Canadian Pacific Kansas City Ltd (CP) 2017 Q1 法說會逐字稿

Good afternoon.

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 2017 Conference Call.

The slides accompanying today's call are available at www.cpr.ca.

(Operator Instructions) I would now like to introduce Maeghan Albiston, AVP, Investor Relations to begin the conference.

Thank you, Mike.

Good afternoon, everyone, and thank you for joining us today.

Before we begin, I want to remind you that this presentation contains forward-looking information and 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 U.S. regulators.

This presentation also contains non-GAAP measures, which are outlined on Slide 3. With me here today is Keith Creel, our President and Chief Executive Officer; Nadeem Velani, our Chief Financial Officer; and John Brooks, our Chief Marketing Officer.

The formal remarks will be followed by Q&A.

(Operator Instructions) It is now my pleasure to introduce Mr. Keith Creel.

Okay.

Good afternoon.

Thank you, Maeghan.

Appreciate those comments.

Let me start by saying this, the results that we've shared this afternoon that everyone's taking a look at now and assessing reflect a very solid quarter performance for this team as we kick off 2017.

I'm extremely proud of the team, the outstanding efforts, extraordinary efforts that we had to deploy in this first quarter.

We actually had a winter this year, a much more challenging operating environment versus last year, which provided some headwinds relative to service, relative to cost as well as, I would say, revenue as well.

So in spite of that, this team has produced a very solid quarter performance.

I'm very encouraged as we transition to a second quarter.

March, the weather started to clear up.

We had some positive RTM growth, about 3.5% as we closed the quarter out, which carried over the momentum.

Quarter-to-date, we're up about 6% for the second quarter from an RTM standpoint.

First, we also went through the leadership transition.

That's something I'm happy to say but not surprised.

We were not distracted.

We're prepared for this.

We've been prepared for this transition for the last 4 years as we built a very solid bench which we were able to implement a seamless transition, took over.

So part of that transition, as Maeghan mentioned, John is with us today doing his first call as the newly appointed Chief Marketing Officer.

When I became the CEO, I couldn't spend the same amount of time with the market group as I had the previous couple of years.

So by creating John's position, I've got John 100% focused on the markets and driving our top line opportunities.

John is someone that's got 23 years of commercial experience in this industry.

Deep experience, started with UP, DM&E to CP.

And then, of course, when we came to CP, that's when I identified John and have been working with him for the last couple of years as he led half of the business units well, sometimes, barely.

When we created his position, that also allowed us to go out grab and seek and recruit some additional talent.

So we've got 2 very talented individuals, one in Tommy Browning as well as Jonathan Wahba who's joined the team with the transition as well that are reporting to John focusing on generating sustainable profitable top line growth.

In addition to that, we made one other small tweak to the staff.

We created the VP market strategy and asset management, Mr. Mike Foran.

Mike has been, for the previous 6 months prior to his transition, out on a railroad MBA program, developing his knowledge of the network environment, his knowledge of assets, his knowledge of the op center.

He has hit the ground running as well.

So very, very pleased with the strength of the bench there.

With that said, too, let me -- I'm going to do a little different today.

Instead of me eating through all the numbers, I'm going to let Nadeem and John speak to the numbers.

And let me spend my last few minutes, before I turn it over to John and Nadeem, to tell you what I've been focused on for the past 90 days.

In this company, we've driven a tremendous amount of change over the last 4 years, fixing the engine, is the way I would put it.

So we've restored our credibility in the marketplace, we've restored financial health, we've fixed the engine, we've got great service.

We got low cost, which are 2 very compelling market competitors when you put them together to go out and compete for business.

And we've retained market credibility with customers.

So taking that out to the market, taking it to the street is exactly what we've been focused on doing.

But at the same time, over the last 4 years, we've had some feathers that have been ruffled.

So part of my focus has been to reconnect with employees and also to reconnect with our labor relations, with our labor unions to ensure that the things that we maybe we didn't get right in the past that we can get right as we go forward trying to cap into that CP pride and trying to engage and enable more and more employees doing what they can do instead of just what they must do.

So I've done a series of town halls across the property, 7 work centers, major work centers, West Coast, East Coast and both in the U.S. Just concluded those last week, the last 2 on the U.S. properties.

And I can tell you that this team.

And I say team, I'm not talking about just the officers, I'm talking about the craft employees that make up this railroad day in and day out are engaged and ready to move forward into the future.

The pride is there.

They're looking forward to the growth.

So with John and his focus with our ability to grow the top line, as we said we're going to do, that's exactly what we will do.

I feel very optimistic about what I see in the marketplace going forward.

We just got to get out.

We got to remain humble, do our jobs, engage our employees, engage with our customers, focus on our strategies on the marketing side, and you're going to see some top line growth coming from this company.

So with that said, to provide some color, I'm going to turn it over to John and then eventually Nadeem.

And then we'll be take any questions when we get finished covering our comments.

All right.

Thank you, Keith, and good afternoon to everyone.

As Keith said, it is my first call, so it's my pleasure to be joining you all today.

As mentioned in our press release that you've all seen, revenues came in at $1.6 billion, up 1% on the quarter.

And in line with our expectations and considering the challenging comps and the weather conditions Keith spoke about, overall, I feel pretty good about our revenue results.

RTMs, as Keith mentioned, were essentially flat.

But if you take crude out of that, they're up about 3% on the quarter.

Foreign exchange, of course, is a little bit of a headwind with the weaker Canadian dollar in 2016, but higher diesel fuel prices provided a little bit of a tailwind for us helping to offset some of that FX.

Our fuel surcharge revenues were $53 million this year compared to $26 million last year.

On the pricing side, we continue to achieve inflation plus.

That puts us roughly in the 2.5% to 3% range, and that was partially offset by some headwinds we had with strong potash and also some weaker volumes in our fertilizer and our autos franchise.

I'll take a few minutes now to kind of walk you through the revenue drivers in each of our commodity areas.

So let's start with grain.

Revenue was up 9%.

Carload's up 7%.

In spite of the challenges we had in our Western corridor and particularly challenges we had with some of our connecting railroad partners, I'm really pleased with how our grain franchise came in, in Q1.

In fact, this Q1 2017 was the best Q1 we've had in the last 5 years, including the big bumper crop Canada had in 2013, '14.

So our dedicated train is working.

The velocity is building and is built through the quarter.

And actually I'm pleased to report that last week, we had our single largest empty grain spotting week at CP.

So although I think our U.S. grain franchise is starting to slow a little bit with the opening with Thunder Bay and the recovery of the U.S. roads, we expect a strong Q2.

On the coal side, revenues were up a modest 3%.

The Canadian coal supply chain had definitely a tougher year.

That being said, March velocity has really picked up with our coal sets.

We continue to see that in April, and it's setting us up well for Q2 in coal.

