Canadian Pacific Kansas City Ltd (CP) 2014 Q4 法說會逐字稿

Good morning, my name is Kirk and I will be your conference operator today. At this time I would like to welcome everyone to Canadian Pacific's fourth-quarter 2014 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. (Operator Instructions). I would now like to introduce Nadeem Velani, AVP Investor Relations, to begin the conference.

Thank you, Kirk. Good morning and thanks for joining us. I am proud to have with me here today Hunter Harrison, our Chief Executive Officer; Keith Creel, President and COO; and Bart Demosky, our EVP and CFO.

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. In the interest of time we would appreciate if you would limit your question to two. It is now my pleasure to introduce our CEO, Mr. Hunter Harrison.

Thanks, Nadeem, and good morning to everyone. I'm -- it's certainly nice to be visiting with you given the quarter that this team has put together. I have been doing this a long time and, all things in, this is the best quarter I have ever been associated with -- which I think sets the foundation for us going forward in our four-year plan and some of our guidance for next year, which I know we are going to have a lot of discussion about and I would imagine in Q&A.

So let me just highlight a few points that I don't want to overlook. The OR was -- came in at 59.8%, which is a 600 basis points improvement and clearly the best quarter performance this Company has had in its history. Our earnings were up 40% over 2014.

If you look at 2014 I think we clearly came in, if you summarize it, two years ahead of the plan with 8% revenue growth an OR of 64% and a fraction and earnings of CAD8.50 for the year. So I was obviously delighted with that performance.

We are going to touch on the guidance, as I mentioned. But we can just highlight it now that the guidance for next year is 7% to 8% revenue growth, operating ratio of better than 62%. And we go through a great deal of grinding about how to characterize the OR, but that is our final analysis. And then earnings of greater than 25%.

And I would highlight that that does not include any share buyback in 2015. And I am -- I know the Board will be addressing this in February and I would hope and expect that we would continue there. But we certainly did not want to get ahead of the -- ahead of the Board in that regard.

But overall it is a great quarter, but it has been a good week for us. And a few things that you might not be aware of that I wanted to take a moment to mention.

We have had some property in Vancouver that has been in quite a dispute for some period of time with the city of Vancouver. And we got a favorable Court ruling this week from the Superior Court, which opens up the value of the real estate which I would characterize it, my appraisal, it is in the neighborhood of potentially CAD100 million.

We had a -- for some period of time we have had an issue that we talked to you about with the EnCana building here in downtown Calgary. We, with the guidance of [Mark Wallace] and his team, we finally got that settled to the tune of CAD60 million this week.

We have also been talking to you for some time about our real estate potential [to possess] and I think we announced this week a new JV with the dream team that we think is going to unlatch a whole lot of the real estate potential of the organization.

And then last but certainly not least, Keith -- and Keith will talk more about this I am sure -- but we brought on a new Senior Vice President of Marketing and Sales, which has got -- he has quite a background to head up the marketing and sales effort.

So had a good quarter, a good week. We look forward to another outstanding year. And with that I will turn it over to Keith.

Okay, thanks, Hunter. Well, suffice it to say I am extremely proud of this operating margin team's combined effort since we continue this journey to making CP a best-in-class world-class transportation Company. Obviously very rewarding, when you take a look at these efforts, improving our train service, our service offering to our customers while we convert to the bottom line -- it is pretty phenomenal.

So let me start some comments on the operating side to add some color. The progress I am most proud of and it is actually the operating ratio, it is more so the improvements we are making on the safety culture. Because I know the safety metrics, which reflect the improvements on the safety culture, are the foundation of our sustaining our success on a long-term basis at CP.

I am a firm believer that our goal is to eliminate all train accidents and injuries, but to see us produce a 19% reduction in train accident versus the fourth quarter of last year [about] 30% for the year, which has been an industry best-in-class performance for I believe the last eight years, it's a strong testament that we are making progress in this area.

But this is an area that I have always said it is not a destination, it is a journey and it is one that we are going to continue to pursue excellence in. We owe this pursuit of excellence to our communities we operate in and [grew] to our employees as well as our shareholders and our customers.

So let's talk more specifically now on the operating metrics side. As I said previously, velocity is the key ingredient to improving our service offering while we unlock capacity for our growth and limit our capital spend.

So as you see in the progress made, the fourth-quarter 10% improvement versus last year is pretty significant. It is substantial. You combine that with running longer, heavier, more fuel-efficient trains, they are all powerful levers that drove our overall performance at the bottom line.

As we look forward to 2015 and our continued pursuit in both safety and operational excellence, you are going to see us progress as we evolve our culture, as we convert the investments made in our franchise in 2014 which will help us drive additional improvements in velocity, train length, train weight and fuel efficiency. In addition to the investments we're going to make in 2015 to continue to improve this network and improve our core infrastructure.

I'm going to spend a few minutes talking on the revenue side. We ended the year with a strong revenue performance in the fourth quarter, up 10% over 2013. RTMs came in line with what we guided to, up 6%, (inaudible) per RTM up 4% which is driven by strong pricing and favorable currency, offset somewhat by negative mix. I'm not going to cover all of the individual lines of business, but let me go over a few of the highlights from the quarter.

On the grain side, very happy that we successfully submitted our new dedicated train program in Canada and in the US for the crop year. This is a significant change in our car distributions. It's driven greater asset utilization and created capacity with our fleet which are both positives for our customers as well as for the Company.

In the fourth quarter we saw strong soybean demand to and from our franchise to the Pacific Northwest. And also on a positive note our [own fulfilled] coal car orders were minimal of course compared to 2013. On the potash side strong volumes in the fourth quarter, it's a function of strong export demand and the need to refill customer distribution networks.

On the coal side overall flat revenues, but on the US side, as I mentioned on our last call, in the fourth quarter we were successful in rebalancing our operations with our customers in connecting carries for the Powder River basin coal to the [net blast] shifting that tonnage from the St. Paul gateway to an Iowa gateway.

We expect this to continue to improve our philosophy in (inaudible) coal supply for our customers while at the same time it's improving the quality of the revenue in this book of business on the US side.

On the crude side we finished the year with 30,000 carloads in fourth quarter. For the year I mentioned it was about 55% light and 45% heavy. This growth is normally driven by new movements in Canada from Bruderheim and the (inaudible) facility which will drive as we go into 2015 that mix change going to the heavy side versus the light side.

And now on the motor side we reflect -- what you see is a full-year reflection of the loss of the [Chrysler] business starting in Q3 2014. Intermodal, again this is a tale of two stories with continued success on the domestic side growing at its fastest pace for the year, up 19% in the fourth quarter versus last year.

International was down in the quarter, but if you exclude the year-over-year impact of the loss of the OOCL business, which was essential -- I mean which was material of course. If you exclude that we are up 15% year over year, which is a reflection of the superior service we are offering to our steamship customers that we are doing business with. All in all very positive on the Intermodal side.

