Canadian National Railway Company - Q1 2015

Transcript

Speaker 15

Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific's First Quarter 2015 conference call. The slides accompanying today's call are available at www.cpr.ca. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to introduce Nadeem Velani, AVP, Investor Relations, to begin the conference.

Speaker 14

Thank you, Stephanie. Good morning, and thanks for joining us. I'm proud to have with me here today, Hunter Harrison, our CEO; Keith Creel, President and Chief Operating Officer; Bart Demosky, the EVP and Chief Financial Officer, and joining us today for the first time, Tim Marsh, our Senior Vice President, Sales and Marketing. Before we begin, I wanna 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 U.S. 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 limit your questions to 2. It is now my pleasure to introduce our CEO, Mr. Hunter Harrison.

Speaker 7

Thanks, Nadeem, and good morning to everyone. Thanks so much for joining us, particularly on a day when we can report such what I think is an outstanding quarter. You know, it's, it kind of gets old to say record-setting because that's what this organization has continued to do. But you know, to produce the kind of operating ratio that Keith and the operating team put together with 10% growth on the revenue side in the first quarter, and those of you that have followed rails for a while understand the seasonality impacts of the first quarter. At the same time, we had a little bit of a battle with a work stoppage, which didn't help. But to produce that kind of OR of 63.2 is really pretty staggering.

I think probably, to me, as a former operator, the thing that's the most outstanding is when Keith talks to you further about the operating metrics that have been achieved. It's those are the things that stick that don't go away. And when you see some of the improvement in these metrics as far as train speed and effectively the velocity of assets, I think it's extremely impressive. We also... I should highlight and mention that the board took action on the repurchase program, and we announced that first quarter and proud to be in that kind of position. So it's very, very nice to sit in the chair when you've got a team that's producing these kind of results and earnings of $2.26 or 59% improvement.

It's very pleasing, and it shows the hard work and that this group has done. And I think everybody around this table would tell you that, um, there's more to do. The story's a long way from over, and the bucket is far from empty. So with those comments, let me let me turn it over to Keith to talk to you in more detail about some of these results.

Speaker 11

Okay, Hunter, I appreciate your comments. Real quick, for the record, though, you know, the kind of relationship we have, I often get to professionally challenge you. I rarely get to professionally correct you. I don't consider you a formal operating at all, nor anybody else on this team. So that said, let's speak to the results. Very strong quarter, 10% revenue growth and a very, a very hard-earned but impressive and respectful 63.2 operating ratio that I wanna thank this operating team for delivering. And I say operating team, it, it happens out on the ground in the operating side, it happens in the headquarters functions, it happens also in the sales and marketing function. So this is a team effort and a team result. Certainly something we're very proud of.

It's a strong testament to the operational focus that this company has, the customer focus that this company and this team has. You put all that together, again, with the H quarter function, day-to-day convert it, and it's a pretty powerful model. We're skating hard every time we step on the ice. This is not done to Hunter's point. We're developing our skill sets continually as railroaders day-to-day. This is a solid business model and even stronger team of railroaders that continue to grow stronger as we learn, from our failures, as well as our successes day-to-day. So I'm proud to be railroading with all 14,000+ of these guys and gals that make this railroad what it is. So operationally, admittedly, we faced some easier comps with a more normal winter versus last year.

This quarter, we saw a continued improvement in our key operating measures. A couple of the highlights we're pretty pleased with: train speed up 22%, train length up 8% for the quarter, dwell continuing to improve 14%. Fuel efficiency, again, 5% improvement over 2014. That's a cumulative... Hunter, I went back and checked the numbers last night, 15% since we started this turnaround in 2012. I'm not sure if that's best in the class yet. It has been the last couple of quarters, second best, knocking on the door of best-in-class, but it's meaningful. And again, I think every 1% improvement is about a $10 million pickup or cost reduction on the bottom line. But let's set aside the numbers for a moment. Let's talk to what Hunter said a minute ago about the strike. It's something I'm very proud of.

Our CP employees were able to do something we've never been able to do before, and that's protect service for our customers during our unfortunate two-day work stoppage that we had back in February. So let me elaborate a little bit. Certainly, strikes are never desired. Obviously, we like to avoid them. We want to avoid them, but sometimes they're necessary. Hunter taught me a long time ago, you never go to the negotiating table unless you're capable and prepared to say no, and sometimes you have to do that to protect the overall health of the company, as well as our service to our customers and our employees. Suffice it to say, maybe at the moment, those you're negotiating with may not understand that, but that's exactly what we were forced to do.

We had about a two-day work stop, work stoppage before, the parties came together and agreed to binding arbitration, and we moved about 70% of our affected traffic. I can tell you, as I shared with the negotiators at the table the months before we went out on strike, we started training our officers about two years ago to prepare for this strike in the event that it occurred. And I say, not preparing for a strike, but preparing to deliver service to our customers in the event of a strike. Something we feel we have an obligation to do. We did it. I can tell you, as I shared then, next time this comes around, if we're forced to, I don't want to have to, but if we're forced to, we're continuing to train our officers. It's gonna be a condition of employment.

It's also gonna be an enhancer to an individual's professional knowledge of what we do. It's gonna help them become better railroaders, and should we face a strike in the future, it will be our objective to be able to handle 100% of our business. So more to come on that. We are happy to announce that an arbitrator was appointed yesterday to facilitate this process. Previously, Superior Court Judge George Adams has some experience with the railroad industry, very highly respected mediator, arbitrator in Canada. Dating back to 1995, he actually was appointed and helped resolve a strike, an industry strike between CP, VIA, and CN at that time. So he definitely has some experience with the railroad.

We're certainly happy he's been appointed, and we're pleased to get this process started, to get it behind us, to get resolved for both ourselves as well as our customers. On a more positive note, at the same time, we signed a four-year deal with Unifor, which is the previous CAW union, which was ratified in early March. This means outside of the Teamsters, that we've got to finalize this arbitration process, we're solid with every union in Canada under agreement to the end of 2017, which gives us stability and reliability for our customers. On the productivity side and the service side, we continue to invest in the network.

We're gonna put in about 30 more sidings in 2015 to continue to help us convert on the productivity and the service side, improve train length velocity, take out train starts. Something we've done a little bit differently this year, as reported first quarter. Well, I haven't reported it yet, first quarter performance up in train speed. What we're seeing in second quarter is even a pickup to that. We actually hit a record today, Hunter. Yesterday, network-wide, we were 22.1 on our train speed, which is an all-in number. That's different than what we report as an industry number because it measures everything. It measures terminal time, dwell, it measures line of road as well. So that's an all-inclusive number that we pay attention to internally to CP, setting levels that we've never reached before.

The approach that we've done differently this year, we did some grading, some work last year, getting ready for some of these sidings to bring them on early in the first quarter or the second quarter, so we can start converting that investment, as opposed to waiting to what was typical, bringing them on third or fourth quarter. So again, some positive momentum there that's helping us. Terminal throughput and productivity, as the snow has melted, we have seen some improvements overall. First quarter, we're picking up some momentum. It's going to garner a tremendous amount of my focus, as well as I know Hunter is gonna do the same. Second, third, and fourth quarter, we've effectively deemed this year the terminal at CP, so we're gonna be driving some additional productivity improvements there. Now moving to the revenue side.