On potash, we had a very impressive 23% tailwind driven by our strong exports.

We believe this trend will remain as we get into Q2 and, particularly, given we have some easier comps and that Canpotex was still working on contracts with China and India last year.

As we head into the back half of the year, I'll remind you that we've got the K+

S mine coming online also.

In the fertilizers area, it reflected the outage and a slower-than-expected recovery, bringing our numbers down about 25%.

This, combined with the market dynamics where we saw greater fertilizer inventories in the country, caused this shortfall.

Now we're gaining some momentum and expect Q2 run rate to improve.

In the energy, chemicals and plastics area, our revenues were down about 11%.

This resulted in a -- was as a result of crude being down close to 40% year-over-year.

Now that said, our crude volumes did outperform as we helped our customer fulfill a number of contract obligations that they had in the marketplace.

So while we're off to a good start Q1 in crude, I think the future still remains a little uncertain there.

But rest assured, as the demand materializes, we will work with our customers to mobilize and provide service.

In the metals, minerals and consumer products area, we performed very well, driven not only by our lumber, steel but primarily our frac sand.

We moved approximately 17,000 cars of frac sand this quarter, and these are levels we haven't seen since 2014.

The industry on CP appears bullish and we've got a number of industrial development and capital investment projects under way.

We remain optimistic that the frac sand run rate will continue into Q2 and Q3.

On the Intermodal front, I'm extremely proud.

Revenues are up 5%, led particularly by our domestic franchise.

I couldn't be more pleased with the team that we've assembled on the Intermodal side as they are committed to drive the results we need in this area.

On the domestic side, our spring inventory levels were strong as customers built their inventories.

We also capitalized on share gains, on strong service in Canada and our cross border business.

On the international side, excluding some contract headwinds, volumes were up based on the strength of our partnerships and growing with our existing customer base.

Looking forward to Q2, I think we're set up well.

Crude and weather comps are behind us.

The bulk environment continues to look favorable, and we're here to tell you we've got strong growth strategies in place for our carload customers.

We have guided to slight volume revenue growth or slight volume growth for the year.

The first quarter came in within those expectations, and I'm very confident we will continue to deliver to that plan.

With that, I'll pass it over to Nadeem.

Thanks, John, and good afternoon.

I'm pleased to walk you through our first quarter financial results.

I'll be speaking to the results on an exchange-adjusted basis, which is shown on the far right column of the table slide.

It was our expectation at the onset of 2017 that we would be facing difficult comps in Q1 given an exceptionally mild winter last year, a weaker Canadian dollar that benefited operating income in 2016 as well as benefits from land sales last year which led to a record Q1 operating ratio for the company at the time.

Given these headwinds, echoing Keith, I'm proud of what the team has delivered to start the year.

Revenue turned positive this quarter, and although it's still early in the year, we're encouraged by the recent inflection in volumes and the operating leverage it will provide going forward.

From an expense point of view, total operating expenses were up 1% on an exchange-adjusted basis.

However, this includes $51 million in cost recoveries in comp and benefits from the retirement of Hunter Harrison as the CEO, which we announced in January.

Excluding this recovery as a onetime item, our FX-adjusted total expenses were up 7%.

Getting into the expense details.

Comp and benefits, excluding the benefit I just referenced, improved by 14%.

This was largely due to a smaller workforce and increased pension income.

Labor inflation acted as a partial offset.

Our workforce is now approximately 11,800.

With seasonal engineering crews and growing demand, workforce will increase sequentially but full year average workforce is still expected to remain flat compared to last year.

Fuel expense was the large driver of increased total expense.

Fuel was up 39% year-over-year as a result of higher fuel prices.

Also to note, a year ago, we benefited from a fuel surcharge lag.

We cycled against that impact this year, which, combined with the higher fuel prices, caused about 2 points of deterioration in the OR and an EPS impact of about $0.07.

Going forward, assuming less volatility in OHD prices, this headwind should be less impactful.

Depreciation expense was $166 million, which is higher by 4% as a result of a higher asset base.

You can expect this run rate to continue for the next few quarters and then expect a slight increase in Q4 as capital projects are completed and added to the asset base.

Purchased services increased by $57 million to $278 million.

But if you exclude last year's land sales and FX impact, it is essentially flat.

We continue to benefit from lower crew hauling cost and other efficiency savings.

However, these were offset by higher snow removal costs, property taxes and general inflation.

For modeling purposes, we still expect $50 million to $60 million of land sales but these will be largely in the second half of the year.

Looking below the line, other charges are flat, excluding significant items, and interest expense is slightly favorable as a result of foreign exchange.

Our tax rate came in at 26.5%, which is in line with our guidance for the year.

In terms of EPS for the quarter, our adjusted diluted earnings per share came in at $2.50 which is flat from 2016.

I've recently met with each of the rating agencies to reaffirm our commitments to our strong investment-grade ratings.

We are committed to protecting our balance sheet and maintaining financial flexibility.

As I mentioned on our last call in Q4, we will bring a proposal on share repurchases and dividends to the board in the next month.

We do think a healthy balance between share repurchases and dividends funded by the significant free cash we generate is an appropriate way for us to return capital to shareholders.

In summary, with a solid first quarter in the books, a return to positive volumes and much easier comps ahead, we remain confident in our ability to deliver.

And with that, Keith, I'll hand it back over to you.

Okay.

Thanks, Nadeem.

John, appreciate that color.

Real quick before we open it up to questions.

Just hot off the press, I'm very proud to share this as well relative to the comments I made earlier on positive labor relations.

I've just notified that we have ratified with our U.S., the brothers and sisters that represent the clerical work on the Canadian side of the border a 5-year deal actually ratified it early.

Their deal was good currently through the end of this year.

I think it's very progressive and innovative as well, maybe a first in the industry relative to the last 2 years.

There's an ability for these employees and their -- to be recognized for their contributions.

And as we see RTM growth, revenue growth, and they can benefit from their share of that as well by getting an increase in their wages relative to the tail end.

So there's something in it for them as well, which is exactly the way we want to get people aligned across the board, be it officers, be it our craft employees as we work together in the CP family to create these kind of results that our shareholders and our customers deserve and expect.

So with that said, we'll turn it over and open it up for questions.

(Operator Instructions) Your first question comes from Ken Hoexter from Merrill Lynch.

And the next question comes from Scott Group from Wolfe Research.

So wondering if, maybe Keith or Nadeem, you can share with us kind of how you're thinking about RTM growth in the second quarter and how we should be thinking about incremental margins as the revenue turns positive here.

As far as the RTM growth, Scott, I mean what we're seeing now is pretty much what we expect to see as we go forward, so mid-single-digit RTM growth.

I don't see any definitive indicators to tell any more than that at this point.

So that's what we're going to stick with as far as the RTM growth and on the margins.

Yes.