As we look forward to 2015 following two years of 8% revenue growth, as Hunter said, we are guiding to 7% to 8% growth in 2015, which is a combination of a lot of moving parts obviously. Based on the assumptions we provided we expect a 3% to 4% RTM growth.

About 4% [cents] per RTM growth on the fuel surcharge -- we are going to have a reduced fuel surcharge obviously, but that's offset by the FX benefits, order magnitude on the reduced fuel surcharge specific to revenue that is about a 5% hit. This also assumes the sale of our southern portion of the DMH and the DME full-year effect reduced revenues is about 1%.

Crude outlook, I am sure that will be a topic of much interest. I will point out that we have taken our expectations down for 2015 to 140,000 carloads for the year. We've obviously seen significant price declines for the commodities that were not expected as our original targets were closer to CAD90.00.

Even in December I will point out that this commodity was trading below CAD60.00. Even today we are in a different scenario and we are down to the mid-CAD40.00s. Bottom line, we feel that this prudent approach is necessary to take down our assumptions to a growth rate of about 25% to 30% versus 2014 volumes.

This growth is mainly expected to count for increases in heavy production with our new facilities that are going to come on line in the second half of 2014 -- or the second half of 2015, as well as two facilities to come up later in the year. We've got ExxonMobil coming on second quarter late, we have got the [Robert Plains] coming on in July.

On the merchandise outlook we expect double-digit revenue growth for our forest products, our chemicals and our plastics and minerals groups. And as we complete our new service offerings positioning us well to grow in these markets, providing superior service for our customers, reduced cycle times and improved transits.

We also see potential strength in a lower Canadian dollar which is going to improve our Canadian company and partner's ability to compete internationally and the impact of lower energy costs should improve economic prospects in the US and Eastern Canada as we move into the year.

Both sides we are assuming low-single-digit revenue growth, the shifting levels are going to moderate versus 2014 levels. Intermodal side we expect mid to high level, single-digit revenue growth given we are going to lap our contract losses on the international side and continued strength in the domestic Intermodal.

And final comments, as Hunter said, I am extremely excited to add a new team member to enhance the strength of our bench. On the marketing and sales side, Tim Marsh is joining us from COSCO. He will be with us February 1, bringing 25 years of experience in sales and marketing, certainly with a vast knowledge of the international shipping industry.

But those same strengths and talents sets as you develop leading that world-class organization and their sales team will help us leverage growth across our board as we move to our 2018 goal of taking this revenue to CAD10 billion.

So with that said I will pass it over to Bart to provide some more color on the numbers.

Thank you, Keith, and thank you good morning, everyone. Very proud to be on the call with you and proud to be reporting this quarter's results, which certainly are a record on all counts. Quarterly revenues growing by almost 10% to nearly CAD1.8 billion.

As Keith and Hunter have outlined, a record operating ratio of 59.8%, that is the lowest in the Company's history. And record operating income and adjusted net income of CAD708 million and CAD460 million respectively. And all that adds up to adjusted EPS of CAD2.68, a 40% increase versus last year and the results combine to produce a reported EPS of CAD2.63.

I am sure our shareholders have an appreciation for our strategy to buy back shares to enhance shareholder value. And we were very aggressive with our purchases in the fourth quarter when prices were depressed. To enable that buying we will be issuing debt and it is our intent to manage our cost of debt very tightly by issuing the lowest-cost way in either Canadian or US dollars.

And we kicked off this strategy in the quarter with the issuance of US dollar commercial paper. And we currently have about $675 million outstanding at an average interest rate of 0.45% or 45 basis points. So very attractive pricing.

This debt does attract accounting currency translation, so every penny change in the value of the Canadian dollar means about CAD0.03 of after-tax non-cash accounting translation below the line. And if we take on additional US dollar denominated debt to reach [$]100 million the sensitivity will be about 4/10 of a cent after-tax.

Now I do want to stress those fluctuations are purely a below the line accounting adjustment and non-cash in nature. So you can expect to see us adjust this out of our earnings going forward.

Now as we said in the past, we intend to be very strategic with our share repurchases and I trust our shareholders appreciate our decision to buy aggressively in the fourth quarter when prices were low.

To give you an example of the benefit of the approach, in Q4 we bought a total of 5.2 million shares of which almost half were purchased directly from Canadian financial institutions at an average price of just over CAD192 and that is a comparison to today's share price of about CAD230.

Operating expenses on the quarter were CAD1.05 billion, down CAD441 million versus last year. If we exclude the impact of the DM&E [West] sale of CAD433 million, a significant item, expenses were still down by CAD45 million on a foreign-exchange adjusted basis, and that is in spite of a 6% increase in RTMs.

I don't want to go into each of the expense categories, but there are a few items worth highlighting. First, we continued improvement in comp and benefits this quarter driven largely by efficiency benefits and lower stock and incentive comp versus last year. There are a few headwinds on the comp and benefits line in 2015 I just want to highlight for you.

First, with falling interest rates the discount rate we used to calculate the pension liability came in lower than the previous year which pushes up pension expense on an accounting basis and for 2015 this results in a defined benefit pension expense of CAD45 million, that is about a CAD90 million headwind versus last year.

As our business performance continues to be very, very strong and it has put us well ahead of plan, we are anticipating an increase in incentive comp as we true up some of our performance share unit assumptions later in the year. And that is about a CAD28 million impact. And we're also modeling higher stock-based comp sensitivity now with a CAD1.00 change in share price having a CAD1 million impact on the comp and benefits line.

Now that is a three-year rolling program, we are now fully into the third year of the program, so that sensitivity should remain very stable going forward.

Lower fuel prices and a 3% improvement in fuel efficiency drove fuel expenses lower year over year and purchased services were up CAD19 million versus last year, but that is largely a reflection of foreign-exchange and lower than usual casualty costs in 2013.

Looking toward this year, we currently expect to see about CAD25 million to CAD30 million of land sales and that is roughly in line with what we have seen the couple of years.

For the full year we generated free cash before dividends of just under CAD1 billion and free cash flow of CAD725 million and that is an increase of 37%. Our CapEx was CAD1.45 billion and, as we look out towards this year, we are expecting CapEx to be relatively unchanged at approximately CAD1.5 billion.

Now consistent with the rapid improvements we made on the cash flow front, our credit metrics have also continued to improve resulting in another set of ratings upgrades in the fourth quarter. And that is a 2 notch improvement over the course of 2014 and it brings our target ratings up to where we want them which is BBB+, Baa1 and BBB high respectively for S&P, Moody's and DBRS.

And the higher rates of course allow us to access debt at much lower spreads than were they were just 12 months ago. And that is important as we manage our leverage going forward to release cash on the balance sheet for shareholders.

And just to finish my thoughts on share repurchases from earlier, we bought back about 10.5 million shares over the course of 2014 at an average price of about CAD199.00 versus an average traded price of over CAD206.00. So a savings the CAD7.00, obviously well below today's share price.

