to equipment rents? I think that was one area that you may not have detailed. If I missed it, I apologize but I think you provided pretty good color with regard to purchase rents and materials and I was just wondering if you could just highlight or detail what helped contribute to the lower equipment rents in the first quarter?

Yes, it is mostly lower leased cars is the primary item along with some locomotive rental costs. Those are the two factors. We were down -- we were favorable about 16%.

Okay. These are not rental rates but the number of cars leased, is that right?

That is right.

All right, thank you.

Jeff Kauffman, Buckingham Research.

Thank you very much and congratulations, everyone. One question for Keith. One question for Jane.

Keith, in previous years when we have had a lot of snow in Canada, we are thinking about getting past the snow but we tend to have flooding in places like Saskatchewan as that snow starts to melt in the spring. Can you talk about some of your contingency plans if that is to present itself this year and what you are seeing right now?

I can talk about what we are seeing and what we are seeing is a slow melt and favorable conditions. We do not anticipate short of some global warming that hasn't obviously happened as of late any overwhelming of the waterways in our network that would have an adverse impact when it comes to flooding.

The Mississippi is always a wild card but we don't see anything again right now on a positive standpoint that leads us to believe that we are going to have anything like we have had in the past.

Okay, thank you. And, Jane, you talked a little bit about some of the stabilization in fertilizer pricing but can you talk a little bit about how some of the currency swings not just the Canadian currency but in some of your key export markets are impacting competitiveness?

What we are hearing from customers is that we have not had any signals that this is having an impact on their ability to market their products in those markets. A lot of the customers that we talk about or that are part of our book are customers who lead in those segments.

I think that what we are seeing specifically in the product side is that the demand fundamentals are such that the prices where the buyers are wanting to get into the market have basically -- because they have been out of the market as you recall last year, we had a period where we weren't moving much potash but again, the real focus has been that they are basically high-quality low-cost providers that do well in their segment. So I haven't heard anything that would be an indication of foreign exchange has been cited as a reason for any change in volume.

Okay, thank you. And again, congratulations.

Benoit Poirier, Desjardins Securities.

Thanks for taking my question. My first one, I was wondering whether you could provide more detail about the opportunity to monetize real estate. I understand that the CAD2 billion amount is more 2015, 2016 but I was wondering about the potential for a portion of D&H and whether it should be realized this year?

The D&H?

Yes.

I think you are right, I think that most of this book of opportunity with real estate will be in the out years 2015, 2016. We are working hard, the staff is, on the right model to best optimize these assets. I think we anticipate a closing on the DM&E this summer probably late May, early June, and then there is still some activity that we talked about originally strategically on the D&H. But certainly you won't see anything this year that impacts that but I think in the out years when you are talking 2015, really 2016 and 2017, you will see this really kick in and start to pop.

Okay. Thank you very much. Just related to free cash flow, am I right to say that it was CAD70 million before dividend and is the CAD1 billion to CAD1.1 billion target still achievable this year?

I think you are right on the pre-dividend, free cash flow for the quarter. And yes, we don't provide guidance on cash but the general consensus in the market is about CAD1 billion to CAD1.1 billion of free cash before dividends and we certainly wouldn't disagree with that.

Thank you very much. That is it.

Walter Spracklin, RBC.

Thanks very much. Good morning, good afternoon everyone. I guess I want to swing back to regulatory for a second but in a little bit of a different vein, Hunter. I know as you will have seen and you are well aware, Bill C-30 has a sunset clause attached to it and so it goes away soon. What is really is in my view the more concerning -- potentially concerning aspect of this more hostile regulatory environment is the review of the CTA.

I think you are right, I mean I completely agree with you that a lot of the stuff that came in the Bill C-30 was very surprising, didn't make much sense to me either. But I'm wondering if the politicians have been listening to that as well, believe that they could make different changes that reflects in the lobby by the grain customers?

I guess my question is what could that be? Have you had your ear to the ground in terms of what new aspects they might be looking at if interswitching is not the solution? Is there other solutions they might come up with that we are not looking at right now that might down the road impact either your efficiency drive or the overall ability to deliver solid service to customer?

Well, it is a difficult question to answer. I would say this, first of all, I think you should split the grain customers out into sections. You've got one that is the large grain companies and then you've got another that is the farmer. And in my view with my years of (inaudible) and talking to a lot of people that is potentially a lot of the friction.

Look, for this industry and I am saying industry, and this is not an announcement for CP, but the industry to deliver grain at record levels in these kind of conditions bodes well for the future.