I mean, Scott, we've talked a lot about how we want to convert the growth to the bottom line and the power of operating leverage.

It'd be nice to see that again.

I mean we haven't seen revenue growth for -- since Q3 of 2015, so we're very excited to how we can convert this.

And I would just say that our expectation for the year is to improve our margins and mostly operating ratio.

So you can expect that to be the case.

I mean our train length, our train weights are significantly improved even 3 weeks into the Q2.

And so my reference to operating leverage, you can expect the incremental margins are going to be very strong.

Okay.

And then, Keith, wanted to ask you, obviously, the big change from a quarter ago is that Hunter's now at CSX and I'm not going to ask an M&A question, but you guys obviously think a lot alike.

I'm wondering, do you see opportunities to work with CSX, be it on coproduction agreements or maybe something in Chicago with the belt?

Do you see opportunities to work together that could be a meaningful cost or margin opportunity for CP?

Well, I'll say this, Scott, we -- philosophically, you know the way I think, I'm not going to disagree with you.

But at the same time, I would -- this company would be prepared to work with any railroad, be it CSX, be it NTSB, be it UP, be it BN if we can create operational synergies.

So with that said, if there's a willing mind and a willingness to do that, then obviously we're going to look at that.

And we certainly understand in Chicago, the dependence upon that city, the dependence upon the belt, the suspect nature of how can I operate at times.

So to me, if I can create an environment where I lessen my dependence upon some of those complexities that drive additional cost into our deteriorated service, then I'd be silly not to do that.

So that would be my best way to answer to that.

Is there a natural rail to work within the Chicago area?

Our single largest interchange carrier in Chicago is the CSX.

We've said that before.

It's a matter of public record, so -- and all that traffic goes to the belt currently today.

So from an operational standpoint, I would have to think that there's got to be some synergies, some opportunities that would give access, terms, improvement as well as customer experience improvement, be it CP originated or CSX terminated or vice versa.

The next question comes from Fadi Chamoun from BMO Capital Markets.

Keith, I want to circle back to some of the remarks that you made at the start of this call, some -- on sort of priorities.

And I'm not sure if you agree with the view that going forward, your growth, your earnings growth is a little bit more dependent on volume and commercial success.

And if you can talk a little bit about sort of the priorities under your leadership versus prior leadership and how you're trying to sort of steer some of that strategy to emphasize these opportunities for CP going forward?

So Fadi, essentially, what it is, is just the continuum of the store.

I mean we came hear the first 4 years, and I'd say we know who the we is, this team that's here as well as Hunter now with the mandate to fix the engine, to fix the railroad, we've done that.

So as we go forward, my focus is, to your point, is top line growth and that's exactly what my mandate is for my team.

That's the reason we established the position with John to make sure that we've got the right leadership, we've got the right focus creating the same kind of performance culture and that marketing team that we have on the operating side while not forgetting what got us there.

We can't lose our ability to provide service and do it at a low cost and turn assets.

That's never going to change.

That's the fundamental recipe of success in sustaining and running this railway.

That's precision railroading.

So that's not going to change.

What will change as we go forward, though, is given that we've got credibility in the marketplace, we can have completely different conversations today that we can have 2 years ago or that we can have 3 years ago.

We talked about this then.

We had said, listen, that's going to take some time to get to a point that with all the change we've driven, customers will listen to us and customers will trust us with their supply chains, and that's exactly what this is all about and that's exactly the strength of this franchise.

When we're shorter in key markets, I should own those lanes.

If I've got low cost and great service and you're a customer that owns assets and you're turning those assets and I can lower your ownership cost and give you dependable truck-like reliable service, then we should be able to win in the marketplace.

And that's exactly what this recipe is about, and that's exactly the product that this operating team has created and given John and his team to be able to convert in the marketplace.

And that's what we're seeing and focused on doing.

There's quite a bit of business, and I've said this before, it's out there that naturally fits our network be it on the rail, be it on the road, and we're going to go after it and we're going to get it.

We're going to hustle and we're going to get out there, we're going to sell the service.

We're going to show customers how we can help them win in the marketplace.

We win as a result as well.

It's a win-win for both parties, and you're going to see top line growth from this company.

And I would just add, Fadi, that we still have runway from margin improvement and that's not dependent on volumes if you look at our guidance for the year, when we're talking about high-single digits EPS growth with slightly positive volume.

So we still have the ability to increase EPS without the need for volumes per se this year.

Okay.

But my second question is just from a maintenance point of view.

Can you remind us what is the pension income benefit you're expecting this year?

And how much of that occurred in the first quarter?

It's about $100 million benefit and it's equal in each quarter, so about $25 million of benefit each quarter.

Your next question comes from Chris Wetherbee from Citigroup.

I wanted to pick up on sort of the volume point that's been made a couple of times.

I just wanted to get a sense, Keith, it sounded like you're maybe more a little bit optimistic about a potential inflection volume and then the metric you talked about being able to grow without volume growth or get OR improvement and EPS growth.

But you do feel, based on what you're seeing from customers and sort of the pickup you saw late in the first quarter and then to Q2, that things are maybe getting a bit better than you thought they might be when we talked 3 months ago?

Yes, I will say that the fundamentals, I wouldn't disagree with that at all, Chris.

I would say that, number one, from a cost standpoint, we've got crude behind us, we've got winter weather behind us.

Obviously, last year, second quarter was anemic for this company.

So we've got an opportunity now for strong demand in potash, strong demand in coal, strong demand in grain.

We've got typical weather conditions or cycles.

Dedicated trains are moving.

Speed is picking up.

So all those underlying fundamentals are what gives us the confidence that we have.

But with that said, we're seeing about 6% year-over-year RTM growth now, and I see and expect the same.

There's nothing that I see that would expect it to lessen between now and the end of the quarter.

Okay, that's helpful.

And then just switching gears really quick to the pricing side, and I apologize, I missed it, if you gave a corporation number in the quarter.

If you did, we'd love to know what it was.

And then just sort of generally thinking about the pricing dynamic, particularly in Canada, if you see any dynamic changes there, kind of how you guys are thinking about that over the course of the rest of the year.

Chris, it's John.

So our same-store was within that 2.5% to 3% range.

To be honest, I was hoping Q1 might look a little better in terms of that change of that dynamic.

There's still a lot of challenges out there in terms of the trucking sector and what we're seeing across the franchise.

That being said, we are optimistic that, that dynamic is going to continue to turn.

So I'd say we haven't quite felt it yet, but hopefully, maybe a Q3, Q4 story we can tell.

The next question is from Walter Spracklin from RBC.

I guess, my first question will be for John as well.

I think you've got a lot of growth opportunity coming on in Vancouver right now.

We've got Deltaport going to be opening up in the summer, that there's 20% more capacity there.

My question, therefore, is that with Intermodal coming online there, are you less concerned about getting share gain versus your rail competitor?