To date we've bought -- completed about 85% of our current programs and we are on track to finish that program by its expiration in March. And I would be remiss if I didn't reinforce the message that we continue to see repurchasing our shares as a strong value proposition for shareholders going forward.

Thank you very much. And I will turn it back over to Nadeem -- or to Hunter.

Well, Kirk, with that we'd be glad to take questions the group might have.

(Operator Instructions). Fadi Chamoun, BMO Capital.

Congratulations on a good quarter. Just want to ask first on the intermodal outlook, I mean you have a strategy obviously to grow that business. I was wondering if you could share with us what do you think the lower fuel cost change in your outlook for that business? Does it at all make it harder?

Fadi, I think it helps. I think you've got to understand the two different books of business. On the domestic side we're converting value as based on service, as based on transit times. So while we may not have a 40% or 45% benefit on fuel cost versus the truck, we certainly still have a service benefit that they can't replicate on the truck side.

You still have a shortage of truck drivers and 40% or 45% -- maybe that is reduced to 20% or 25%. It is still very compelling to continue to grow on the domestic side as we improve that book of business.

So on the international side fuel costs come down I think that is a good thing for our steamship partners. If you align the steamship partners that start actually (technical difficulty) and actually give you some consistency in your arrival at your port, that is going to allow us to improve our service and reduce our cost of handling that existing business. So on both fronts I think it is a positive, Fadi.

Okay, thank you for that. The second question is more a sort of big picture question. In October you told us you intend to double earnings by 2018. And obviously the energy is sort of a big component of that at the time.

And I was wondering how do you feel about that goal if energy market remained depressed over that time frame. Can you still meet your goal, your target? Are there levers that you can pull on that would offset that energy component that you have in there?

Fadi, yes, I think we are still comfortable there. The components might change a little bit, but I think the bottom-line earnings we are very comfortable with. We don't expect for crude to stay depressed like this for that period of time.

But to your question if they do, we think there will be some improvement across the board in the rest of the economy which will pick up things there. We think the aggressive continuing cost control effort and efficiencies that we talked about really in the plan, we are kind of at the corner -- turning the corner here, can certainly replace any deficiencies that crude might bring to us.

But at the same time I would point out you, and I will continue to point this out -- and I am not bragging about this, it is just a fact of life -- is our crude business is not the highest margin business we have got. We have some legacy contracts there that are initial contracts. So I don't -- there is -- I think we still feel very comfortable with the guidance that we provided in the full year plan going forward.

Okay, thank you.

Chris Wetherbee, Citi.

Keith, just wanted to come back to intermodal for a second, just sort of thinking about that opportunity and particularly on the domestic side. When you think about that spread how should we think about the pricing dynamic between rail and truck? I know there is a service benefit that you guys can offer. I just want to get a rough sense of maybe how that spread looks. Is it in that sort of 20% to 30% range potentially?

I don't know if I would [stand that up] broad but it is generally close to that. I know that there was about a 40% difference in per se the rate for a container versus the rate for a truck in certain key lanes when I started this journey a little over a year ago. So as that came down is that going to be impressed? I'm sure. Is it going to be 25%? That is just to me an educated guess. But at the same time maybe it is a little bit more, maybe it is a little bit less.

The key to understand this though is you're still going to have a constraint on truck drivers. They are not going to be able to compete head-to-head transit time, single truck driver coming into these key lanes which are the most profitable for CP and also the most important to those partners of us that care about service that are service sensitive.

So we have got a reliable product in the marketplace that's head to head competitive on the transit side if not better than the truck and there is a cost advantage. So all those play to our strengths.

Okay, that is very helpful. And then when you think about sort of the state of the railroad heading into the first quarter, obviously with what weather was last year certainly some disruptions from a service perspective. Still some improvement coming from some of your partners.

Just want to get a rough sense of kind of how we think about that, particularly relative to last year maybe from an operating ratio perspective. But just overall speaking -- kind of heading into the first quarter feels like we are in a much better position than we were last year. Want to just get kind of get some color around that would be helpful.

Well, let me qualify my comments and (inaudible) how excited I am about January, but this winter is not over, we still have February and March. So knock on wood, I would love to say [and assume] that we would have the same kind of kind treatment by mother nature in those two months. But I just don't know that.

So I would say that, yes, you are going to see some benefit, January is very encouraging. Speed is up, our train length is up, our train weight is up, our service is up, our business is up and our cost is down. So those are all good things. But again, we still have February and March to go through.

All right, great. Thanks for the time, guys. Appreciate it.

Benoit Poirier, Desjardins.

Congratulations for the good quarter. Keith, just in terms of RTM expectation I was wondering if you could provide more color in Q1 given that you might be facing an easy compare given the weather. I know it is still early. And also if you could provide more color especially on the grain and intermodal given that the OOCL loss, you will be facing an easy compare again on that side?

When you say easy compare on the international side, OOCL loss, we are going to lap that. We actually still had some OOCL business in January of last year. So the easy compare piece is not fully effective until we get into the second quarter.

Okay.

There is going to be a little bit of headwind there. When you say RTM, explain a little bit more. I don't quite understand --.

Just in terms of -- I mean you are looking for an RTM close to 3% or 4% for that year, but specifically in Q1 would it be fair to expect a higher number, lower number given the conversion versus last year and the grain situation?

I would say a little bit higher. I would say mid-single-digit as opposed to lower-single-digit.

Okay, perfect. And second question if you could provide also an update on the [early] agreement, whether there is any change on that side.

Well, it was put out for vote and it was turned down on the US side. This is specific to the US operation. So at this point I still think it is relative. And do I still think it is possible? I would say yes. It makes too much sense not to be and not in the immediate future. So it is nothing that we are (inaudible) with right now.

We are looking at optimizing the way we operate our crews, optimizing -- there are still some gains to be made relative to maybe some consolidation on the multiple agreements that we've got on our US properties that we are looking at. But we will continue to improve labor productivity in the absence of that agreement.

But as time evolves and as people retire and attrition takes hold and you have a workforce more concentrated with a different set of values, that hourly deal is going to play very well to those values as we go forward. So more to come on that.

Okay, thanks for the time.

Bill Greene, Morgan Stanley.

I wanted to come back and just touch a little bit on the OR. Hunter, you sort of hinted already that it could be conservative. But when we think about the puts and takes here, whether it be pension or falling fuel, I assume falling fuel is a bit of a benefit to the OR as well.

Can you talk about how to think about those longer term ORs in the world of lower fuel? We know it perhaps has risk on crude maybe longer-term. But maybe it has a benefit on the margin we didn't think through. Can you speak at all to that?

Well, I mean, Bill, if you play it out, it is a timing issue and effectively the fuel surcharge is going to be a wash. It is going to obviously be a negative hit to the top-line. But at the same time it is kind of a non-event when you look at the overall OR over any extended period of time.

So I mean does it make the industry, the sector more competitive with pipeline or what? At least psychologically there is some benefit there. But it doesn't play strongly in the four year planning either way. We are going to have some adjustments with the DM&E top line. We are going to have some adjustments if we're successful with the sale of the D&H.