On the revenue performance, we saw double-digit for the second consecutive quarter. Overall, the revenues were made up of about 5% volumes measured by RTMs, 5% revenue per RTM growth. Breaking down the revenue per RTM further, we've seen positives and negatives in the quarter. We've got a reduced fuel surcharge, which lowered the top line by about 3%. On the positive side, positive pricing, nearly 4%, which was partially offset by some negative mix. Also benefiting the top line, we had a 7% currency tailwind, given our US-denominated revenues versus a weaker Canadian dollar. If you look at the overall performance on an FX neutral basis, the growth was a bit different than what we had originally anticipated.

Strength in bulk, forest products, and chemicals and plastics offsetting some of the weaknesses in energy and automotive, which speak to the strength of this diversified portfolio. And I say this with emphasis that our revenue story at CP is not about crude. This is a diversified franchise that this performance alone shows us the strength of that diversification, where, yes, we're gonna face headwinds, but we have an ability to pick up in other areas where we may be facing headwinds in certain areas. With that said, very excited to officially and formally announce to the group today on the call that we've added a key member to this team. I mentioned him the last quarterly call. Mr. Tim Marsh joined us February the first.

He's hit the ground running, so very, very proud that he's on the team, proud to introduce him, leading the sales and marketing team. His mandate is clear, to take this product that we're producing, to take this industry-best service, convert it on the bottom line, top line, and create a world-class sales and marketing team. So Tim, why don't you share with the group your some of your general impressions since you joined the team just a few short months ago?

Speaker 20

... Thank you, Keith. Good morning, all. I'm Tim Marsh. I'm excited to be part of the CP team. I'd also like to put a special thank you to Mr. Harrison and Mr. Creel for believing in me and giving me this spectacular opportunity to come on board with CP and help push them to the next level. The CP is rich with opportunity, and I'm here to make sure that we achieve that. The CP is furthermore than just a railroad. We're an origin-to-destination third-party carrier, rail carrier, and we're here to move the market forward with all of our customers. I came on board during our most recent national sales meeting. I had an opportunity to meet up with the whole sales and marketing team.

Since then, I've been able to get around the country to start seeing some of our top customers and seeing what their concerns are and where we can further benefit their supply chain. As well, we've identified a tremendous amount of opportunities out there that we will move forward and sell with the CP program going forward. My focus at this point in time is to shore up the national sales team, to work on sales training for the team. My mandate is clear: I'm here to build a world-class sales organization and to grow the line. I'm energized, and I'm focused, and with that, I'd like to pass it over to Mark.

Speaker 1

Okay, thank you, Tim, and good morning, everyone. Like Hunter, talking about positive results is certainly something that I never get tired of, and in Q1, CP delivered the best first quarter financial results in the company's history. Quarterly revenues grew by 10% to nearly CAD 1.7 billion. We achieved an operating ratio of 63.2, and that's an improvement of a full 900 basis points over last year on an adjusted basis. When we take out the impact of FX on long-term debt, adjusted EPS came in at CAD 2.26, a 59% increase versus last year. Now, underlying those record results was the RTM growth of 5% that Keith mentioned.

I'd say that in spite of that fantastic result and the increase, expenses were down a full 9% on a foreign exchange adjusted basis, and that clearly demonstrates our ability to grow revenues at a low incremental cost. There are a couple other notable items that I wanna mention that occurred in the quarter. First is around our share repurchase program. In March, we did receive TSX approval to implement a new 12-month repurchase program. That program will enable us to buy up to 9.14 million shares, which is about 6% of CP's public float. And at today's share price, we absolutely continue to see share repurchases as a very, very strong value proposition for shareholders.

Now, as has been the case in the past, we do intend to take full advantage of our ability to repurchase up to one-third of those shares through private share purchase agreements. Those are purchases directly from Canadian financial institutions. Repurchasing in that way enables us to buy the share at a discount to prevailing market prices. As an example, in 2014, we realized an average discount of about 9%, and in today's numbers, that's about $21 a share lower. On the debt issuance front, some of you will have noted we were quite active in the market this quarter or this past quarter.

In January, we issued $700 million of U.S. dollar-denominated debt, and that was at a coupon rate of 2.9%, the lowest in the company's history by some margin and another fantastic benchmark for CP. You can expect to see the company continue to be active in the debt markets this year and going forward to support our share repurchase programs. For those of you who are modeling, I would remind everyone that we've got about 80% of our debt denominated in U.S. dollars. So between the new issuances that have occurred and are planned, and currency translation headwinds, that's below the line on the interest expense. Interest expense will ramp up over the course of the year.

And last but not least, for me, as you all know, in February we announced my intention to leave the company at the end of May, and this will be my last call with the team here and with you. I can say this, that while my time with CP has been relatively short, it has been an extremely sweet time as well, and I don't leave without some regrets. It's been a wonderful experience working alongside Hunter, Keith, and the rest of the executive team.

I'm certain we're all gonna be friends going forward, and they have my thanks for welcoming me in as one of the CP family, and for teaching me about what it takes to run a best-in-class railroad. I've learned a great deal from them, but I also leave with the knowledge that shareholders are going to benefit from our combined efforts, not only today, but into the future. So, with that, turning a page, looking forward to the next chapter and hopefully running into some of you going forward. So with that, thank you very much, and I'll turn it back over to Hunter.

Speaker 20

Well, thank you, Mark, for the contributions you made to this organization over the last 18 months. I know there's gonna be questions raised about Mark's potential replacement, but what- Mark has been very cooperative in working with us and staying beyond, I think, what his original desires were, to be sure there's continuity in that transition. And so we're, for that, we're very appreciative. We're all Calgary neighbors, and I look forward to continuing the kind of relationship that we've developed. At the same time, I should welcome Tim aboard.

Speaker 7

... I'm not sure you know what you're getting into, but, you're gonna find out quick. But it's, it's exciting to, to have Tim join us. You know, I was very, as I sat back last night and kind of reflected on these results, having some appreciation for what it takes to achieve these kind of numbers. I just looked back historically at the last 5 years, and if you see that CP's Operating Ratio, if you will, if you wanna judge that as a measure of efficiency, started off in 2011 at 90.6%. Now, I, I know the history. I know that 2011 was a, was a real bad year from, from a weather standpoint, but at the same time, I don't think it, it represents...

I've never known the weather to represent effectively 30 points. And so this organization, with Keith's leadership and, and the team that he's put together, you know, have taken this OR from, 90 in 2011, and then 80 in 2012, and 76 in 2013, and 72 in 2014. And now we report a first quarter that I've never known. I didn't check the books here, but my memory's pretty good. I don't think any railroad has ever achieved an operating ratio in that level, first quarter. And the real question is gonna be, and I'm gonna wait till it's asked, is, "Well, where does it go from here?" And, and we're, we're glad to talk about that.

But this is a solid foundation that the operating group has put together for to build the type of service offering that Tim needs to be able to go and take to the marketplace. And, you know, we sometimes get this make this business a little too complicated. And I say to the group here all the time: "Look, we gotta do two things, okay? Provide service to the customer, do what we say we're gonna do, and control the cost. If you're the low-cost carrier and you got the best service, everything else will take care of itself." So, good job to the team. Congratulations to all of you. And on behalf of the board and shareholders, I congratulate you. And with that, Stephanie, we'll be glad to answer questions that the group might have.

Speaker 15

Thank you. If you would like to ask a question, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. As previously highlighted, please limit your questions to two. There will be a brief pause while we compile the Q&A roster. Your first question comes from Brandon Oglenski with Barclays. Please go ahead.