Now the market tends to say well, we don't want to hold grain, store grain, carry grain over. Sometimes you get these adverse effects. I think that every state politicians for a moment, every editorial op ed whatever that I have read, commenting on their actions to date have been rather critical. I hadn't seen a lot of people endorsing this, this is the way to go.

I think that for an example, there is issues with revenue cap. Does a revenue cap make sense to me? Absolutely not. Who is going to buy equipment in the future? The grain fleet is getting old in this country and the ownership is very diverse and you don't build railcars overnight. But how could a company go to its Board of Directors and say I would like to buy a lot of grain cars but I can't tell you anything about what the returns are going to be, I don't know what the cap is going to be, I don't know what the IRR is going to be. I know nothing about it. He is not going to be very successful.

So I think that there is some shakeout going as we speak. There's people that are learning more about the system that have not paid attention to it. And have I been pleased with all the reactions? Absolutely not. Have I been pleased with the dialogue I have had with some participants? No.

In the final analysis, I think that the right thing will be done. I mean I have not been able to get audiences with some of the people that are key players for whatever reason but they don't want to talk. If you don't want to talk, it is hard to have a dialogue and decide what the right model is if people don't want to talk. (multiple speakers)

This too shall pass and we will come back to our senses and get to moving grain and product for Canada like we should and let this political wave go away.

Do you think there is any compromise solution where they relax a little bit on the revenue cap, it allows you to invest a little bit more in grain capacity or something around that lines at all? Is the revenue cap or is that just something off the table that is not going to --?

Look, I heard feedback from some key people in the government both provincial and federal that are not all that pleased with the revenue cap. If you looked at the revenue cap and you really peel it back which I have recently, and it makes very little sense. So is there some compromises out there? Yes. Are there some considerations probably given to the elections coming up? Yes. I think once some of the political rhetoric dies down and I think all of us have gotten smart through this exercise, then yes, I think there is probably some positive compromise and I think that people are going to say look at this interswitch in 160 km and what does that do for us in Canada?

All it does is from an efficiency standpoint, the carrier that is going to linehaul the business has to purchase the equipment so as I told you, I don't think my friends at Burlington Northern are going to be a participant for a while. They've got their hands full in the US.

But in this system, they would have to give us cars at the border for us to take some place wherever to then load -- for them to take back to them and create other interchanges and exchanges and it just doesn't make any sense. But once again, sometimes make a decision that don't really understand the issues and problems. So I think it will all shake out and my optimism is bubbling through here in the long run.

Okay. Switching gears over to Keith, first I want to say the FRA accident statistics, those were pretty impressive. I thought it was a typo the first time I looked at them so great job given the conditions.

But related to that on the volume side, we did notice a significant revision to what we were looking for what consensus was looking for on the volume side after the winter impact occurred and you provided some really good insights into Chicago and some of the structural challenges that you have with regards to the Chicago area.

My question is as you get lower and lower in your operating ratio, do you start to hit up against -- you move away from call it operating efficiency and you start to hit up against some structural impediments that make it a little bit more difficult to address the operating ratio, and does that mean we might see some more capital invested not in locomotives but more in addressing some of the structural constraints that might be on CP's network be it in Chicago or perhaps in the West or anywhere on the network?

I would say the only structural constraint that we have in the network given the level of business we face today is Chicago and I don't know what the answer is to Chicago. If we could buy the harbor, if it were up for sale or the Belt if it were up for sale then I would make a compelling case we could create some capacity for ourselves and for others. But outside of that, our capital spend I think is right sized. I would expect it to be the same.

We've got to be careful what we spend to optimize the network because I don't want to ramp up on employees and ramp up on those type assets just to lay them off when we get done. So we've got a very robust and thorough five-, six-year plan that we put together since I have arrived here that I feel very comfortable. It addresses our ability to bring on incremental sustainable profitable growth and at the same time maintain the leverage we need to maintain to control costs and produce a positive operating ratio.

I guess my question though was, does structural costs become an impediment down the road as you get lower and lower?

No, I am only going to spend money in the lanes that I've strategically got growth and it is going to be profitable growth to provide a return to maintain that operating ratio. So short of that, I would say the answer is no.

All right. Thank you very much.

Jason Seidl, Cowen & Co.

Yes, asked and answered. Thank you.

Keith Shoemaker, Morningstar.

I would like to turn to what seemed to be a couple of positive metrics namely average train weight increased 6% and length also improved. I guess at face value it seems a little surprising in light of the extreme cold Keith mentioned. Was this just a function of mix in commodities that move in longer trains or could you add a little color please?

It is a function of train miles that we have taken out, train consolidation, using DC power, leveraging and optimizing DC where we could to maintain train length versus last year.