But all things in, there is a lot of moving parts. And as I tried to point out earlier, the components might change, I think the thing we still feel strongly about is the bottom line doesn't change. It might be made up a little differently, but we are entering a stage -- and people tend to forget this -- that in the four-year plan where we starting to turn the corner. And really this leverage is based on the low-cost carrier team.

So we can be much less aggressive -- and I hesitate to say that -- but we can be much less aggressive price given the strength of the OR and not be in a position where we are trying to drive the [57], but we're trying to drive more growth. And that is the key shift that people tend to miss in the overall strategy of the four-year plan.

I mean, I feel very confident that if we look at some of the business we got -- if you go back initially and look at some of the legacy contracts where people were very concerned about, business that was at the bottom of the book from a margin standpoint now at the top. So now you have got much more markets that open up to that you can really generate growth in spite of what potentially happens with crude over the next two or three years.

And I certainly, personally, don't think that crude is going to stay in the $40 -- mid-$40 range. I think you are going to see a shift there. But -- and I emphasize this -- none of this plan is dependent upon crude moving to other levels of $75 or $100, it is almost -- it is not a huge factor in the plan.

Okay, that makes sense. Can I just have one follow-up here just on the currency. And that is, how long do you think it takes for, whether it is Canadian manufactures or producers of any sort, to start to benefit from the lower currency?

Is that something we should be thinking about? Does that benefit, for example, Ontario manufacturers or whatnot such that it could help CP? Or is that a very long lead that this would come out over years, it is not something to think about for 2015?

I don't think it is -- though certainly that is a pretty broad area you are talking about. Some of it -- exports will take advantage immediately where there is comparable products north and south of the border and with the lower dollar, clearly some of those things will change quickly.

Now there is others that have got contracts and legacy contracts that will see -- certainly will see a lag. But I think that will be an additional boost to the overall North American economy that to some degree really hasn't been taken into account north of the border because we didn't get our tears out of our eyes here.

Okay, fair enough. All right, thank you so much.

Scott Group, Wolfe Research.

Wanted to first ask about the buyback. I know it is not in the guidance. I know you can't get too ahead of the Board. But if I just let -- you bought back 7% of stock or so in three quarters, so call it on a run rate of buying back 10% of the stock a year. Do you feel strongly about the stock at these levels, that that is the kind of buyback you would like the Board to approve? Or should we be thinking something less aggressively?

Well, I think, Scott, if you look at the plan and believe the plan, we believe aggressively. And if we produce those kind of numbers I think we are going to see that in the market. And if we see the stock at the level today and we think it is going to improve, that is certainly not going to put any damper on our aggressiveness. We still think it is a great investment.

Okay, so kind of the run rate you are on you have been doing you think you can sustain?

Yes.

Okay. And then I do want to ask just a few questions just about the crude outlook. So the change from up to [200] to [140], how much of that is the market and is any of that market share, Keith? And then do you have a view on what your run rate is at the end of -- what your run rate will be at the end of 2015? And then there is one more on those lines. Do we need to think about any changes in the pricing that you are charging on the crude?

Where do I start here. Okay, pricing on the crude I can tell you this, we are not going to haul it for free and we are not going to do it for practice. So we still have a legacy contract in there that is not the most favorable. But as we sign these deals and we lock and load on this crude growth, we are certainly bringing it on at a fair rate that reflects the service that we are providing.

So as far as the run rate, 140, we were at 30 fourth quarter of this year, that run rate probably is going to ramp up in the second half to get us to the 140 versus the first half, if I do the math that puts us --.

160, 180.

Yes, right at, at the end of 2015. And that's again assuming that oil stays pretty close to where it is at now. The key to that of course is those two facilities we have got coming on to (inaudible), with [Plains] as well as the ExxonMobil, Kinder Morgan facility in Edmonton, which we'll be serving.

And as far as share, I think it is a wash. I don't necessarily see anything material on the share side. I believe strongly we can provide a superior service. I believe that we have got an advantage when it comes to transits, reduced miles going into key markets. And I think we are strategically positioned extremely well with partners south of the border for heavy crude growth that is going to (inaudible) this franchise. So I feel fine on the share side.

Thank you, guys. Appreciate it.

Walter Spracklin, RBC.

Congratulations on a great quarter. I guess my first question here is on the guidance that you provided. I just want to make sure I understand because when I put in -- even at the top end of your revenue growth at 8% and even if I go below 61% on your OR, without a buyback I am having trouble getting to 25% or over 25% earnings. I just want to make sure that you are assuming zero buyback in the guidance that you provided for 25% earnings growth?

Walter, it is Bart. We have got some buyback built in. As you know, we have got a program underway right now that ends in March. And I think what Hunter was referring to zero beyond the current program. So we haven't built anything in beyond this, but there is a little over 2 million shares to be purchased yet under the current program and we will complete that by mid-March.

Even with 2 million shares of buyback built in it is still not working out to 25%. Perhaps I have to come back to you afterwards. But there is nothing I am missing here. If I am assuming 8% and even below 61% I should get to north of 25% earnings growth with a 3 million share buyback.

Yes, Walter. We can come back to you after the call. But there is a pickup there in the interest expense line and other charges as well and we can walk you through that.

Sure. Okay, and then following up on the guidance, your longer-term guidance, I don't know Fadi was asking about, but centering in on your revenue growth, the guidance you implied was for 10% CAGR for the next four years. You are at 7% to 8% now for I guess this will be officially year one.

I know you mentioned a lot of it would or could be back end loaded. Is that what explains it or is it rather now crude is dialing you back? I know one-third of your future growth was built around crude, you are dialing it back and kind of hoping to make it up perhaps on a little bit lower end of the operating ratio to get to that doubling of EPS, is that the right way to frame it?

You know what, I can let Hunter provide a little bit more color. But let me set this up saying for this year you have got to make sure you understand 5% debt on the lost revenue from fuel surcharge and then also 1% overall from the network with a full-year effect of the DM&E and D&H. You have got DM&E on the front half and you have got D&H on the back half. So those are huge offsets.

And I mean you could also take a look at just the exchange rate. If we take today's exchange rate, it is at 8% and 10%. So it is just -- there are so many moving parts in this thing trying to know exactly where the pin is, it is not exactly easy to do. We just have to reiterate the fact that we feel very confident in the long-term bottom-line EPS, which is what the real value is.

Okay, understood. Thanks for that, Keith. And just administrative -- your core pricing in the fourth quarter, if you could provide that. And if I am reading it right, if you are saying kind of 3% to 4% RTM, are we looking at about 3% or 4% core pricing built into your guidance for 2015? Is that right?

That is exactly correct. It was 4% core in the fourth quarter and we can assume the same thing for the guidance in 2015, 3% to 4%.

That is great. Okay, thank you for answering my questions. That is all. Thanks.

Tom Wadewitz, UBS.