Speaker 4

Good morning, everyone, and congrats on setting new benchmarks for the first quarter.

Speaker 7

Thanks.

Speaker 4

Hunter, I guess I'll just come out and ask it: So where does the story go from here? And if I can be a little bit more specific, you know, you have the 10% growth target for the next four years, but your price and your growth in RTMs were up about 6%. So, you know, with incremental challenges in energy, what's going to drive the acceleration in the outlook in the network for CP?

Speaker 7

Well, you know, I think most of you are familiar with our portfolio, and we're heavily weighted to some degree towards commodities, obviously. Obviously, what kind of grain crops we see. But the real opportunity, I think that, I think that Tim is seeing, and we'll see further, is this area, what we refer to as the merchandise side, domestic intermodal. And there's probably, a big wild card with, a little reentry into the maybe potentially the, the international arena. So I think that's where the majority of growth will come from. But I-- and I, I'm not sure that everybody understands the story, and maybe I haven't been too good a storyteller. But clearly, if you're at 63 first quarter, there's opportunities to do better than that.

If you look at on a full year basis, if you look at what can be done second, third, fourth quarter. So we've clearly said that in a high fixed cost, capital-intensive business, it's not all about continually going lower, that there's a point, and we've reached that point, where we should be in a position to convert the low cost and the productivity gains that have been made into growth. So still achieving record ORs, but being able to convert that into growth, through more aggressive price, if need, in certain commodities, given those markets. So I think hopefully that gives you a little flavor of where we're going in the future. The one last comment I'd make is this, and we're starting to see a little bit of this: It's hard in this business, rail business, to get people to change.

It's very difficult. Tim will find that out. But once you make a breakthrough, once the big customer sees your service offering, the advantages it has, and they make a shift, they're big shifts, and they tend to stay with you, and others tend to follow. So when that, as that momentum starts to gain, there's a lot of power there. So hopefully, that's helpful.

Speaker 4

But it sounds like you're still confident that that target is still very relevant today.

Speaker 7

Absolutely. I mean, I feel, you know, stronger about the story every day. As I said, with the foundation we built, with the opportunities that we have, you know, I just for an example, I said to some of you early on, as far as capital spend, that as a result of the turning of the assets and the better utilization of locomotives, we were gonna be able to take a holiday until maybe 2016 or 2017 for locomotives. Well, that holiday now might be 2018 or 2019. We've got about 400 locomotives, I think, parked. So we've got all the ingredients of what we need here, and I see nothing to get in our way.

Speaker 4

Well, I appreciate that. And if I can get my second question, and I don't mean to beat a dead horse here, but we talked about M&A quite a bit about a half a year ago, and, you know, it was very clear that no one really wanted to come to the table back then. However, you know, things have changed. You still have a lot of service challenges in the East. You know, management teams are struggling with costs and service outcomes. You incrementally have a lot of headwinds from coal. And so is there any new desire to discuss, hey, you know, diversifying away from Eastern coal? I'm sure shareholders would like it, and I'm sure that, you know, some of the proven improvements that you've driven at CP could definitely be helpful for some of the other carriers.

So does that change the discussion at all for M&A?

Speaker 7

No. I, and I don't mean to be short about this, but effectively, we have no interest.

Speaker 4

Thank you, Hunter.

Speaker 7

Yep.

Speaker 15

Your next question comes from Fadi Chamoun with BMO. Please go ahead.

Speaker 8

Okay, good morning.

Speaker 7

Morning.

Speaker 8

So, I mean, this first quarter looks like a pretty big, nice down payment on your full year goals in terms of operating ratio and earning growth and all the metrics you highlighted. Would you say that outside of any major change in the outlook for foreign exchange or energy, the biases to your guidance are now to the upside? It looks like you're coming out a little stronger out of the gate here in the first quarter. What sort of challenges or what issues do you fear that would not, if or help you do that or exceed it this year?

Speaker 7

Well, Fadi, I guess the two biggest questions we have right now is one that I guess everybody has, is what's gonna happen with crude? You know, crude goes down and nothing much happens, then it goes up, and nothing much happens except a lot of rhetoric. But clearly, it has had some impact and will have some impact in the future as it shakes out and crude settles in. And then the other issue will be, you know, what kind of crop we see with Canadian grain. So if Canadian grain is a quote, "normal crop" on some five-year average or whatever you like to look at, and we're, let's just say we're close in our estimates on crude, you know, I think that it's all pretty well upside.

Once again, if there happens to be a bad crop, if we're wrong about crude, will it put some pressures on? Sure. But I think those are the two largest kickers.

Speaker 8

Okay. Tim, you're welcome to the call, obviously, and happy to have you. But you mentioned in your remark. I don't mean to put you on the spot. You mentioned in your remark that you've identified tremendous opportunity that you sort of talked to customers. I'm wondering if you can go talk a little bit specifically about the segment where you think there's opportunities for CP to sort of improve the share of wallet with customers, as you've looked around so far.

Speaker 22

Yeah, you know, simply, we have sales people all over North America, and we have to now make sure that they're selling every possible component that the CP has to offer. Traditionally, in the past, maybe we had areas of lines of business that we were working with, and they were focused in one area. Now, we're going to start diversifying the sales packet for each person. We're also going to root out other opportunities where we have assets in place that we can work, sell, and try to turn a profit for the CP Railroad. We're trying to put the CP sales team on steroids at this point in time.

Speaker 8

Okay, thank you.

Speaker 15

Our next question comes from Tom Wadewitz with UBS. Please go ahead.

Speaker 19

The strong results, very, very impressive performance, and especially in the first quarter. I wanted to ask you, Hunter, about how much visibility this gives you to a sub-60 OR this year. Do the first quarter results give you high confidence that the full year will be a lower OR than 60? Or how might we think about, you know, the OR outlook for the year given the first quarter numbers?

Speaker 7

I can see it from here. I don't know the timing exactly. You know, I think that, and I anticipated this question to some degree, and I know the staff is sitting around the table here taking long, deep sighs with what my response will be. I think this: I think it doesn't take a genius to do the math and see what this operating team has put together from a cost structure. And if we have any success, and Tim brings to us, it becomes a supercharger, if you will, on the sales side. You know, Tom, it's easy for you to do the numbers and get to a number that could be below 60. Now, am I telling you we're gonna do that? No. Am I changing the guidance formally? No.

But at the same time, if somebody says, "Is there a chance that if it hits on all cylinders, could you get below 60?" Sure. I mean, I'm not trying to kid anybody. Y'all can do the math. That's in the cards. Now, once again, it's just a timing issue, and that issue then becomes sensitive with the conversion towards the growth. I think everybody buys into the cost side. I think there's a little reluctance that we can have the growth. So we're gonna show you there. But yeah, I mean, I think that we can certainly see 60, and the issue is, you know, is more timing than it is. It's not if, it's when.

Speaker 19

Okay. Yeah, I appreciate that. As the second question, when I look at your intermodal volume growth in first quarter, in domestic intermodal, in particular, you're up about 6%. That is a deceleration versus the 15.5% volume growth you saw in domestic last year. And, you know, I think on a multiyear basis, domestic intermodal is certainly an area that you're focused on growth. Do you think that we would expect that to accelerate this year versus the 6%? And how much of a factor is your competitor's response? Because, you know, my impression is that they are gonna try to hold on pretty hard to both domestic and international business.