Are you going to focus on share gain on truck?

I know you got a nice add there on the -- with Jonathan with -- from a trucking background.

Where do you -- or is there share gain to be made back from rail?

How do you look at all the buckets of growth in Intermodal?

And which do you prioritize as you're looking out the next year in that segment?

Yes.

So you brought up the Vancouver port and the opportunity there.

Certainly, Walter, we're excited about that.

We think there's a lot of upside in 2017 and, certainly, beyond there.

I think there's a great opportunity for us to leverage our fastest, most direct route in Chicago hitting our Eastern partners and also leveraging, certainly, our business into the Twin Cities.

I'd say from that international business, that's probably job one, to continue to secure that route and that opportunity.

As I think about the buckets, certainly, over the road is -- probably takes the top billing.

I think we've done a heck of a job in growing that business in our cross-border.

I think we've got work to do in domestic Canada that we can still convert a lot of that traffic.

And as we talked about on the pricing front, is that sort of worm turns here, the second half of the year, I think that opportunity begins to build for us.

Okay, that's great.

Moving, second question here, over to Keith.

I found it interesting you mentioned ruffled feathers.

I think when I look back to the period after Hunter left CN, there might have been a case that there were some ruffled feathers there and you were certainly part of the team that unruffled those feathers with CN to -- certainly to a good degree of success.

Is there anything that you learned from there that you might apply to CP here?

And I'm talking about customer -- those customer service agreements that were put into play.

Is there anything specific you have in mind that you want to sort of go forward with, particularly with regards to customer reengagement that you might have learned from your time over at CN in that period?

Well, part of the customer engagement, Walter, I've been doing since I arrived here, so there's just more of the same there.

I mean I -- those kind of ruffled feathers, in all honesty, because of our previous lot.

And maybe they led the way.

A lot of the similar customers, they expect to pay their demerged bills.

They expect to go through some fair assessment of demerged charges and pay the bill.

I mean, some of that was significant change that CN drove that now are the same customer today.

As long as we're given a fair and an accurate deal, you don't have those same kind of responses that we might have had in the past.

My focus is more specific to our craft employees.

I mean at CP, we've driven a tremendous amount of change, trying to restore the health of the company.

What we were doing before was not sustainable, and I don't blame the employees for that.

The employees certainly just didn't understand that.

We had to drive the change that we drove.

And the union that's been affected by it the most was TCRC.

We've got 2 strikes with the TCRC, and listen, we haven't got it all right.

But at the same time, part of my focus is to focus on those things we haven't got right to establish relationships of trust and respect, and it works both ways.

It's not just for us to the TCRC.

It's also the TCRC with us.

So that's been my focus from the very beginning.

I met with the President of that specific union.

I've been able to properly interacting with those specific employees as well as the other employees, and it's refreshing to see the response and the willingness to change and the positive momentum that we're starting to create.

So as we do that and we go forward, we get to an environment where we can actually negotiate a favorable collective agreement for the employees as well as for the company and for our customers and allow us to not miss a beat and continue to provide the service that John needs to be able to drive that revenue top line story.

I just might add to that, Walter, that from a customer experience perspective, we're not going to be everything to everybody.

We certainly are going to pick our partners and want to help them succeed in the marketplace.

And from a customer experience standpoint, I think that means more product development, improvement and working with our IT systems in providing more transparency into our service for our customers.

And then it's also about building a high-performance customer service group.

So I think there's a number of elements you're going to see on that front in terms of the customer experience, things that we can fold into this overall product.

Your next question comes from Ravi Shanker from Morgan Stanley.

So a question specifically on crude.

I mean, we're hearing reports on kind of ramping of crude production out of the Canadian oil sands especially in the second half of the year.

Wondering what you're hearing there and what your current crude outlook might be and if you're prepared to handle more crude barrel volumes if it comes to that.

I'll let John provide some color, but I'll say this.

I'm a commitment guy and I don't have any commitment to -- I'm a bit pessimistic about crude.

I'd love to be surprised.

But at this point, we've been burning so much of this company with crude and it's to a point that it's less than 2% of our revenue.

It's important business to us.

I'm not going to suggest it's not.

But at the same time, it's nothing that I'm willing to bet the farm on or let get ahead of us the way we did in the past.

But that said, John, go ahead.

Yes.

I guess I'd only add that I think we're excited about the prospects of the new production coming on towards the end of the year.

If that, in fact, provides the opportunity to sort of outstrip, we can move in the pipe and we can move it on rail.

We're going to be there to mobilize the assets, the service to try to deliver that.

But as Keith said, in no means are we banking on that today.

Understood.

And if I can just follow up on the ruffled feathers comment.

How do you ensure that smoothing those feathers doesn't send your OR back up again?

And I think you said some of those -- some of the actions you may have taken may have been unsustainable.

I mean, does reversing that kind of necessarily hurt your profitability?

Yes.

When you say feathers, it doesn't mean you compromise your principles.

The way we run this railroad, precision railroad means going out and explaining to people so they understand what's in it for them and understand why we do what we have to do.

It's very encouraging when you go out and speak to some of these employees that have gone through this ruffled feather comment, I don't want this thing to get too carried away with us.

But if you sit there, it's funny, listen, we didn't have a choice.

We weren't very well respected when it came to service.

So our competitor was beating us day in and day out, so do you want to work productively, safely and efficiently and provide good service to our customers, so you get the benefit and the honor of moving that freight?

Or if not, the alternative is not very attractive for you to let up.

When you have those kind of conversations with people, they get it, they understand.

It doesn't mean you change the way you do business.

It just means we better communicate eye to eye, boot to boot, out on the ground with our employees.

They understand why it's important that we did what we did and why it's important how we do what we do day in and day out to be able to provide that service at low costs so that we can compete in the marketplace and protect their jobs.

And I think as we grow, add more jobs back to the company but it's going to be lockstep with revenue.

It's not going to be giving away any kind of efficiency that we've worked blood, sweat, and tears to put ourselves in a position to be able to benefit from it.

The next question comes from Tom Wadewitz from UBS.

Wanted to ask you a bit, first, on cost drivers.

I know that perhaps there's a lot of different factors not 1 or 2 big ones, but if you could identify what are some of the key cost drivers or alternatively, what might drive the operating leverage as volume comes back.

Well, the main driver -- I'll let Nadeem provide a little color, Tom, but the main driver is absorbing the additional business without simply adding additional train starts.

So we've made investments in our physical plant.

It's time for those investments to be paid for.

We've got DP power on 100% of our fleet.

We can run longer trains, which we're doing.

We can run heavier trains, which we're doing which are more fuel-efficient trains which drive those synergies and the leverages to the bottom line.

So with that said, that's pretty much it.

It's basic blocking and tackling in doing what we do and what works well for us.

Yes.