Wanted to ask you a little bit along the lines of the volume growth. And I am assuming -- you have expected strong intermodal volume growth and a pretty aggressive 10% revenue CAGR over four years. When you had the analyst meeting in October obviously you reflect the lower crude oil prices, you say you think you will get less from crude by rail.

Are there places where you say, well, we have got a bit more capacity. And even though we were aggressive in our volume growth assumptions before, we can do even more, we can push even harder. Is that possible or is that the wrong way to look at it in terms of the kind of expecting less crude volume over the horizon?

Tom, let me make this comment. I try to -- and I've been really unsuccessful -- in decoupling us so much from crude. Now we talked about the all in it is potentially 10% of the business if you look at frac and sand and pipe and crude and all of that.

The first answer is this, we don't know where crude is going. And I would like to know the person that does and I can be more defensive in my answer. But I know we have a plan A and a plan B and a plan C if crude would stay here. We have got a lot of capacity, we have got a lot of improvements in service and we will be continuing.

And the big leverage is we have got a lot of leverage on the cost side which can be converted to the top-line volume side, which equals as strong or stronger bottom-line than we have indicated going back to the four year plan.

So this is -- there's a lot of moving parts here. And it gets into high levels of details which we will be glad to go through at some point in time with all of you or any of you. But the bottom line of it is that we are highly confident that in four years the EPS will be where we said it will be.

Right. Okay. I appreciate that. How should we think about headcount opportunities if you look at 2015? Does headcount go down a percent, a couple percent? Is it flat? Can you kind of frame that? And I guess maybe looking at 2016 as well, how do you think about the headcount side?

I think the headcount -- the latest numbers I saw we figured it will be down around 500 to 600 this year. And then in the out years there are similar type numbers given that the sensitivity and the shift in the book of business doesn't change.

And one of the things that some have missed is this -- as we bring on additional tonnage it doesn't necessarily bring on additional heads or costs. The big leverage that Keith has been able to create is with train size.

And if we are operating some trains, for an example, at 12,000 ton and our average is [6,000] or [7,000], we have got a lot of leverage there that we can bring on incremental business without bringing on additional heads and T&E and associated cost that people kind of straight-line, which is the wrong assumption to make.

Let me add to that, Hunter, if I can. Order of magnetite, if you think about this physical plant, we said this, we have inherited a physical plant that was under invested in, that's not optimized, still to this day with our existing business to run long train. This past year we are seeing the benefits of about 16 siding extensions that we invested in in 2014. Now we have got 30 on the books for 2015.

Now some of that we can pull back if we want to in the absence of [crew] growth, but still the order of magnitude, it's going to be 20, 21 sidings. So if you take that, continue to invest in and expand upon this franchise even with today's book of business, that gives us incremental gains -- some would argue quantum leaps in train length, train size and weight and train speed to bring it off the bottom line based on today's revenue. So that is just order of magnitude some of what we are talking about and the level of detail that we have in front of us to play this plan A, B or C.

Okay, yes, great. That is very helpful, great results in the fourth quarter. Thanks for the time.

Cherilyn Radbourne, TD Securities.

Wanted to ask a question about fuel surcharge programs, that has become a recent investor concern, whether they are based fully on highway diesel or whether they are still some WTI-based programs lingering. Can you just speak to your confidence as to the robustness of your programs?

We feel very confident in the robustness and the fairness of our programs, Cherilyn. Order -- just to give you some color on this, 4% of our fuel surcharge is based on WTI, the balance is based on highway diesel.

Okay, great. And then just with respect to the train size opportunity that was just referred to, can you just give us some color on -- to what extent that is an opportunity in bulk versus merchandise versus Intermodal?

Well, I would say that it is on all fronts. Because when you look at our network and all the corridors, we are investing the southern region which is going to benefit us on train size, on merchandise, on bulk as well as on Intermodal.

We have got some limitations and some restraints on our productivity because they will be absence CTC in those corridors, the absence of long sidings to reduce train starts, which allows you to increase train speed and increase train and track capacity. And it is a similar story in the west.

So as we continue these investments you will see some opportunities on bulk in the southern region. The stuff going westbound, I think we are pretty right sized when it comes to coal and to potash. However, as we continue to invest in the out years, you're going to see a pickup on grain, which we don't benefit from now.

And then in the northern territories and across the east you are going to see again a pickup in grain and, a pickup in potash. We don't run any coal east so that is not a benefit. But definitely a pickup of the merchandise side. So we are well-positioned across the board to see some synergies relative to train length, train weight and train size.

Great, thank you. That is my two.

Allison Landry, Credit Suisse.

I wanted to ask sort of a different question on the buyback. Considering improving free cash flow, capital efficiency and, Bart, your comments about establishing the commercial paper program in Q4 where it looks like there is still quite a bit of borrowing capacity. It seems like this sets up for share repurchases in 2015 that would exceed those in 2014. So am I totally off base here with this line of thinking?

I'd go back to what Hunter said earlier, that obviously we are very confident in the program, we are confident in the future of the Company and the way we are going to perform. And so, we really do believe that continuing to buy back shares makes great sense.

We had a very strong year in repurchases in 2014. We do have lots of debt capacity and we'll continue to build debt capacity, I think you have probably got that modeled in.

So is there some flexibility around the numbers? Yes, absolutely. If we saw very favorable prices you could see us be a little bit more aggressive. But obviously we do need to get back with our Board in February and have a good discussion with them about it first.

Understood. Okay, and my follow up question, thinking about moving less crude by rail than you initially expected in 2015. Does that potentially imply that you can perhaps speed up the network a little bit faster than you initially thought just given that it is such a resource intensive movement? And are potential operating efficiencies from this baked into your current guidance?

As far as velocity?

Right.

Yes, yes. No, we will definitely see a benefit across the other books of business. But as I said the sidings I am talking about investing in, if we stay at this level or get to a greater reduced level, so to speak, which I hope doesn't happen and I don't anticipate, we have got a plan B and a plan C there as well. So we would not to spend quite the same amount of money that we plan to spend in 2015 on sidings that we don't need.

As we said back at Investor Day, we are trying to bring this capacity on to match the growth in the business. So if a certain piece of that business growth isn't there then we have got an ability to scale back or throttle back on those investments. But regardless what is left you are going to see a pickup in efficiencies and velocities across the balance of the book of business.

Okay. Fair enough. Thank you.

(Multiple speakers), Allison, let me add this.

Sure.

In a crude way, no pun intended, so look at crude -- if you cut down to it it has got a relatively high operating ratio relative to the other book of business. So as we lose crude revenues we don't lose as much at the bottom line. And there are a lot of unknowns with crude going forward, a lot of potential liability issues and our liability coverage and our insurance and what is going to happen legislatively.

And so, all things in, if we get hit -- and we have been I think pretty conservative in looking at units of crude -- it is not all going to go away and it is not a linear equation there to look at the potential loss.

Understood. Okay, thank you very much.

Brandon Oglenski, Barclays.