You know, I guess I don't know how much growth you can see if it's only from the trucking market and if it's tough to win rail share. Thank you.

Speaker 11

Let me, let me take that one, Hunter, if you can. On the domestic side, you've got some diluted performance there because of the strike. So that 6% adjusted is not 6%. We, we plan to finish second quarter better than actually on target, which represents about low double-digit increase versus last year as far as growth for domestic. So we won't get to 15%. That's a quantum leap that we made from the previous year, but certainly stronger than 6%. As far as what my competitor does, I really can't be too concerned with it. I can tell you that I know their product, and if product matters, and if service matters, they don't have a product that can compete with this railway domestically. So that's all I'll say for that.

We continue to provide excellent service in the marketplace. We continue to have customers knocking on our door. That train is sold out, gives me an opportunity to improve margins, increase the yield on it, get to a point where I'll decide if we're gonna add a second train or not, and continue to grow that domestic offering and domestic service. On the international side, to Hunter's point, when those contracts come into play in the future years, which are included in that multiyear plan, it's our strategy, it's our objective to be at the place we, we are at now. Two years ago, I didn't enjoy the same cost structure. I couldn't compete if I chose to compete in the market, make a buck. I can today.

When I go to the table, I go to the table with a different set of cards to play than I did two years ago. I can still make a buck doing this. I'm not doing it for practice, and we're gonna be in position if it makes the right financial sense for this company to play in those markets.

Speaker 19

Okay, that's great. Thank you for the time.

Speaker 15

Your next question comes from Walter Spracklin with RBC Capital Markets. Please go ahead.

Speaker 7

Thanks very much. This is Dan MacDonald listening for Walter. I just have a quick accounting sort of question for you. In your most recent disclosures, you pointed to an FX sensitivity of about $0.07 EPS for 1 cent strengthening the US dollar. Does that relationship still hold today, or has that changed?

Speaker 11

That still holds today.

Speaker 7

Okay, great. And just as a follow-up, I just wanted to confirm, are you still looking for 140,000 crude carloads today for the full year?

Speaker 11

Listen, that's our number. We haven't changed it. It's too soon to do anything different. I mean, there could be headwinds there, there could be risk there, there could be upside there. I don't know. You guys probably know about as much as I do, which is none of us really know. So at our point, it's too premature to change anything. We took a conservative approach when we set that number, so we're holding to it for now.

Speaker 7

Great. Thanks very much.

Speaker 11

Hey, give Walter our congratulations as well, please.

Speaker 7

Thank you. I will.

Speaker 15

Your next question comes from Chris Wetherbee with Citi. Please go ahead.

Speaker 19

Good morning, guys. Hunter, just wanted to go back, have to clarify the comment. I guess I just want to make sure I understood your comment in regards to the M&A question. No interest in doing anything at this point, is that a fair way to characterize your view?

Speaker 11

Yes.

Speaker 21

... Well, thank you for that. Then switching gears on to the pricing side, you know, Keith, maybe you can talk a little bit about sort of the pace of pricing. It seems like it's stepping up kind of across the rail industry as we look in early 2015. Can we see better numbers as the year progresses, or should we, you know, I don't want to get too far ahead of myself, but is it fair to assume that you might get a little bit of a tighter market as the year progresses? Or, you know, somewhere in that sort of 4% range, probably the right thing to think about.

Speaker 11

You know what? I'd just stay with that, that 4%. You know, 3.5%-4%, maybe a little bit upside. You know, maybe it's 3.8, maybe it's 4.2, but I wouldn't model anything different than that. I think that's a strong, reliable number to count on.

Speaker 21

Okay, perfect. Thanks for the time, guys. Appreciate it.

Speaker 11

Thanks, Chris.

Speaker 15

Your next question comes from Steve Hansen with Raymond James. Please go ahead.

Speaker 17

Oh, yeah. Good morning, guys. Congratulations on a great quarter. Just a quick question on the compensation benefits. The expense came in actually quite favorable versus what we're looking for here. Just trying to think about how that rolls through the balance of the year, recognizing there's a lot of moving parts related to pension headwinds and others.

Speaker 1

Yeah, I can maybe comment on that. Just on stock-based comp, currently, if every $1 change in share price means a $1 million change in expense. We're modeling on the pension expense side, it's about a $24 million negative each quarter.

Speaker 11

Yeah.

Speaker 1

Each quarter. So that's, that's obviously a headwind versus last year, but that's fixed in for the year, and we, we assess that and, and make a change on that, in January of each year. So those would be the two, the two key components, and you can, you can see how that will perform over the year.

Speaker 17

Okay, great. Then just to follow up to Keith's comments earlier on the velocity hitting new records. You know, Keith, how do you weigh that increased velocity relative to some of the volume headwinds that might be showing up in some of the bulk categories and your ability to deliver on OR improvements?

Speaker 11

When you say weigh relative to reduction in demand or increase in demand, which commodity?

Speaker 17

Yeah, well, some of the bulks that we've got, some of your key bulk categories are gonna come under pressure on a year-over-year basis, grain in particular, and it sounds like Teck now has taken some of their guidance down on a coal basis. So I'm just trying to offset that, perhaps some of the volume headwinds relative to the speed advantages you're getting and how that translates into the OR.

Speaker 11

Here's the bottom line: It's, you know, obviously the OR is a combination of our cost and our revenue. So let me speak specifically to the improvement on the cost side and the service side. Be it Teck, and listen, we've exceeded our expectations with Teck in the first quarter. I know they've adjusted, I read this morning, a little bit in the second quarter, but we see that as a wash. So there's nothing material there. I'm not concerned about Teck. It's my objective to continue to put them in a position so they can succeed in their marketplace with a low cost and a great service, which we're doing. We've never moved coal sets any faster. We're moving fewer sets. We're consuming fewer locomotives, fewer crews. Our margins are better. Their margins are better.

Their reliability is better, and we're not stopped. Even in the face of reduced coal demand, we have opportunities on the operational improvement side, on the productivity side, where we're working with Teck to convert three more of their mines to auto load out, as opposed to previous history, where we've had train crews sitting on those trains, pacing them through their facility, which again, impedes sometimes reliability, and it drives additional cost. So take that out, turn the assets faster, you know, be it sulfur and coal, be it sulfur and grain, that gives me assets to turn in a more fluid environment at a lower cost, and I get asset benefit turns on every other product I'm moving. We've got strength in potash. It's moving in the same corridor.

That tells me with strength in potash, that potash I'm moving even at last year's rates with an improved rate, if I can do it faster and turn the assets, I've got it at a lower cost, I've got a better margin. So it's gonna help us on the Operating Ratio side. So again, a lot of puts and takes, but by and large, I don't see anything that's causing me concern. We're not changing our guidance. We've got a strong franchise that's getting stronger every day, and I think this is a great story.

Speaker 17

Very helpful. Thank you.

Speaker 15

Your next question comes from Turran Quettawala with Scotiabank. Please go ahead.

Speaker 21

Yes. Good morning, great quarter here. I guess my first question is on just the yield on the domestic intermodal side. That was a little bit weaker, I guess, than just the average. Keith, can you comment on that? What are renewals coming in at? And maybe a sense of how much mix is impacting that?

Speaker 11

Yeah, the weakness you see, it's directly related to fuel surcharge. As far as renewals, we're taking price increase. Again, I reiterate the point, we're providing service, we're not doing this for practice. So I feel pretty solid about the international side.