There's always the initiatives that you've continued to incorporate to help fit some of the inflation on the expense side.

We have a fuel sourcing initiative that's going to add some savings that we'll see advantage of in the coming quarters.

Some of the locomotive modernization program we've put in place that are going to help us reduce some of our costs associated with how we've grown the network, there's a lot -- but a lot of it is just blocking and tackling.

The opportunity to grow at a low incremental cost is -- and like I said, the operating -- the power of operating leverage as well.

I mean when I think of that, I would have thought that unlike your coal and potash trains, you already would've been running optimized train length.

I know you identified a couple of quarters ago how you could run longer grain trains.

But is that the right way to think about it?

Or can you run longer coal and potash trains as well?

Tom, the coal is there.

I would say no on coal.

I think we've got that at an optimal spot.

At the potash sector, there's still more opportunity left.

We run 172 car trains to the West Coast to Neptune there on the North Shore in Vancouver, but also a portion of that business goes down to Portland, Oregon.

So that's one of our initiatives.

And we're working close with UB as well as the customer to extend that train length as well.

Some of the things we've got on the South Shore tie through some of the fake news that I read last week.

The service on the South Shore has never been better.

We've got efficiencies we've created.

We went in and made some investment down there.

So we're effectively moving our assets faster for our customers with less operating cost.

So all those things, when you put it all together, there's no home runs anymore.

It's singles and doubles.

But you start putting those singles and doubles together and they start adding up the scores, and that's how we continue to -- continue the store as we go forward.

And recall, Tom, a lot of the initiatives that we put in place last year were more on the back half of the year, right?

So we'll see the benefits of that currently and that will flow to the bottom line as well.

Okay.

And I -- if can -- I don't know if this is the second one or whatever.

I probably want to parse in but a second topic, if you will.

Just any quick thoughts on the competitive environment?

Obviously, volume growth is a function of what the truck market provides, how well you execute but also how the other railroad behaves.

So is that -- is anything changing there?

Is it still pretty competitive with the broader rail market?

Tom, it's John.

I would say, yes, it's a competitive environment right now, right?

As I talked about a little bit earlier, I hope for a little breathing room to get after it maybe later in the year in terms of that over-the-road business.

But that being said, we've also been pretty successful on that front.

And it can be focused on the competitor.

Certainly, we need to understand what they're doing and how they go about it and we'll do that.

But first and foremost, we're focused on what we need to do to grow with our customers.

That's the priority.

So the competition is all going to be there but this is more about how we can get after it with our existing customers, grow their share, help them win and then eventually convert more over the road.

Tom, we've always said this, and you can expect this to be maintained at this company.

We're not going to commoditize our sales.

We're going to make smart business decisions.

We're going to sell service, and selling service is not selling price.

Selling service is going into a customer and educating that customer on how we can help them spend less money, maybe not in rate but also in their total transportation spend to make them more competitive in the marketplace so they can grow their top line and we can grow with them.

It's blocking and tackling.

It's taking this franchise.

That in a lot of these lanes now that we have service reliability, we're actually shorter to the market.

So I've talked about this before.

I talked about this to a specific customer I'm not going to name last month about this.

I said, listen, if you own 4,000 cars in this particular lane, and I can give you an asset to turn this 25% faster, you need to own 25% fewer cars, do the math for those cars and it's over $100 million of capital cost that you can avoid as long as you can rely on this company to get your product to the marketplace.

So we can have those discussions now, which is exactly what we're doing.

Our team's learning how to have those discussions, Tom, to be able to convert this.

And that's what gives me confidence as we go forward to grow this top line, taking share that rightly should be on this railroad as well as be it rail, be it off the road, be it off the highway.

Your next question comes from Brandon Oglenski from Barclays.

So I guess I want to belabor that point that Tom got into here, Keith, if you don't mind.

Because for an investor, it's a relative world and we do see your competitor with a higher valuation.

And I think the perception that their operating model might be just a little bit better.

And if you look at their OR, they are leading you a little bit.

So what are some of the incremental steps that you can take to get back that rightful share that you talk about and retain growth that maybe matches or even exceeds the other stocks that potentially investors could also look at?

Well, again, if I think about the operating ratio, we're pretty much on par with our competitor.

I'm not going to get focused on what CN's doing.

I'm focused on what we're doing and what we need to do better.

I understand.

I've got a very unique understanding of this industry in Canada, both sides of the border, that I think serves this company well and allows us to understand what we're good at.

And that those lanes that we're good at, we should be able to convert that business, be it, again, like I said, from a rail competitor or a truck competitor.

As long as we maintain and don't get too consumed with it, but maintain a low-cost structure and provide good service, we're going to win in the marketplace.

There's no doubt about that as far as I'm concerned.

It's worked in the past.

It will work as we go forward.

I mean, that's what we bring to the table with this franchise, and that's exactly what we're focused on converting.

Okay, appreciate that.

And John, welcome to the sell-side questions here, but I'm going to ask one more of you, too.

How integrated is the operating culture and the sales and marketing team at CP?

And how much of an integrated approach do you take when you're looking at these opportunities that you guys have laid out on the call today?

Yes, so very integrated, I can tell you.

I'll give you an example.

As part of our focus in growing that margin that Nadeem and Keith spoke about, we recently put an initiative in place.

We're working very closely with the key superintendents and operating managers out there to go train by train, and I call it a surgical growth approach.

We go train by train and look at the opportunities on those trains where we can add length, add cars at a low incremental cost.

And it's a matter of picking that apart with the operating team, understanding that opportunity and what lane it's in and what customers then we can go after and provide that attractive opportunity.

Your next question comes from Allison Landry from Crédit Suisse.

Maybe thinking about the notion of top line growth from sort of a longer-term perspective.

Clearly, you have the $200 million to $300 million opportunity that you can chip away at in merchandise and over-the-road conversions to Intermodal.

How much of that $200 million to $300 million do you think you need to get?

And how much Intermodal growth may be on a 3- to 4-year view in order to consistently drive either high single digit or low double digit EBIT and earnings growth?

I can tell you on the merchandise and the auto's perspective, as I look back at my first 100 days or so in the role, I've spent a lot of time focusing in that area of our business.

Certainly, there's a list of opportunities in the bulk and we'll capture those opportunities.

I think we've got -- we're off and running in the Intermodal space.

And certainly, we're going to pick our partners and deliver on the international side the opportunities that we want for Canadian Pacific in the future.

But that opportunity on the merchandise and autos to repatriate that business and bring it back, I don't know what the number is and how quickly it comes back to our property.

But I can tell you in terms of spending the time in those areas and looking at those opportunities, it's very real for 2017 to make a material move and certainly 2018 in those areas.

Certainly, there's a lot of heavy lifting to be done on the network to take that business back and put it on the railroad, but it's out there.

Okay.