Congrats on the quarter. Hunter or Keith, I think a lot of the confusion here obviously stems from the fact that the 10% CAGR was built off of a lot of energy growth. But your confidence level seems pretty high that you are going to hit it with some potential offsets even if energy isn't quite the contributing factor you thought it was.

And are we thinking about it the wrong way? But you guys structurally have a shorter distance from some of the West Coast ports into inland US and inland Canada. And I think our view is that you historically just haven't leveraged that with the velocity that the system should be moving at.

So how much of the plan is really predicated that you are just under serving the markets to begin with, inefficient -- and now you are going to bring efficiency up for the customers that you are serving today, be more competitive with highway moves? And it is not really contingent that much on energy or even the economy for that matter?

That is the point of the whole plan. It is based on the leverage of the low cost most efficient carrier. And if I can continue to lower my cost and keep my price the same, if I don't even take a price increase, it allows me the opportunity to grow the business at the bottom line and that is the basis for the plan.

As we get stronger and stronger in a cost control standpoint, which adds to the leverage of the service, which turns the assets faster and you start going at the top line even if you impose flat rates, you get some -- if you want to model that the numbers (inaudible) all over you with cash. That is the foundation of the plan that people seem to be missing because their model doesn't support that strategy. But you have got it.

Well, appreciate that, Hunter. And we talked a lot last year obviously about Chicago and some of the bottlenecks in the industry. Keith or Hunter, do you guys see that alleviating this year? And what is CP doing specifically? Where should we look for velocity improvements this year for your Company?

Well, we are seeing velocity improvements obviously with an improved network, an improved Chicago versus last year. But we are not -- say it's improved versus last year, you have got to be careful what you compare it to. It is going to be fragile, we have not had not even close to the weather we had last year.

So I am cautiously optimistic right now given the weather conditions about Chicago. We do have, again cautiously optimistic, this industry expert team that the industry has put together, this think tank that is working at ways to improve fluidity in Chicago.

The thing that I do get a little apprehensive about though -- and I caution and I raise this as an issue for my colleagues in the industry -- just because we are experiencing maybe a breath of fresh air now compared to last year, we can't forget how sensitive that city is.

We can't forget the need to do all that we can do collectively as an industry to improve velocity and to create capacity in a place that is constrained. So that I think that is going to continue to be a focus for us. But short-term things are much better than last year, that is for certain.

Appreciate it.

Tom Kim, Goldman Sachs.

I'd like to go back to Bill's earlier question around OR and what lower oil prices mean. I mean one would think that the lower diesel prices should provide a significant offset to potentially lower crude. And so, I guess what might help us is to understand like what was your fuel assumption based into that long-term OR?

(Technical difficulty) the assumptions that I think it was closer to CAD90 WTI. We can pull up the deck, but I am pretty sure it was CAD90.

That's right.

Okay.

So, yes, when you take out revenues at an almost 100% OR, the 5% revenue that we are going to take out from fuel surcharge, it naturally -- the math just helps your OR. So that's certainly helping us this year.

Absolutely. I mean just in times of absolutes fuel cost savings, it is obviously going to be much more significant than what you probably had envisioned earlier given that $90 WTI assumption.

Let me just ask also another question. Obviously with oil prices where they are one would have to think some of your shippers are approaching you for rate concessions just given that that period of supernormal profits is [here to stay], at least for now.

I am under the impression I am sure many of the investors on the call would believe that you price based on your value proposition, not based on the relative cost of oil. So I just wanted to just make sure that our thought process here is correct. Is that right? And if so, if you did get pricing pressure are you comfortable enough to walk away from that business? Thanks.

Short answer is absolutely yes. We will walk away if we get pressures that effectively put us to a position that we are not going to make a buck moving freight. The other issue relative to reducing rates, our customers will see a reduced fuel surcharge. That is where they are going to see a reduction in the rates, it is not going to be the rate that we charge to move their freight from point A to point B.

Great, thanks very much.

Steven Paget, FirstEnergy.

You answered one of my questions on fuel surcharges, so I will skip that. It seems you have had some success increasing your per carload charges in grain. So can we expect to see per car revenues in the CAD3,500 range in the coming year?

The success on the grain side has been centered on our growth in the Pacific Northwest, taking Canadian product, taking US product, those were -- over the Pacific Northwest export terminal. We are getting a longer haul and a better quality of revenue. So as long as those trends sustain themselves then you will see continued strength in that regard.

And I assume a little bit of US dollar uplift as well. Thank you, Keith. A question either Keith or Hunter. After two years of the shippers, two plus years of the shippers working with the new CP, have you seen shippers change their behavior now that CP has better and more reliable transit times? I mean I could use the words supply chain management or some other thing to describe it, but are shippers behaving in a more constructive way?

Keith can comment. I would say this. Number one, we clearly have a much better service offering than we had before. Clearly we have a much better reputation of doing what we said we are going to do. I think it is clear we gained some respect of the shippers that maybe the organization didn't possess before.

Now, was some of that hard, was some of that change, was some of that a different way of doing business? Yes. But I think -- Keith can bear this out hopefully -- but as we interact with customers today as opposed to 2.5 years ago, it is a much more pleasant experience.

I would echo those comments, Hunter, and I would say that you are seeing -- starting to see some of the fruits of our labor in our increased merchandise non-crude, if I exclude crude from the growth that we are seeing there.

And I'm most encouraged by as we bring Tim on board -- I mean Tim is coming to an environment where we have done great things improving our engine so to speak which is producing a much superior service offering. I am excited about the leadership and the expertise he is going to bring to the table enhancing our team's strength and ability to convert that in the marketplace. So all very good things in that regard.

Excellent. Thank you, gentlemen.

Ken Hoexter, Merrill Lynch.

Congrats on that sub 60% OR. And Hunter or Keith, maybe just to dig in on that for a second. How do you think about this in your long-term balance of revenue growth with the low hanging cost? It seems like you have still mentioned a lot of programs that exist to lower cost, whether it is the leftover whiteboard sessions, train lengths and other.

Is there structurally still a lot more room to go? So when you think about your long-term kind of targets, do you still kind of see the operating ratio maybe going beyond those targets just given what is structurally left when you look at the network?

I'd say the structural opportunities are there to take it to a different level, a more improved level if we so choose. But to Hunter's point, the game is shifting, we want to grow the top-line. So it gives us an ability to decide if we want to play in markets.

There are certain markets a couple years ago I couldn't play in because I couldn't make a buck doing it. That game has changed and our toolkit has changed and improved dramatically.

So I would just say that we are getting stronger day in and day out with this franchise as we invest money and as we convert this culture to be able to play ball with a level playing field. Which is pretty exciting as we go forward trying to grow this top-line with the opportunities we see and in the future excluding crude. I don't want to even talk about crude, I'm talking about the other parts of our business. There's some exciting opportunities in years laying out that's playing for us.

I think I will just add this -- look, the operating ratio is our hold card, okay. It is going to make this thing tick one way or the other. We can go either way we need to go strategically. If there is not, I believe there will be, top-line opportunity and the only thing to focus on is cost -- people are going to shudder when I say this -- there is a lot of runway left.