Speaker 21

Got it.

Speaker 11

The mix, there's a little bit of mix impact that you see in the % per RTM, because we're actually eliminating empty miles on the back haul. We're taking equipment that otherwise we'd be shipping east for the head haul move empty and putting product in it, which obviously may be at a lower RTM versus the head haul business. So there is some mix impact.

Speaker 21

Understood. Thank you very much. I guess maybe overall, could you give us a little bit of sense on what the RTM outlook is for Q2 here? Obviously, a little bit weaker here in the initial part of the quarter, but obviously, it's early days, so just a sense there would be appreciated. Thank you.

Speaker 11

Right now, what we see is sort of flattish. I would assume same for the balance of the quarter.

Speaker 21

Great. Thank you very much.

Speaker 15

Your next question comes from Bill Greene with Morgan Stanley. Please go ahead.

Speaker 17

Hi there. Good morning. Hunter, at the Investor Day, we talked a bit.

Speaker 3

... potential for a labor deal. My guess is, given the experience of the last few months, that that's kind of off the table. Is that sort of fair? Can you sort of comment on where we are in that process at all?

Speaker 7

Well, I think it's fair to assume that in Canada. I think it's still an open book in the U.S., but the leverage is much larger in Canada. But, having said that, you know, as Keith mentioned earlier, there was a neutral appointee yesterday, who I don't know, but I know he has a wonderful reputation, and had some rulings back in 1995 that were pretty significant in changing the landscape of labor agreements. And, so to some degree, I'm not sure what he might have in mind. Now, I think you folks understand our story conceptually. I think it's clear where labor's position is, and so, you know, it's certainly off the table at some bilateral deal.

But what is gonna be handed down in arbitration, you know, is kind of a wild card, and I think it's better that we don't speculate on that.

Speaker 3

Fair enough. All right, thank you. Let me ask one question on the guide. You talked a little bit on the OR side. I've gotten a few questions about the buyback. Seems like that should be additive. We didn't really change the guide, but it's kind of open-ended at the EPS level. Can you talk about whether there's sort of a deterioration in core here at all, in terms of what you're thinking about for the back half or something, and so the added buyback sort of keeps you even? Or could that just mean sort of more upside from the buyback?

Speaker 7

I think it's probably more upside, potentially. But given my earlier comments, there's a couple of question marks out there. But yes, I mean, it's fair to make an assumption that if everything else being equal, the buyback will be additive.

Speaker 3

Okay, excellent. I appreciate the time. Thank you.

Speaker 7

Thanks, Phil.

Speaker 15

The next question comes from Allison Landry with Credit Suisse. Please go ahead.

Speaker 0

Thanks for taking my question. I was wondering if you could comment on any developments that you've seen with the recent JV with Dream Unlimited in terms of the surplus land?

Speaker 11

It's Mark Wallace speaking. So we've been really active with our partners at Dream. As you know, these are development properties that we're looking at. So you know, it does take time to start that and to start developing these properties. We are fast-tracking a few of them in Toronto, so hopefully by the back half of this year into early next year, we'll start to see some progress there. We've you know, we handed over a large portfolio of properties to our partners. We've had you know, many discussions with them on the properties. There are. We have identified you know, 5-7 or so that are probably not right for development.

So as I said at the Investor Day, last year, you know, we should expect to see some land sales, you know, going forward, probably by the back half of this year, early into next year. So, so that's good news on that front.

Speaker 0

Okay, and then just, maybe switching gears. In terms of the, the 22% increase in, in velocity, is there a way to sort of disaggregate, how much of the improvement came from easier weather comps versus efficiency gains? And, and specifically, are you seeing a benefit from moving, excuse me, less resource-intensive, crude by rail and, and proppant?

Speaker 11

Well, listen, I'm not gonna kid myself. Some of it, obviously, you know, operating the kind of winter we operated in last year helped. Chicago has worked much better than it did last year. We've seen a significant pickup in our train speed in the U.S. properties, as well as progress in Eastern Canada and Western Canada. So that's some of it, but that's not all of it. It's hard for me to quantify. I'd be guessing, but I'll just give you a compare. You know, second quarter was more normalized versus the harsh, harsh first quarter. And although there's some winter impact in there, I mean, quarter to date, we're up 30% versus last year. So it's meaningful. And it's not just, it's not just weather. It's investments in sidings. Like I said, last year, we invested in about 11 extended sidings.

We've got train length up, we've got train weight up, we've got crew starts down, we've got RTM growth. That's a powerful, powerful model to deliver superior service at a very low incremental cost. So that's exactly what's transpiring on this network, and we'll continue to do that. This year, you know, as I said, we've got a total of about 30 that will come online, and we're looking at the same thing for 2016 and 2017. So this story still has a tremendous amount of runway left when it comes to if I just wanna focus on productivity, sheer raw productivity, turning assets.

Speaker 0

Okay, I-

Speaker 7

And I think to add to that, I think you can get maybe a better flavor of that when you look at what potentially the second quarter achievements would be. And keep in mind, people kind of overlook this, the trains are moving a lot faster, and they're bigger, heavier trains. So this is the leverage here is very powerful, and I've done a little work on this in the past, and I would tell you that about 75%-80% of this improvement is core, it's just better railroading, and those other things might account for 20%, if you will.

Speaker 11

Absolutely.

Speaker 0

Okay, excellent. That was very helpful. Thank you.

Speaker 7

Sure.

Speaker 15

Your next question comes from Benoit Poirier with Desjardins. Please go ahead.

Speaker 2

Congratulations for the good quarter. If we look at the revenue growth this year, still maintaining 7%-8%, is it a fair statement that there's a few tweak in the sense that probably the yield will be a little bit better than expected and maybe a few downward revision in terms of RTM? Is it a fair assessment?

Speaker 11

You know what? It's too soon to tell, Benoit. I mean, yeah, there's a possibility. You know, I'm looking on the price side, that 4% RTM growth, 3.5-4%, you know, ±. That gets me to that 7-8% number, which is I'm pretty consistent with. Maybe we get a little pickup on exchange as well. I mean, that's modeled at an 83-cent dollar, so maybe we get a little tailwind second half that pushes us beyond that, but that's pretty much where my head's at with the numbers.

Speaker 2

Okay. Looking at the RTM in Q2, obviously, it's coming down from a tough compare, where we talk about the grain. Is it the most key reason why you've—you would be able to increase speed? And also, can we assume that there will be further ad comp reduction, given, let's say, the softer volume potentially taking place?

Speaker 11

No, I would not say that the reduction in grain is material to impact train speed at all. To Hunter's point, it's about executing. You know, with the board has given us the resources, this cash generation has given us the resources to deploy, to strengthen the robustness of this franchise, but at the end of the day, you got to convert what you've got. You got to use the tools you're given, and that's what this team is learning how to do better and better, day in and day out. And that goes from the conductors and engineers operating these trains all the way through the leadership team. So we're just becoming better equipped with the tools and better railroaders. Obviously, we get a little bit of velocity opportunity with reduced business, but it's not material at all.

It's just us railroading better, converting the assets that we're investing in.

Speaker 2

Okay. Thanks very much for the time.