And I guess, have there been any changes in the conversations with some of the customers that give you increased confidence that some of this will materialize this year and more of it next year?

I would say yes, unequivocally, yes.

At least the conversations I've had, John can speak to his, but there are certain business that's out there that's in play now as we speak.

It likely will be awarded later this year that, again, back to my point, my thesis, it serves to the strength of our franchise.

Again, we turn assets.

If you own assets and I've got a shorter route and I can reliably turn them so that you have fewer assets moving the same amount of business or the same number of assets moving even more business, that's a pretty compelling value proposition that makes it quite easy to have a conversation that could come to a good outcome with a customer.

So long answer to your question, but the answer is yes.

Your next question comes from Turan Quettawala from Scotiabank.

Just have one here, I guess, also on the top line growth.

Just wondering, when you think about your guidance of slightly positive RTM growth here for the full year, is it possible to parse out sort of how much of that you expect will come from share gains or sort of this new top line growth that you're talking about as opposed to what will come from maybe the economy and the easier laps and such?

That's a tough one, Turan.

I mean, there's a lot of uncertainty in terms of some of the merchandise space and what's happening in the economy.

I would say that we have a lot more comfort around the bulk environment there.

We talked a little bit about -- John referenced K+

S coming online.

We've had a strong start with potash in Q1.

It's going to be a very strong bulk quarter in Q2 that we can certainly check the box.

But to parse it out in the manner you described, I mean, I wouldn't -- I don't think we have the comfort to be able to give that kind of color and visibility, I'm sorry.

No, that's fair.

But I guess what I'm try to drive at, Nadeem, is that mainly you think will come from what you'll get from the economy and the bulk side?

Or is that really expect -- or are you expecting a lot of share gain in that positive?

I would say, not a great amount of share gains is baked into our slightly positive RTMs, I can definitively say that.

Your next question comes from David Vernon from Bernstein.

Keith, I wanted to address the sort of the cultural transformation on the marketing side with you just a little bit differently.

If you think about kind of how you may have seen other railroads kind of approach the market, the tools and the methodologies, the marketing practices that were in place, how long do you think it will be before the team you've recently put together kind of gets to that same level of execution from a sales and marketing perspective?

I think it's a shorter runway.

I mean, this is work that we started 2 years ago.

So we didn't just start 2 months ago.

I think with John, John's a very entrepreneurial, results-oriented guy.

He gets accountability.

That's the reason he was put in the position and he's working that day in and day out and sort of taking the baton that I handed him.

He's worked with me for the past 2 years.

He certainly understands what I expect from an accountability standpoint and applying that to the team.

We had a sales training session.

We call it -- this is back in January, I guess, or February, first week of February, a show of hands in the room, we've got about 100 -- rough number, 100 people that work under John's leadership.

And about 2/3 of that were new, less than 2 years of service.

1/3 of that, about a year of service.

So the people that are here now by and large are people that subscribe to performance, that people that want to be incented.

They want to be compensated.

They want to make commissions.

They step into those challenges, they don't step away from, again, by and large.

So I think the culture is there, the people, the players.

I said this before when we brought on Jonathan, we want A players.

We want people that come to work.

They want to get paid for the results, but at the same time, they know -- they understand if they don't produce results, someone else will.

That's our obligation to our customers.

That's our obligation to our shareholders, and I take that very seriously.

And John subscribes to the same kind of thought process.

So again, I think the team's here.

I think you're going to start to see the results, some of the things that we've done already, the strategies John and his team have put together.

What we did last year driving Intermodal growth being the only carrier in North America that did it is the result and proof positive of that.

So you can expect more of that as we go into 2017.

And maybe as you think about helping us who are a little bit maybe outside the business or investors who are trying to understand this from the outside looking in, are there any sort of signposts or goalposts or mile markers that you can point to?

I mean, on the operations side, you've got the OR, and that's pretty straightforward.

But I think on the sales side, I mean, is it just the weekly carload progress?

Or is there something that we can think about as far as kind of additional insight that you might be able to help us to tell us whether this transformation is actually happening or not?

I'll let John speak to that.

Yes.

And I don't know if there's an easy answer.

Obviously, it's the carload growth and the revenue that ultimately will define our success.

I won't say and I'm not going to provide the playbook here, but there's been a number of things that are sort of being developed in the tool chest that we'll be able to sort of, I think, certainly outline more as they materialize.

And I think that sits in maybe the area of network development.

And I think certainly one of the things in the merchandise and auto space that I've uncovered here in this first 100 days is our network is set up from an operating standpoint, as Keith spoke about, to succeed.

But there's some key areas of focus in terms of enhancing that reach and enhancing that franchise that I think become milestones as we move through the year.

I think something I would point to is take a look at our RTM growth.

When you see RTM growth at CP growing faster than the economy, that's pretty proof positive of what we're talking about.

At the same time, maintaining our pricing discipline.

We're going to control, sustain profitable growth, they're the keywords.

We're not going to get away from that.

We're not going to grow for the sake of growth.

If it's not profitable, we're not going to chase the business.

Your next question comes from Brian Ossenbeck from JPMorgan.

Just a follow-up on the Domestic Intermodal strategy answer that did drive the growth.

Can you just give us a little bit more context of what really figured that kind of outsized growth relative to the rest of the industry?

Was it finally getting down to the -- utilizing the trip planning, seems to be another focal point.

I think it is the majority of your mix of Intermodal.

So if you can give us some color on that, that would be helpful.

Yes.

I think it was a number of things, and it started with people, right?

So I took over the Intermodal franchise, I don't know, 1.5 years ago or so and a lot of it was an assessment on the people and getting again sort of that right performance culture and mindset in place.

We spent a lot of time just getting the team out in front of our customer base, selling the service that the operating team had put in place.

So again, I think there was a lot of opportunity out there in lanes that our competition, whether it be CN or trucks had taken away from CP over the years, and it was really getting the product back out in front of those customers.

So it's leveraging the service, getting back out in front of the customers.

And then I think there were some areas in terms of our cross-border business that maybe CP in the past just hadn't put a lot of focus to.

So we kind of tuned up that focus and got in front of those customers on that.

And in that case, really got after the service in some of those lanes and it produced results.

That was a key driver -- cross-border Domestic Intermodal growth was a key driver for us last year that really started to get some legs and gaining traction with John and his team, and it's something we're still working on.

We're not done, but at the same time, that was definitely one of the keys to our success and innovation in new product offerings as well.

The business with the triangulation of the reefers and the frozen pizzas and just being innovative in the marketplace and putting solutions out there for our customers that previously were not there is what's driving this growth.

Okay.

Was the trip plan being implemented?

I know that was in the fall of last year.

Was that contributing to any of this?

Or is it still a bit too early?

Yes, no, it's too early.

Trip plans, we came through the winter.

We're focused and trip plan performance is coming up.