Look, we just went through a 59.8% fourth quarter. From a seasonality factor the fourth quarter is not your best quarter with the holidays and some weather factor. With the initiatives that Keith has talked about here, with some of the headwinds we have got that are going to be tailwinds and reversed, I don't think the crude situation, in my personal view, is going to get much worse.

I think there is much more upside than there is downside. So I am pretty pleased at where we are positioned and -- but as I have said before to this group, it is a simple formula. Be the low-cost carrier with the best service and the rest of it will take care of itself.

Okay, great, great takeaways. Hunter, maybe just expand on -- we went through a lot of discussions over the last two quarters on your thoughts on acquisition on discussions. It has quieted down through the New Year period here. Is that something you want to revisit at some point in the future?

I mean obviously you keep talking about spinning off amazing amounts of cash and your desire to grow. What are your thoughts about reentering discussions, especially if the industry -- if the fear before was the industry was scared of where the service metrics were, but if we start to see without weather service metrics for the industry maybe improving a bit, does that take some of that off of the table and is something that could be revisited?

Ken, I think we are always going to be opportunistic. And if we see -- look, we are not obsessed with trying to create some merger. But if there is a fit, if we are in a position and there is opportunity there to enhance shareholder value from our strategic plan we are certainly going to take a look at that.

Now, it appears today that there is nobody that wants to dance. It takes two. But look, we have got a great agenda here, we have got a great plan. And if someday, whether it is six months or six years, there is an opportunity that comes up and it meets that criteria of enhancing shareholder value, we are certainly going to be nimble and in a position to react to.

Appreciate the insight. Thank you.

David Newman, Cormark Securities.

Bart, I guess you are quite happy to be working for a railroad versus a producer at this juncture. Just looking out on your free cash flow, you didn't give specific guidance on them, but if I do the math on it, it looks like it is around CAD1.1 billion to CAD1.2 billion next year before dividends, is that in the ballpark?

Yes, David, -- you would be in the right area. We came in just under CAD1 billion this year, we are forecasting greater than 25% earnings growth. So you know the correlation between the two in terms of how that is going to produce some more free cash, so (multiple speakers).

Right.

(Multiple speakers) where you are (inaudible) things.

And then, Hunter, you said (inaudible) obviously some properties here in Vancouver, etc., and then you struck this deal, Dream Unlimited. Do you think, Bart or Hunter, that this is something that on timing that you might see something come to fruition this year or are we looking at a longer-term timeframe?

Well, we are over hurdle one, which took a lot of dotting I's and crossing T's and lawyers, which I don't have a lot of patience for. But we got that behind us. I mentioned the other two that are going to be accretive day one. I know that the dream team has a great reputation. Both of us do not want to sit on opportunities.

So I would expect that possibly by year end you will see the first transaction and starting to see some things hit the income statement whether it is below the line or above the line given the rules. But certainly from a cash flow standpoint I would think you are going to see those things start to kick in within -- certainly within the next year.

And does that change your plan with respect to buybacks, dividends, potential acquisitions? I mean obviously these could be chunky bits of cash that could be coming in the door. Your first priority would probably be buybacks still for the elevated amount of cash?

I think what gives us the best return. In my world cash is king. It's nice to have it, it gives you a lot of flexibility, it gives you a lot of latitude. And we are certainly going to take a look at it and say, okay, now if we are in this cash position we are in a position to do something that maybe we couldn't have otherwise. So it just opens up more doors of opportunity.

Very good. And last one for me, guys. Just on the delta and the OR year over year, if you had to look at sort of the existing momentum that you have got versus new initiatives, is there anything else in the magician's hat here that you could pull out? And with the commodity weakness at all do you think there is any other costs that could be extracted out of the system?

I think -- I mean Keith can comment further. I still think that we think that across the board we can get better in all accounts. Now if you pick one place that we are spending a lot of time on, and Keith and I spent yesterday afternoon and half the night on this, the one that we are focusing on this year a great deal is terminal cost. So I think you will see some improvement there.

But I know people think there is a wall that we are going to hit. There is still a lot of opportunity out there to further become more efficient -- whatever we do with that efficiency as far as leveraging, there is still a lot more to be done on the side.

We are a long way from being a perfect operation. So there is a lot of opportunities on the asset side, there is opportunities on the terminal side, in spite of the fact that we made huge improvements there, it just shows you --

Absolutely.

-- what the opportunities were.

Right. And anything on the back of the commodity? I know you didn't invest a lot into infrastructure, etc., on the back of the oil and gas. But is there anything there that you could pull away or pull out or eliminate in terms of cost?

Yes. I think there is one line statement, effectively most of it is in North Dakota, that if we saw that crude was going to get worse and not going to bounce back and our volumes are not going to be where we expected, there's several siding projects.

But it is -- it's not a huge number. Maybe it would be CAD8 million, CAD10 million -- some would describe it as a rounding error, but it is not a significant. Because we basically think that all the line segments that we have put a substantial amount of capital in are supported by grain, potash and other commodities and it is not just related to crude.

And I am convinced one thing, worst-case is that we put some of these sidings in too early, that over some time frame crude is not going to stay at $45, okay. I mean look, I got here crude was $22, I thought it would go to $140 and we've done pretty well between $22 and $140. So we can deal with $45 oil.

Very good, thanks, guys. Congratulations.

Jason Seidl, Cowen & Co.

Congratulations on a good quarter. First question, the West Coast port issues here in the US, has Vancouver seen any benefit from that that is noticeable?

Yes, we have had a pick up on the international side of course, both at -- all three terminals really.

Is there any way to quantify that in terms of dollars?

No, I wouldn't say it's -- it's not material enough to quantify. But I would say some pickup. Again, it is not something we expect long-term, so with that increased business also come some increased headaches that have driven some operation -- operational costs that I am not very happy about.

We were actually reviewing that yesterday and looking at Vancouver's terminal. So I would much rather have something that is ratable, that is sustainable that we can plan for that I can control the cost on. So there is puts -- there's positives, there's negative, I would just say it is net neutral.

I think one of the things that we've focused our attention on even further is the fragileness of Vancouver Gateway. We had some shift of business, to Keith's point, not a huge amount but just pick a number, 10% to 15% and it has created a whole lot of problems.

So, if you think out in the future and you can say, if we are going to have growth over the next 5, 10, 15 years where is it going to be? We had to do something at Canadian ports to be more competitive.

Thanks for the color on that. My follow up, Hunter, I agree with you, I don't know the direction of the oil price either, but let's just assume it doesn't change from current levels. There's obviously an impact to the Canadian economy sort of Western versus Eastern and the impact of lower crude prices. Does that change supply chains up in Canada a little bit? And if it does, does it change where you guys are going to have to invest more money?

No, I don't see that we need to do any additional investment. I think that people are probably sitting in rooms right now trying to figure this whole thing out. And if it is long-term what do we do, what is the political response, what is the individual corporation's response, what is their risk issue? And so, until they figure things out it's not going to give a lot of indication to us.