Speaker 7

Benoit, let me add to that. You know, the question I'm surprised that hasn't been asked, and it was not asked, is this: You know, how are you gaining revenue tons and getting more growth, and at the same time lowering the headcount when other people are raising the headcount, and now they're concerned about how much they've raised them? This is just basic fundamental raw productivity. Just doing a better job with what you got. It's not any double reverses or four corners. It's just basics.

Speaker 2

Okay, thanks.

Speaker 15

Your next question comes from Ken Hoexter with Bank of America. Please go ahead.

Speaker 12

Good morning. Hunter, if I can just expound on that, it's amazing to see you continue to expand, Keith, it on the lead over your peers in the industry. But Hunter, you threw out before, you're kind of dismissive of M&A at this point in the industry, but given a lot of management changes, the divergence in performance has only gotten worse. So I just want to give you a chance to maybe expand your thoughts on that a little bit, given how much you were focused on that a couple months ago, at least the opportunity and what you could do. Seems like the ability to achieve has only widened, given their poor performance with exactly what you're saying, hiring more and more and adding so many more assets.

Speaker 7

Well, I appreciate the opportunity, but I don't need it. My only answer is in response to this: We just don't have any interest right now. We've got a strong franchise here, things are rolling, and that's where we're going to focus our time and attention.

Speaker 12

Okay, and then your thoughts on the economic, you know, given Keith your comments on the volume growth before, is that in light of the economic slowing, perhaps in some areas, and then obviously with the tougher comps you're facing on the grain side? Or, you know, maybe you can just talk about what your economic view is built into that growth outlook.

Speaker 11

That's... I mean, it's obviously considering some headwinds on the crude side. There's some risk there, to Hunter's point. You know, I'm encouraged that I see the arbitrages get more favorable. Some of that crude is getting in the money, but to Hunter's point, right now it's just rhetoric, so I'm not gonna build the church for Easter Sunday. We haven't in the past, we're not going to now. I'm seeing some positive signs on our merchandise. Forest Products moving stronger. We've got potash that's moving stronger. Canpotex has settled with China. That sort of sets the bar there, so we expect that to continue to have strength. That gives us some upside. We've got our domestic partner on the potash side, Mosaic, which is the largest domestic potash producer in North America that we're partnered strongly with.

We moved record amount of their product in the first quarter. That's not just a revenue story, that's a great operating story as well. We've partnered with Mosaic and taken our approach to whiteboarding and developing operational efficiencies and turning assets inside, internal to these facilities.

We've gone, Guido has led these, our Senior Vice President in the Western Region, literally sat down with the leadership teams at Mosaic and their facilities, two of the three large producing potash mines, to effectively drive out a significant and meaningful amount of car supply, car dwell days, which allows us, of course, to move more potash, fewer assets, less costs. The story goes on and on and on, and at the same time, in a material way, lowers Mosaic's cost, improves their margins, may give them an opportunity to shift higher cost productivity from a U.S. facility to their expanding capacity, lower cost, more reliable service Canadian facility. Those are all great, powerful levers that are making this success story work for us. It gives us confidence to maintain that view as we look at the revenue opportunity for 2015.

Speaker 7

Steve, let me tag on there. Again, I think, with due respect, some look at this wrong. Let me just make some observations about Teck. If you go back when we went through this management change, we were running effectively the same amount of coal with 28 sets, and today, Keith and team are doing it with 18 or 19 sets. That is powerful on the cost side. And as a result, the margins and the net net is a whole lot more powerful, and people were looking at this initially. Well, you got a 10-year contract, you can't raise rates. What are you gonna do? That's where the cost leverage comes in. Now, you know, there was announcements this morning, and people were nervous. "Oh, God, Teck just made an announcement." Well, we can adjust accordingly.

We've been working with the tech people very closely. There hadn't been any increase in price, but there's been huge increase in margins, and that's the power of the cost containment.

Speaker 11

Reliability. Let me speak to that point. I, I don't want to beat a dead horse here, but on the reliability side, if you're sitting in Teck's shoes and get down to the mud, so to speak, when we got 28 sets out there, and we're trying to man those trains, we're trying to provide locomotives, we're trying to weave those trains in and out, 28 of them, in a busy corridor going to the West Coast to export that coal, that impedes Teck's ability to provide their suppliers with the product they've sold, to provide a reliable service, to make sure they maintain their presence and their power in the marketplace. So while we benefit from a more fluid railroad on the margin side, they've got a reliable supply chain, a reliable source of coal in the world markets they can compete in at a low cost.

So yes, there's some headwinds, but it's powerful in the headwinds, and it's extremely powerful once they become tailwinds and the demand picks back up.

Speaker 12

Well, I truly appreciate that additional insight and add-on. I'm just—I'm still baffled by the answer to the first question, given that you were the ones that broached the subject before, but I'll leave it at that. I get the answer. But thanks for the time, and I appreciate it, and great job on the quarter.

Speaker 15

Your next question comes from Scott Group with Wolfe Research. Please go ahead.

Speaker 16

Yeah. Hey, thanks, morning. So, you know, I, I do want to try and go back to the M&A question, Hunter, 'cause it's rare we get short answers from you. And I just want to try and understand, you know, what has changed, 'cause it seems like a pretty dramatic change in your thing, not just from a few months ago, but for years you've talked about the belief in M&A of rails and that there would be more big deals coming. Do you feel comfortable giving us any more thoughts in terms of why your view has changed? And if that's a permanent change or a temporary change.

Speaker 7

You want a long, no interest speech? I mean, look, there's a lot of other things that come into play here. You just don't do merger activities regardless of what the circumstances are. You know, sometimes the stars have to align. There's a lot of things that have to work to make these happen, to make them accretive, to make them smart for your shareholders, and those things aren't happening. Y'all saw what happened before, and so if you want me to tell you I've got interest when I don't, I don't have any interest in them. Doesn't work.

Speaker 16

What doesn't work? I guess is because it would've worked. What's changed, why it doesn't work anymore, if I can?

Speaker 7

Well, I think that's maybe inappropriate for me to comment on.

Speaker 16

Okay. Fair enough.

Speaker 7

You know-

Speaker 16

And then, yep.

Speaker 7

Then I'm starting to do your job, critiquing what another organization is doing, and I don't think that's not my job.

Speaker 16

Okay, that's, that's fair. And then I wanna just follow up, though, about Tom's question about the OR. So if we look at a first quarter, typically, the full year can be, I don't know, 500-700 basis points better. So it seems like we're kind of well better on a run rate, much better than that 60 OR for the year. What are some of the things that we might be missing, why you don't have, like, the clear visibility in terms of the timing for this year?

Speaker 7

Well, you know, I think it is what it is. You know, I think that there were some moving parts the first quarter, but, I mean, as we look down to the basics, you know, we know what it takes to achieve this, and we're comfortable with the run rate. Now, you know, stock-based comp is a big swing, for an example. When we try to start trying to project, I don't know where the market's gonna be at the end of next quarter, and we have to mark-to-market in some of those. But, I mean, the message is this, I think, is this: This is a strong operating, powerful franchise. It's the leader in cost control, it's the leader in operating metrics, and it will continue to be, and that's good.

We will be at, we're gonna take that and leverage that further into growth strength with Tim and his team, and you'll continue to see the kind of results that you've seen in the past and even better.

Speaker 11

Okay. Thank you, guys.

Speaker 7

Somebody saying they don't have any interest. I, I was just a little hearing interrupted there.

Speaker 15

Your next question comes from Jason Seidl with Cowen and Company. Please go ahead.