But the benefits of that both from sales for John and his team to go out and sell service, but more specifically for the operating team to turn assets, those are all opportunities.

That's all part of some of the operational synergies we'll be driving this year, lowering cost, lowering dwell time, making sure the right car is on the right train, asset turns will improve.

Those are all the things that we'll be focused on the second and third quarter from an operating standpoint and from a margin standpoint on controlling our cost.

Yes, I would add.

I'm not sure we've scratched the surface on how well we can leverage trip plan and really how we present and sell that to our customer base.

And then with that, particularly on the Intermodal side, how do you take that to the next level and really provide our customers daily transparency to their boxes, their trip plan and their expectations.

We think it's going to be a strong selling tool.

Your next question comes from Benoit Poirier from Desjardins Capital Markets.

First question maybe is for John.

You recently strengthened the bench on the marketing front.

So I was wondering if you could provide an update on where you are right now in terms of new position that you added and also what you're tracking in terms of key metrics to measure the success of this initiative.

Yes.

So I think the -- certainly, in the bulk and the Intermodal side, we're often running, Benoit, in terms of the people.

As I said, I am extremely pleased with the new team we've got in our Intermodal side.

They're deep into the market.

We're measuring the success actively of our sales team, not only in terms of generating revenue, the number of sales calls they're seeing, what customers seeing, how often they're out on the road spending time with our customers.

I'm very pleased with the direction of that team.

In the merchandise and auto front, we've got some gaps we're still filling in that area, but we're aggressively sort of implementing all the discipline that I think we've had success in the Intermodal side into that area of our business, too.

Okay, perfect.

And second question, could you provide an update on K+

S related to the timing, whether it's second half or the end of Q2?

And also quantify the impact we might see, we should see on the volume front in the second half.

I think we're looking at a June, July timing in terms of starting to see some of that business move and we're anticipating about 500,000 tons yet this year.

Your next question comes from Konark Gupta from Macquarie.

Just the first one, can you please provide update on grain network fluidity?

I guess, the bad weather and some derailments have negatively impacted your car supply to your customers.

And if you probably have lost any volumes to your competitor, are you seeing those volumes coming back to you on your network?

Yes, I think we've just put into the marketplace the largest number of cars last week in our grain franchise than we ever have.

The velocity on our dedicated trains, particularly when you add in Thunder Bay, is at very high levels.

I feel very confident in the level of service and the speed of our service as it stands today.

Okay.

And Nadeem, one for you.

Just want to touch upon the CapEx side of equation.

Your gross CapEx has run about north of 20% for much of 2011 to 2015, but came down to 19% this year and last year.

I was just wondering, are you running into the risk of underinvesting relative to your competitors when you look at CapEx as a percentage of revenue?

Or you're pretty happy with what you've got for the next 2, 3 years?

No.

We don't invest based on what our competitor does.

We invest on what's required to run safely and efficiently and grow the business.

And quite frankly, those are decisions we make independently irrespective of what our peers do.

And we've raised our CapEx 6% this year and it varies year to year depending on what the growth projects are and where the needs are.

One thing we don't second-guess is how much we spend on basic maintenance CapEx, which is $750 million to $800 million, and you can just put that in pen every year.

So quite frankly, right now, $1.25 billion is what we expect to spend.

And again, it's a little bit -- I think we're the only rail that's increasing CapEx this year and we're confident and that's what we need to run our business.

So do you anticipate, sorry...

I just want to add a little color to that to remind everyone that this railway also is the only railway that gets to take a capital holiday.

We've got locomotives that are stored.

We don't need to buy locomotives.

We're not obligated to buy locomotives.

I think there's only one other railroad in this industry that can say that.

So we're in very good stead and position.

We're still in year 2. We talked about this last year of taking out switches out of the mainline, taking switches out of sidings, taking switches out of yard tracks.

That represents a decline of about 1,000 switches, that again, when we take those switches out, the ones that are serviceable, which many are because they're not necessarily -- not necessary and haven't been used, we just inventory those and it forgoes our ability or our obligation not to buy those additional switches as we go into '17 and '18 in line with our basic capital expense.

So those are a couple of positives that this company certainly is benefiting from and will over the next couple of years, unlike some other roads in this industry.

Your next question comes from Justin Long from Stephens.

So I wanted to maybe follow-up on some of the earlier questions about the potential to improve some of the interchange points going forward.

Is there a way to frame up the potential benefit or runway you have from just operating a more fluid network around Chicago?

I just wanted to see if there was any way to put that opportunity into perspective.

No, I would say it's too early.

I mean, you can hypothetically think about the art of the possible, but I think it takes more definitive discussions.

And then the true time when the true benefit would come is actually during the tough times, when you have severe weather, when you have line outages, when you have congestion in the city, that's when you see the true benefit, both from an asset turn standpoint as well as service reliability or cost.

So it's effectively a little bit too soon to talk about that.

It's way too soon to put a number on that, but I would just suffice to say that there is opportunity there.

Okay, fair enough.

And then as a quick follow-up, maybe this one's for you, Nadeem, but 2Q is a tricky quarter to model, especially with the easy comps, and you talked about expectations for mid-single-digit RTM growth.

But is there any color you could provide on the OR expectation for the quarter?

Just curious what's getting embedded within the full year guidance that you've given.

Sure.

So I'd say to keep in mind, of course, that what impacted us this quarter with fuel and the impact on fuel surcharge was a bit of a headwind.

But as you look at to Q2, typically, you don't have the weather challenges, although I think there was snow in Calgary Sunday.

I would say that you're going to have the operating leverage that we talked about, the strong bulk performance that we have in front of us, so all the runway to allow us to reduce the OR meaningfully especially compared to last year and certainly meaningfully sequentially.

So all of that without really giving you a number, Justin, sorry.

But yes, we expect a very low operating ratio relative to where we've been.

Your next question comes from Matt Troy from Wells Fargo.

Wanted to ask a question on grain, specifically the divergence in your numbers versus your competitive player up in Canada.

If you could talk about the challenges in the Western Corridor and with connecting partners.

I'm just wondering, could you just provide investors with a little bit more detail as to exactly what happened in 1Q to drive that divergence and perhaps what you learned from that and how we can get comfortable that, that gap will narrow in terms of the relative RTM growth through the year.

What's your road map there?

Well, I guess, first thing, Matt, I need to just remind everyone that in 2016 Q1, we had our largest world record grain movement to Vancouver that we've had at CP.

So we got a big comp out there from -- again, at record levels.

I think what we are seeing now as our grain product flows and it's sort of the dedicated train is an offering to both our U.S. and our Canadian grain customers.

So really, we try to operate it as one grain franchise.

And I think what we saw through Q1 as some of those supply chains, whether it be into Vancouver or the U.S. PNW, you saw our customers moving their trains back and forth between -- across the border to fill market opportunity.