Listen, that was definitely, definitely dilutive with the weather. We have already seen incremental train length improvements which are quite healthy just the month of April. Train length improvements which are quite healthy in the month of April and we are maintaining our train mile reduction so it is a combination of all three. It is really not a mix issue at all. It is just our operating model taking hold and providing the leverage that it provides and the strength it provides in this business at low incremental cost.

Great, thanks. And a quick quantitative question. How many locomotives and cars were online at the end of the quarter please?

We will have to get back with you on that exact. I don't want to give you a bad number. Nadeem will get back to you.

Very well, thank you.

Cherilyn Radbourne, TD Securities.

Thanks very much. Good afternoon. I wanted to ask a broader question because it seems to me that the rail industry as a whole has lost some broader goodwill and I think that is with the general public, with customers, with regulators and I think that is tied to Lac-Megantic, and also the capacity issues in the first quarter as a result of winter.

So I just wonder if you think the industry is doing enough as a whole to reassure those stakeholders that A, there isn't an underlying capacity issue, and B, that it is a safe industry?

Well, let me make an attempt at that. Number one, I think one of the problems is that we talked about as an industry, this industry is made up of seven Class 1s. Some of them are doing some things strategically, others are doing other things and I don't think that the industry deserves to get painted with a broad brush. A railroad is not a railroad is not a railroad. That is one of the reasons that we have not necessarily participated in some of the industry initiatives.

I think we would like to think that we are trying to do everything we can to have a positive influence on the industry and customers and the public as far as understanding some of our issues. But they are difficult to deal with.

Now let's take what we have going on in Canada as we speak. We've got a lot of pressure on one side to catch up and deliver grain. On the other side, we've got the regulators talking about Lac-Megantic for example, talking about -- and they just -- lowered the speed of trains. That is inconsistent. That is going to slow the network down and we have not had -- and I'm being very cautious when I say this -- we have not had any derailment related to speed. We have had no derailment with crude related to speed. Lac-Megantic had no issue with speed. Speed was not an issue.

So I think maybe that some of us individually should do a better job of educating the public and the politicians and the regulators on the true bottom-line issues, the way to approach them, the way to deal with them rather than once again to borrow your comment about a knee-jerk reaction.

Yes, I think that to some degree, are we getting a little bit of a black eye if you will? Yes. Am I concerned about that? Yes. We should do a better job of talking to people about what we are providing and what we are doing. It really kind of concerns me at times when people are talking about the grain delivery in Canada.

Guess what? You go to Vancouver on the weekends, there is not one grain company out there that is working through the weekend. Our employees are working 365, 24 hours a day, seven days a week and if we stopped to take holidays off or the weekends, you would see major shutdowns, major gridlocks. So we just haven't done a very good job in that respect and we hope to address that better individually as a Company in the future.

And then just very quickly, could we get the EPS impact of a weaker Canadian dollar in the quarter?

On average, it is about CAD0.05 per CAD0.01 change so annualized we've got CAD0.07, CAD0.08 a quarter.

Thank you. That is all for me.

David Newman, Cormark Securities.

Just a couple of quick ones, guys, just in terms of headcount reductions that you had that you have been tracking towards, has there been any change at all because of the weather? In other words, are you going to keep some bodies on a little longer just to get through the Chicago congestion?

I think you had a big not for the IT side that was going to -- that you were going to reduce at the end of the year. Where do you stand on the headcount reductions? What is kind of the waterfall chart from here?

Well, this is kind of a work in progress and there is pluses and minuses. The headcount right now is about 4980+ as we stand. You are right, we had planned this bubble with IT. I am not sure if it is going to be as big a bubble as we initially thought but we are right on schedule in that regard and clearly this organization had too many people.

I mean think about, let's turn the page back and if you go back to 2011, the instructions here were to hire enough people to handle business plus 25%. Now I don't understand that rationale. But we are working our way through that and there will be some -- we've got some attrition taking place in certain places and we've had some people that don't like to work in snow and cold and windy conditions and outdoor sport, if they don't want to do that, now is the time to find out. So I think overall we are in pretty good shape there along the plan.

And the IT, Hunter, is that sort of late this year? Was that the plan?

Yes, I mean the plan was I think that there was a bubble of about 300 people year-end and that is I have said, there are a lot of moving parts. We have had a little bit of some challenges with our SAP cutovers and so I am not sure that bubble is going to be as big as we had initially planned.

But if you are looking from a headcount standpoint, there is other opportunities that we didn't see when we publicized those numbers. So I think overall the guidance we provided in that regard, I feel very comfortable with.

Okay, very good. Last one for me on the -- I know your network is not naturally aligned towards it but obviously a big opportunity in BC and Alberta in the LNG side in terms of moving construction materials, hype, frac sand, things like that. Are you seeing any early business on that or what sort of potential opportunity could LNG be for CP Rail?