Speaker 9

Hunter, I promise not to ask you why you have no interest here. You made an interesting comment, at least in my mind, about sort of the dynamics between volume and pricing going forward. Clearly, you've gotten your network to be much lower cost. I was wondering if you can maybe give us some more meat on the bone and talk about the areas in the network that could potentially, you know, favor CP for going after more volume. Is it everywhere? Is it more bulk? Is it more truck competitive business?

Speaker 7

Yeah, I think all those you named, but I think maybe the next larger breakthrough is selling to capacity. Although we have increased, and Keith and company have done a hell of a job in increasing train size and their capacity management, I refer to it as, there's still a lot of opportunity to grow this business on the merchandise side of it, which there's huge leverage. I mean, you've heard the story, those last 10 cars on the train, pretty low cost, okay? You can be pretty aggressive, which creates more growth. So as we establish more of our brand, our core, our reputation, that wasn't the best in the world, as a first-class player here, with first-class service that the customer can depend on, and we can start...

Look at a quarter, and let's just say, theoretically, that quarter, the trains have a 150-car capacity. Well-

Speaker 9

Mm-hmm.

Speaker 7

At 100 cars a train, you're still making money, so you don't want to exit it. But at the same time, if you fill the plane up or the train, and we're not gonna get to 150, we get to 135 or 140, the growth, it is huge. It's like a slot machine in Vegas, standing below it, and you hit the jackpot. It just comes rolling out because of the leverage. And if you've got that kind of leverage with your margins, you can be more aggressive in the marketplace in trying to fill those slots up. So that's kind of, you know, I think that Keith would tell you that the train speed's not over, the train size is not over.

A lot of the basic fundamentals are not over, but that's one that when we convert, that's when this $10 billion hurdle is not gonna seem so high.

Speaker 11

Yeah, and let me add some color to that. More specifically, we're starting to see some encouraging trends there. We've actually, the sell to capacity, the information that we're giving Tim and his team to convert, we started this in March, so it's in its infancy stages. But 10 specific lanes that we've targeted where we have capacity to sell, if I look at those 10 specific lanes, our merchandise trains, train length is up about 10%, versus a lower single digit number on the balance of the network. So that tells you that it's starting to gain some traction. Now, again, it's in its infancy stages. This is gonna have to grow into what we think it will become eventually, but it's very encouraging from the start.

Speaker 9

Sort of tagging on to that, you know, you just opened with 10 lanes, you know, assuming this continues to go well, how, how, how quickly is the rollout gonna be? Are we gonna see, you know, another 10 by the next quarter, or is it gonna be up to 100 by the end of the year?

Speaker 11

I don't know if it's gonna be 100 by the end of the year, but this will be progressive over the next three quarters.

Speaker 9

Progressive.

Speaker 11

We're gonna get ourselves, we're gonna be careful not to cannibalize any business. We're gonna make sure that we're doing what's smart, making the right business decision. We're educating our, our sales team. We're changing their focus. I mean, this is a sales team that they weren't as diversified as they need to be. They didn't spend a lot of time with the customers. It was more time behind the computer. So developing relationships, face time, establishing accountability, that's a huge word in this company. You got to have the constructive tension on accountability, be it operations, be it marketing, be it the finance function, be it any HQ function, you got to add value day in and day out. You got to skate hard every time you come on the ice, you got to have measures. That's part of Tim's challenge.

Not measure quarter to quarter, measure that sales activity week to week to make sure his skaters are out there skating hard, developing those relationships, getting face time with customers, and selling our product. Which that is just one of the many bullets that we got in this gun, so to speak, to succeed. So again, you'll see it as we roll this thing out. It will gain momentum. It's going to help us be accretive and help us deliver and gives us confidence in that $10 billion number, as well as short-term, our 2015 numbers.

Speaker 9

Well, I appreciate the time, I appreciate the colors, and I really appreciate the hockey analogies. Gentlemen, thank you.

Speaker 11

I'll appreciate it even more if those Blackhawks go all the way.

Speaker 15

Your next question comes from Bascome Majors with Susquehanna. Please go ahead.

Speaker 6

Yeah, can we get an update on the CFO search timeline and what experience and style you're looking for as you fill that role?

Speaker 7

... I can't quite hear the question, what?

Speaker 6

I'm sorry. Can we get an update on the CFO search timeline and what experience and style you're looking for in filling that position there?

Speaker 7

Well, look, I mean, I don't want to go through what all we're looking for. I mean, I think you can appreciate that. I—what we're focusing on, to my comments earlier with Bart, is that we have someone selected, the right individual, at the right time here with the fit and to be in place, prior to Bart walking out the door, where there'll be a smooth transition. So that's really what we're focusing on, and I feel pretty confident we'll be able to do that.

Speaker 6

All right. And you've made so much progress since mid-2012, and, you know, today's results clearly show that the railroad continues to run extremely well here in 2015. You know, once you and Keith get Tim and your new CFO up to speed, and things kind of reach a steady state in the C-suite again, I mean, is there a scenario where, where you, Hunter, would hand over the reins before the contract ends in mid-2017?

Speaker 7

I've given that a lot of thought. I mean, could it be? Look, the plan is right now that I have an obligation through the middle of 2017. I think things are going well. I think that we're building a pretty strong team here. I think Keith and I are a pretty good partnership, and I think there's still a lot to do. Now, that's my view. If others viewed it differently and said that, you know, this could be done better than one or something, I guess something could happen, but I kind of doubt it. I mean, it's hard to. And I say this hopefully with a little bit of some degree of humility, it's hard to argue with this track record here.

So this, this thing has been working pretty good, and I wouldn't want to mess with a winning combination here.

Speaker 1

I couldn't miss the hockey analogy, Hunter. You know what? If you, if you get to skate with the Wayne Gretzky, the greatest goal scorer of all time on the ice, you don't want him to leave the ice early. I hope that Hunter does stay through 2017 as planned now, and if he stays longer, that's great as well, too.

Speaker 6

All right. Well, thank you for the time.

Speaker 15

Your next question comes from Matt Troy with Nomura. Please go ahead.

Speaker 13

Just wanted to clarify, we're running long here. When people start talking about price, and Hunter, to your comments earlier about, you know, the margins getting to a point where you can start using your low cost and your service to go after business, and then at times, price might be an appropriate level to pull. And then, you know, some of Keith's comments just now about, you know, selling to capacity, you know, there's perceptual danger to a marginal pricing strategy. You've been at this a long time. No one thinks you're going to do anything crazy or nuts.

Maybe if you could just clarify and just put a finer period on the end of the sentence that you're talking about opportunistically going after business where it makes sense at a margin and a return threshold that is consistent with that which you've achieved, so the Chicken Littles of the world on this call don't need to go out and write about the potential for pricing escalation. Thanks.

Speaker 7

Yeah, look, we, we've always said this. You know, I, I'm a believer this, the market gives you the price. You decide whether you want to be a player or not. What I'm saying is, we have the opportunity, because we have such large margins now, to effectively go after certain business, to Keith's point earlier, that we might not have gone after. Now, look, we're not going to go out there and have some giveaway and give green stamps or coupons, for somebody to bring us a load of freight. That's not the story. But if there's a certain lane that we can be competitive in, that brings a powerful margin on because of our cost structure, and so there's an opportunity for us to be more aggressive, appropriately on the price side, expect us to do that. This is a bottom line deal, okay?