But I think all in, I think what we missed is this is supposed to help the overall economy. Now those of us that are related to energy and energy-related companies have got some big headaches. But overall to Canada as a whole, this should be a plus. It should -- and with the -- depending on which side of the ledger you are on but with a weaker Canadian dollar certainly from an export standpoint it strengthens the economy more.

I think it is just a cleansing, if you will, that certain sectors or commodities have to go through to find out where it is going to shake out and end up. And I think there is a lot of things that are going to happen yet, and shoes that are going to fall that people haven't even imagined. But I am not going to give you a follow-up on that one.

I appreciate the time, guys, as always. Thank you.

Matt Troy, Nomura.

Great, thanks. Running long, I'll try and keep it short. I guess my question centers around the real estate JV. Just curious why -- was it the magnitude of the opportunity, a desire to accelerate, why you chose to go with a JV structure which is fairly uncommon, at least at this size in the industry?

And then, have you dimensionalized what will be in this JV, i.e., the discrete number of properties specifically identified or a dollar amount? Or is it really more of an open ended and flexible ongoing agreement?

I think it is -- to your last point, it is an open and a flexible agreement. I think the reason is that we clearly made a decision that we did not possess in-house expertise to deal with this.

I think also as a result of the rationalization that came from the operating plan some properties that we were of great value became available where before we were looking at valuations that weren't near where they are potentially today.

When you start looking at properties of 75 acres that is not a stone's throw from O'Hare you are talking real money here. So I think that given those things is that we could bring something to the table in the way of the assets. Those people could bring the expertise that they have and we thought it was a good fit and the best way to generate and create value.

Okay, sure. And again, it is open ended as in it is not just 30 properties per say with --?

No, it is open ended.

It is open-ended.

It is ongoing. There might be properties that we rationalize tomorrow and add to it. At the same time there are properties that maybe the joint venture doesn't want to fool with that we just settle in a traditional way. We have the right to take any property and set it aside. So it is an open ended and pretty flexible agreement.

Got it. Thank you, Hunter.

John Larkin, Stifel.

Congratulations to Hunter and Keith for sweeping the Railroader of the Year awards. That was rather impressive I thought. First question is for Keith and it relates to the improvements in velocity and weight per train that you were able to accomplish in 2014, quite impressive, up 10% on velocity, 6% on weight per train.

As you go forward into 2015 and 2016 can we think of that same magnitude of improvement or does it get progressively harder as you move forward and the railroad becomes even closer and closer, to use Hunter's words, perfect?

You can see we are not anywhere close to perfect, I can tell you that. Train speeds you will see large leaps again this year. I am looking at double-digit expectations on train speed improvements from investments.

When we get to train length and train weight we are approaching industry best, we are not too far from it. You won't have those same quantum leaps, you are limited by the technology, you are limited by the locomotives and the (inaudible) and all those things we have to concern ourselves with to make sure we don't push the envelope too far and compromise safety because that is paramount. So on train weight, train length probably mid-single-digit improvement year over year.

Thank you for that. And then on a different topic, back to fuel surcharges. Was there any lag benefit in the quarter due to the rapid decline of fuel prices that occurred during the quarter?

Yes, there is a little bit but not really material. Order of magnitude about CAD10 million benefit.

Okay, that is very helpful. Thank you very much.

Jeff Kauffman, Buckingham Research.

I think I will give Hunter and Keith a break and ask Bart a question here. Bart, I am going to follow up on Cheryl's question. You talked a little bit about who knows what the Board is going to do. But from your perspective what is the right amount of cash that you should be holding on the balance sheet?

And when I look at your cash flow statement, can we talk about some of the cash drags that aren't as visible in operations? So for instance cash funding of the pensions, things like that, how are those assumptions changing?

Yes, thanks, good question. Our view on cash is pretty straightforward, it is a form of liquidity. And you have got a well-run organization that is performing exceptionally well time and time again. The need to have excess liquidity on your balance sheet in the form of cash just falls away.

So our view is simply that cash is something that is available to enhance shareholder value and so we are going to keep minimum cash on the balance sheet going forward. We do have very strong liquidity in the form of back stock credit facilities and we carry about CAD2 billion there, so from a liquidity point of view we are in great shape. But we are not going to sit on a bunch of cash.

In terms of cash usage, there's two real areas in 2015 where we are seeing material bumps in the need for cash beyond the normal use of it. If you think about pension and pension expense, cash expense. As you know, we went through pre-funding (multiple speakers) something exercised some years ago. And we are going to continue to do -- see the benefits of that over the next few years and so cash contributions there remain very, very stable.

We guided in the [NYT] about CAD50 million to CAD100 million and we think we will be in the CAD80 million to CAD100 million range this year just because we have seen prior expense there. But there is no other big buckets that I see where we are going to see draws on cash.

If anything we are going to work very hard to reduce our working capital by running things much more efficiently and hopefully be able to free up some cash that way as well as through the real estate initiative. So I think we are in great shape.

Okay, guys, thanks. And my other questions are answered. So congratulations. Thanks.

David Tyerman, Canaccord Genuity.

Yes, I'll keep it to one question. Just on the intermodal, so Keith, I think you said you expected around 5% or mid-single-digit RTM growth this year. But you also noted that in Q4 you had double-digit and you've had double-digit for a while on the domestic side and you had double-digit on the international side excluding the OOCL and that is going away -- that negative comp after January. So I am wondering what is your thought and why it would slow down from that kind of double-digit rate on both sides of the business in 2015?

Well, I think the reason the rate of growth is coming down is because the comps are getting tougher, right. You can't continue to grow those kind of leaps and bounds in quantum leaps year over year. So once we get into February, March, April you have got a clean number compared to last year. I still think single-digit growth is pretty strong. I'd expect the same kind of aggressive growth on the domestic side than the international side, I just don't think that is realistic.

Okay, very good. That is helpful, thank you.

Keith Schoonmaker, Morningstar.

Quick question on frac sand. I recalled you shared some destinations at the investor meeting, but would you estimate what portion of the frac sand carloads serve gas drilling rather than oil? And could you share your outlook for this portion of the portfolio, please?

I am not certain about the gas drilling versus the oil. I think we are serving both markets. I think we are very well positioned with our suppliers, we have got strong low cost producers on the frac sand side. So while we saw growth last year which exceeded our expectations, I think we will probably come in pretty close to the same volume level, maybe down a little bit, maybe 3%, 4%, 5% (inaudible).

Those are the assumptions that we are making, but I think we are well positioned. And quite frankly there could be upside back to the low cost producer side as you see consolidation in the industry. Fewer players in the game so to speak. If you are a partner with a strong low cost provider you could see some growth there, some upside.

Thank you, Keith.

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

Thanks very much for joining us. We are still celebrating this quarter and will be for the remainder of today and we will move on to other things. And so we look forward to talking to you after the second quarter.

Thank you.

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