Clearly one of the things that we would like to do as the model evolves and as you say as the facilities get identified, is obviously syndicate the crude by rail models that we have to LNG and those discussions are in very, very early stages.

But with respect to construction materials, I have a part of my organization, Canadian Pacific Logistics, and basically what we do is we go out and look to work with companies to basically handle those construction modules. The discussions are early but again, this is an area that given the fact that we have had experience in moving wind energy, turbines, blades, etc., we move a lot of dimensional materials today, it would be an area of growth for us as well.

Very good. Impressive results in a very tough quarter.

John Larkin, Stifel.

I had a question as to whether or not any portion of the CAD0.30 to CAD0.35 of weather-related impact in the first quarter could be tied to costs or foregone revenue associated with being compliant with the regulators' requirement to haul 500,000 tons of grain per week?

No, John, look, as I said to the regulators, look, our interest is to haul as much grain as we can selfishly. That goes to the bottom line, it starts at the top and goes to the bottom. So I want to haul all of the grain we can possibly haul. So effectively, there is very little if anything that has been done by the "regulators" that has impacted our operating strategy.

Now I will give you one exception for example, some of the challenges that we face. Thunder Bay has had problems with ice and getting ships in and so forth so when you can't get through Thunder Bay, the alternative is to go to Eastern Canada so effectively for us Montreal and Quebec city markets. So we had customers literally begging to go to the long East. Well, that was going to start to jeopardize because they are only counting units. They don't look at the length of haul.

And so we said to the regulators, we have got this quandary. The customers want to go long East but that will impact your model about the number of cars and the response was the law is the law is the law which is a wonderful response.

But we took the chance and we hauled stuff to satisfy the customers to the East and have tried to serve those Eastern markets with Thunder Bay having its problems. But you know, that is some of what you get into. You've got the customer begging for one thing, the regulators asking for you to do something else but with that exception, it has been kind of a non-event.

Thanks for that. Maybe just one more question on the whole issue of Chicago. There is this project underway. It has been underway for a number of years involving all the different parties that have a foothold in Chicago called Create and in listening to Keith earlier, it sounded as if you believe that maybe Create isn't having that much positive impact and that what would really work to solve the problem would be to route traffic completely around Chicago, that traffic that doesn't need to go into Chicago. Is that a fair assessment?

Yes, I think Create was broke when it started and it has been broke ever since. And it has created zero value in my view. You know, it is hard enough to get two railroads to agree on something much less seven or eight. And it is a bureaucratic machine that adds additional layers that provides nothing in return.

So the issue with Chicago when you really peel it back is to take traffic out of Chicago that shouldn't be going there. We are hauling stuff out of Western Canada that is the perfect fit to go down the East Coast of the US but people want to drive it to Chicago and so this is not some recent phenomenon with me.

I have talked about Chicago, I've talked about it for years. It is not going to get better and Create, which I'm not proud to say, we are a member of, and try to participate in but with due respect to those 12 or 14 people in there in that room that are getting instructions from three or four different places, Create just creates more mud in my view. Keith might want to comment further.

Hunter is talking specifically to the way we coordinate movements in and through Chicago trying to get all the railroads to agree. In the best of times it is a challenge, in the worst of times which we just experienced, it is almost like pulling your hair out. So I would echo Hunter's comments about the value add of that central coordination office.

Now there have been some Create projects from a capacity standpoint that increased capacity, increased velocity on some of these belt railways and flyovers. Some of those things that have transpired mitigated some of the impact this winter but in spite of that investment, it is a compelling case that the only long-term solution to help mitigate the impact of this kind of weather in Chicago is to get as much traffic out of Chicago as we possibly can.

There is only so much infrastructure you can add. People don't want you going up in their backyards. You are landlocked in many locations. So I don't say it has run its course but it is pretty close to fruition from a capacity addition standpoint on the Create standpoint and I will echo Hunter's comments on the coordination and the control in that central planning office. It is challenged at best.

If 25% of the traffic hubs over Chicago, what percentage of that do you think is divertible to another routing?

You know what, I am not qualified to answer that. I can tell you that there is a percentage of the business -- 40% of our traffic either originates, terminates or passes through Chicago. If I could get 10% rerouted, it would make a compelling case but it is a little bit premature for me to say yet. I haven't been here long enough to completely understand our flows but rest assured, my objective is to get 100% of it out that I can.

Thank you.

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

Thank you, Mike. Thanks for joining us and we appreciate the support you have shown and we will talk to you in July and make your plans for Analyst Day in the fourth quarter.

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