If Vancouver was full or slow or there was an outage, those trains move into the U.S. If you see it in the PNW, the same issue, they may move back up into Canada.

So that sort of moves our numbers between our properties, but I think the bottom line as you look forward is the velocity and demand is strong in Canada.

A lot of those trains that we're operating in the U.S. have now since been moved into Canada by those customers.

And with Thunder Bay opening up, we get a big lift in terms of that velocity.

So we're optimistic with that.

Okay, got it.

And the follow-up would be, you did press release the United Steelworkers agreement today.

I think you said that's something like 600 employees.

Perhaps just an update from Keith or someone else on the team, just give us a refresher if you could on union negotiations.

I know some of it's collectively with the other roads, but from a CP-specific perspective, what's the road map over the next 2 to 4 years in terms of what major agreements are coming up for negotiation, what are outstanding and Keith, what are you focused on there?

I'd say this, on the Canadian side, to your point, we ratified the Steelworkers.

That's all the clerical employees.

And it is about 600 of our employees.

We're currently in early negotiation discussions with our Maintenance of Way, which is also TCRC, but the Maintenance of Way employees represents 2,300, 2,400 of our employees.

That contract expires at the end of this year.

The big one that we still have to negotiate is actually TCRC Running Trades.

It's about 2,500, 2,600 of our Canadian employees.

The current agreement we have expires also at the end of this year, but certainly we're starting to have some discussions.

That's part of what we're trying to do to connect and establish relationships with trust and respect so we can have productive discussions.

But with that said, the competitor road is ahead of us in their bargaining schedule.

So they're actually -- I believe they've got a date of this summer.

So they're certainly the same people, the same leaders are consumed with that contract first.

So our work, the heavy roller, so to speak, will be done in the second half not the first half when it comes to the TCRC.

So other than that, we're in good stead.

We've got an agreement that goes through '18 with Unifor, which is previously the Canadian Auto Workers, the CAW.

We've got TCRC, our dispatchers are good through 2020.

And the last piece which we've had not a lot of fanfare about, but we were -- we talked about this last year, we ratified an agreement, an hourly deal, a progressive deal with our engineers on the U.S. property.

However, we did not have an hourly agreement with our [ TELL ] and our UTU conductors, switchman, brakeman.

We've since gone through an arbitration process.

And literally, I guess about 2 weeks ago, the arbitration award came back and effectively we will have an hourly deal for all Running Trades employees on the U.S. property.

We're going through the implementation of that now.

We're going to make sure we do it in a very orderly fashion working with our employees.

But with that said, that was the last sort of agreement that we're taking out in the U.S. side as well.

So over the -- across the board, we're in pretty good shape.

I feel pretty good about it.

Again, the TCRC Running Trades employees talked about this a lot.

I don't want to continue to harp on it, but we're certainly working hard and working with the TCRC to focus on negotiating this agreement and not having to go through a strike like we have the last 2 times, and I'm confident, cautiously confident that, that outcome is possible.

I appreciate the detail.

I'll keep it to those 2. Certainly wouldn't want to ruffle any feathers.

Our last question at this time comes from Ken Hoexter from Merrill Lynch.

John, maybe can you talk about the capacity?

You talk about the record grain volumes.

Keith, you just talked about kind of the locomotives you've got.

But are there any capacity issues in terms of track, train lengths, anything that requires new startups as you hit some of these record volumes in terms of trains?

Ken, we just need velocity.

And the challenges we've had in the first quarter it's not -- it's an outdoor sport.

Avalanches on our railroads, the mudslides when the snow melted fast.

And then, of course, part of our product on the grain side is in partnership with one of the roads south of the border, and they had some of the similar weather and similar operating challenges.

So whenever those supply chains are affected, then obviously, it's going to affect the velocity of those assets that are out there running.

So without those headwinds, we should expect to see what we're seeing now.

We've got cycle turns that are moving fast.

Those dedicated trains are spinning.

We should get 3 trips, round trips a month.

Whatever dedicated train we add in the wintertime, you might only get 2. So those things are behind us now as we go forward.

We've got extreme confidence and we've got the locomotives, we've got the people and we've got the cars to be able to move record amount of grain as long as mother nature cooperates with us.

Great.

And then that was a great rundown on the employee kind of contracts before.

But with this, you've taken out about 1/3 of your employees over the last few years.

Is this a comfortable level for you in terms of staffing?

Do you still find when you talk about -- Nadeem was saying still room on the operating ratio, is that via more cost cutting on the employee reduction side?

Or is it just refining operations?

How do you -- where do you see continued improvement coming from?

This thing is always going to be constant continuing improvement.

We're going to get better doing what we do.

I mean, Vancouver is a good point there, Ken.

We went through a little crisis back in December, went down and took a look at the operation.

We were spending a lot of money, and the customers weren't very happy.

And quite frankly, what we're doing was not sustainable.

So I went in and we made some investments.

We made some operational changes.

We pushed some business back to another road which effectively we were being their agent and it was eating up our capacity, our customer's capacity to be able to provide good service and turn our assets.

It just didn't make good business sense for us.

So we triggered a change.

We said, you know what guys, I can't do this anymore.

I can't be your agent.

I'll give you your allowable service for your customers and get my customers allowable service and I know which one that I've got to keep happy first as a provider.

So with that said, costs come out, we become better at what we do.

We got a much lower cost and a much better service and that's one of the key corridors for us where specifically back to this grain, it's going -- those dedicated trains are going straight to that service area.

And if we can turn those faster, get it back up to the splitter to move more of that grain that's out there waiting on us to move, then that's a win-win for us.

We're seeing on the South Shore specifically, Ken, record set -- I won't say on a weekly basis, but it's not uncommon with our grain customers those 2 facilities that we're servicing with the investments we've made and with the innovation work with those customers and the team that we have in place, a very, very much improved lower cost operation which helps drive part and parcel to those additional operating synergies.

So it's that kind of story.

You sprinkle it over the railroad as we get better at doing what we do day in and day out, and that's what allows us to drive continual improvement and provide superior service that John and his team converts into the marketplace.

And we'll now turn the call back over to Keith Creel.

Okay.

Let me wrap this up and I'll close saying that so I'm extremely excited and energized.

I'm honored to be the CEO of this iconic company.

We've built a kind of leading team of talented and committed railroaders.

We've got tremendous runway ahead of us and we're committed to delivering to our customers, our shareholders and the communities that we serve in the months and the years ahead.

We did what we say we're going to do in the first quarter of this year, and you can expect more of the same as we go forward to the balance of 2017, and we're certainly able to track to achieve the guidance that we set out at the start -- at the beginning of the year to again meet the expectations of our shareholders as well as our customers and our employees.

So with that said, I thank you and I look forward to discussing second quarter results as soon through the quarter.

Thank you.

This concludes today's conference call.

You may now disconnect.