In my view. And I mean, tech is a great example. You know, we hadn't made any increases with tech, and people said, "Gosh, you know, you missed whole opportunities." The margins are a whole lot better than they were three years ago. Powerful. And it's all about cost. There's two sides to the component, and so, you know, and that's why I hesitate, because some are misunderstanding the strategy.

Speaker 13

Which is why I asked the question. Thank you for the time, and I'm pulling for the Rangers. Sorry, Keith.

Speaker 7

You're a great straight man.

Speaker 15

Your next question comes from Cherilyn Radbourne with TD Securities. Please go ahead.

Speaker 6

Good morning. We are running long, so I'm just going to ask one, and I guess it's a bit of an accounting question. Your EPS was up a very strong 33% year-over-year on an as-reported basis. So I wonder if you could just explain the adjustment that you're making to calculate adjusted EPS, what that represents, and, and why you think it's necessary to properly understand the numbers.

Speaker 1

Yeah. Hi, it's Bart here. The main item there is simply foreign exchange on our US dollar-denominated debt. That debt is core. You know, our focus when we add debt to our book for our share repurchases is to get the lowest cost debt that there is, which has been US dollar-denominated. Each quarter, we simply have to translate that back into Canadian dollars, but that debt will remain part of our balance sheet going forward. So it's not something anybody needs to be concerned about. So it's just simply a translation item, and it's non-core, so it needs to be adjusted out to understand the performance of the business.

Speaker 6

Okay. Thank you. That's all for me.

Speaker 1

Okay, thanks.

Speaker 15

Your next question comes from Brian Ossenbeck with J.P. Morgan. Please go ahead.

Speaker 5

All right. Thank you. Good afternoon. Just had a real quick question on the regulatory front. And you had mentioned crude and cropping uncertainty through the rest of the year. I just wanted to make sure that that didn't, that was more market specific, didn't have anything really related to, you know, regulations like tank cars and the Canada Transportation Act. And if you could just give us a quick update on those two as they progress, if there's anything in particular that, you know, you're concerned about at this point in time. Thanks.

Speaker 11

Market related, not directly related to the government's action. Obviously concerned that the governments on both sides, be it Canada, be it the U.S., are number one, are aligned as they develop this final tank car standard and any other implications to moving crude, I think improve safety. So yes, concerned, we stay very close to the file. Certainly have not been bashful about voicing our opinion on the areas that we believe make a significant improvement to the safety of the operation of these trains. But at the same time, we continue to be seized on doing what we can do within our own control to continue to operate those trains safely to avoid incidents or well.

So we're doing some very progressive things to help strengthen our case, to make us bode well, such as, you know, we've spent a lot of time, effort, energy, and money patrolling ahead of crew trains. During the first quarter, we transition from the winter freeze to the spring thaw. Track conditions change. We want to be out there ahead of that, ahead of those trains, finding them, potential broken rail, track condition that may impede safe movement of the train. So it's something that we are concerned with. Long answer to your question, but we're focused on it. We're cognizant of it. We're gonna do our level best to make sure that we don't create any kind of case for change and continue to do what we do well, moving our products safely for our customers.

Speaker 5

Okay, thanks. And then, just one quick follow-up on ECP brakes. Is that something that you see a favorable cost benefit to installing those across the system? Or is that something you think is gonna have to be mandated from a regulatory aspect?

Speaker 11

Yeah, absolutely no cost benefit. Not necessary, not needed. To me, money can be well spent to improve safety in other areas, not ECP brakes. The Canadian design to this point does not have ECP brakes.

Speaker 5

Mm-hmm.

Speaker 11

Don't know yet about the final plans for the U.S. side. Certainly, to have continuity and to have interoperability, we need the same standards. So that's back to the point of alignment.

Speaker 5

Right.

Speaker 11

But from a cost-benefit standpoint, I'd never be an advocate, always an opponent of ECP brakes, especially considering the marginal, if any, safety benefit that are associated with it.

Speaker 5

Okay. So find out in a couple of weeks. Thanks for your time.

Speaker 1

Just before we end there, it's Bart here. I just wanna mention that, after I made my response on the foreign exchange question, somebody externally made an extremely inappropriate comment. I want to assure you it was no one on this end of the call. So we're not quite sure where that came from, but some of you may have heard it. Thank you.

Speaker 15

Your next question comes from Jeffrey Kauffman with Buckingham Research Group. Please go ahead.

Speaker 10

Thank you very much. Thanks, and congratulations, guys. I wanna ask a question on basic, fundamental raw productivity, I guess, as Hunter would say. Keith, you mentioned the 30 sidings this year and perhaps another 30 to 60 sidings in the years that follow. I guess question is twofold. Number 1, where do you believe you'll be able to get some of the productivity measures after these 30 sidings this year? And then where do you think we could be, say, 2, 3 years from now? And I guess secondarily, aside from the sidings, what other capital investments are being made to improve efficiency and productivity?

Speaker 11

Well, I think, you know, we're not starting from zero anymore, so those kind of quantum leaps that we've enjoyed the past two years are not easily duplicated. I'm not going to suggest that we'll be able to, but what I will suggest, and what I know from experience, the plan for that additional capacity to drive those synergies is in step line with where we see the revenue growth, and it's in step line in those corridors where we're gonna experience the revenue growth. So the end game is to not just protect our existing operating efficiencies, but for stepped improvement.

So you'll see us transition, you know, instead of 8, 10, 14% kind of improvements, once this gets more to a steady state, 2%-3%, 4%, something more modest, but at the same time, raising the bar on a continual basis. And we'll do it right now at sidings. To your point about other investments, we're investing in certain yards. We've taken some hump facilities, obviously, out, taken a lot of cost out, but we haven't spent a lot of money repurposing and redesigning all of those hump facilities that we now do flat switching in. So that's just the one, for instance, where we're spending some money to optimize capacity, to minimize cost and the handling... which are those high-cost centers in our yard. St.

Paul is another location that we've looked at trying to invest in, to take a hump facility that was antiquated, that was built for short trains effectively, and create it to be a very efficient, low cost, productive facility that can handle longer trains. So there are those singles and doubles all over this railway that we still have not converted yet that are gonna help us drive those continual improvements, although not quantum, but consistent and respectful and meaningful on those OR productivity numbers.

Speaker 3

All right, guys, thanks so much.

Speaker 7

Thanks, Jeff.

Speaker 15

Your next question comes from Steven Paget with FirstEnergy Capital. Please go ahead.

Speaker 18

Thank you. Like, several people have said, it's well into, well into the second hour, so I'll just ask one question. My question is, what sort of merchandise shippers tack 10, 20, 30 cars on a train? Are these shippers converting from truckload, seeing a good price and adding and deciding to convert to rail? Or are these merchandise trains that are then splitting and being tacked onto existing trains?

Speaker 11

You know, it could be share pickup in markets that we serve, where we haven't enjoyed the service to be able to convert some of that product, and it also is truck conversion. Other transportation standpoint that some of our existing customers, again, tied to reliable service, have not trusted us with that particular freight. Because there is a compelling cost advantage, obviously, going from truck to rail. So it's a little bit of both, Steve.

Speaker 18

Thank you, Keith.

Speaker 11

Thank you.

Speaker 15

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

Speaker 7

Well, thank you very much for joining us. We appreciate your interest, and I have no interest further. We'll see you next earnings call with some more exciting announcements.

Speaker 15

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