Canadian Pacific Kansas City - Q1 2013

Transcript

Operator (participant)

Good morning. My name is Jonathan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Canadian Pacific's first quarter 2013 conference call. 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 * then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Velani, you may begin your conference.

Nadeem Velani (Head of Investor Relations)

Thank you, Jonathan. Good morning, and thanks for joining us. My name is Nadeem Velani, AVP Investor Relations at Canadian Pacific. I'm proud to have with me here today Hunter Harrison, our Chief Executive Officer, Keith Creel, President and Chief Operating Officer, Jane O'Hagan, Executive Vice President and Chief Marketing Officer, and Brian Grassby, our Senior Vice President and Chief Financial Officer. The slides accompanying today's call are available on our website at www.cpr.ca. I would like to remind you that this presentation contains forward-looking information. Actual results may differ materially. The risks, uncertainties, and other factors that could influence actual results are described on slide two in the press release and in the MD&A filed with Canadian and U.S. securities regulators. Please read carefully, as these assumptions could change throughout the year. All dollars quoted in the presentation are Canadian unless otherwise stated.

This presentation also contains non-GAAP measures outlined on slide three. The presentation will be followed by Q&A. In fairness and courtesy to all participants, we would appreciate if you limited your questions to two. It is now my pleasure to introduce our CEO, Mr. Hunter Harrison.

Hunter Harrison (CEO)

Thank you, Nadeem, and good morning to everyone. It's a beautiful sunshiny day in downtown Calgary, certainly in more ways than one. I trust you've read our press release, and I'm proud to be part of this team here reporting this morning record earnings for first quarter performance. That's something that was achieved in some tough operating conditions with the seasonality factor, and I think it gives some indication of the potential of this organization going forward. Let me just highlight a couple of points here before I turn it over to the people that are really going to take you through the quarter. First of all, we saw 430 basis points improvement in the OR and a 51% improvement in earnings year-over-year, which is pretty outstanding.

One thing of note, probably by far the most important thing that took place and happened the first quarter are some key personnel changes. The first one is the announcement and the appointment of Keith Creel as President and Chief Operating Officer, which answers a lot of questions that were out in the market that people were wondering about and succession plan. Keith is recognized as one of, if not the top, operating minds in North America. I've effectively worked most all of his career. I've been along with him. I've seen his progress, and he has hit the ground running here. He's already had significant impact on the operation, but the most encouraging thing is what he's got to bring. It's kind of basically, you haven't said anything yet. So welcome, Keith. Nice to have you.

I should also bring to your attention also that Nadeem, who introduced this morning, is a new addition about three weeks or so. Nadeem is our new Assistant Vice President of Investor Relations, and it's nice to have Nadeem along. So we've made some real significant personnel changes. Keith is brought on, and he'll probably talk about it, a new general manager in the East and new superintendent in Toronto. So the team is coming together pretty well. And I think what this does more significantly is, if you look back a year ago, a lot of you on this call said this couldn't happen, that we couldn't have this type of performance. We couldn't have it over this quick a time frame. And I think the most important thing it does is lays a solid foundation for what's to come in the future.

And so with that, let me turn it over to Keith, and then Brian and Jane will add some additional color, and then we'll have a Q&A.

Keith Creel (President and COO)

Okay. Thank you, Hunter. Well, let me start. I think it's only appropriate to publicly start my first call with CP. I'm thanking you, Hunter, thanking our board, and also the colleagues here at CP for giving me the opportunity to be part of this exciting transformational journey that we're on at CP. I'm approaching three months on the job, and I can tell those on the call as well as my colleagues here, I'm having a blast. I came here to CP knowing for certain the expectations are pretty high. The challenges are going to be many, but at the same time, what I didn't understand, what I didn't begin to imagine, is how well I'd be received by this team, by our team of proud railroaders, and that's both officers and craft alike. They're embracing change at this company, not resisting it, which is motivating and inspiring.

It's a team of proud railroaders that have taken to some success and their hunger for more. It's a team of railroaders that are energized. They're seized with the goal of becoming the best railroad in North America, both from a service and an operational efficiency standpoint. I'm seized to help lead, to help us enable that opportunity. With that said, in spite, like you said, Hunter, of a very challenging winter, it's only befitting that our team closed out a record-breaking first quarter operating performance at CP in our history. Let's spend a few moments. I'll provide some brief points on what contributed to that success. Again, there's no secret formulas here. There's no special plays, just a focus by our collective team on a key ingredient to railroad success that we call asset utilization.

It's the theory that you can move more freight with the right-sized fleet as opposed to the traditional "it takes more to move more" mindset, which is gaining traction within this company and with our customers by sweating our assets, keeping the pipeline fluid rather than clogged up with more cars and locomotives than it can actually sustain. This mindset and approach has allowed us to move record grain volumes in Vancouver in the first quarter, in fact, about 13% more this year versus last, with about 10% fewer cars, which is even more impressive when you think, again, about the mild operating conditions that we enjoyed last year versus what we've just experienced this year. It's good for our customers. It's good for the ports, and it's good for Canada's reputation as a reliable supply source worldwide for grain.

We experienced similar success on the coal side, moving 12% more export coal to the western coast than 2012 using our standardized 152-car coal sets, which we turned consistently mine to port. As I noted in the presentation, the focus on turning assets not only provided a vastly improved service to our customers but also allowed us to improve locomotive utilization in a meaningful way, as well as it drove car velocity numbers, among many others, to record levels. In spite of the challenges winter presents, we were able to drive year-over-year record-setting improvements in a majority of our key operating metrics, and we created momentum that we carried into a strong start to our second quarter. Let me shift my comments to the most important ingredient to our success here at CP, which is our people, our team of railroaders, craft, and officers, again, alike.

I'm focused on building a strong team not only to sustain but to accelerate this journey to become the best North American railroad in the industry. I've inherited a pretty talented committee team of railroaders. They're eager to learn. They're embracing changes, I said before. But at the same time, I'm building the bench strength as well by bringing on some new members to the CP team, which you had mentioned, the general manager of operations in Eastern Canada, Guido De Ciccio. We've got a new superintendent in Eastern Canada, Jason Ross, and also new general manager of our U.S. dispatching center in St. Paul as of a couple of weeks ago, and Mike Farrell. So looking ahead, Hunter, I'm excited about the progress we've made so far on the service and the operating front, but I'm even more energized knowing, to your point, that we're just getting started.

Many more opportunities to convert. In fact, our upcoming, as I've noted on the presentation, the Whiteboard session, which for those of you that don't know what I'm talking about, effectively, it's a roll your sleeves up marathon session where Hunter and I will go in with the operating team. We'll effectively schedule every car, every train across the network, two or three sessions to get this thing done. But once we get that done, we'll be able to take another step in improving both our service performance as well as controlling costs for our shareholders. So with that said, I'm sure you can sense my enthusiasm. I'll keep my comments brief, but let me publicly state in closing and reaffirm a commitment that I made to Jane about three months ago when I started this company.

It's my number one objective to produce a vastly improved service offering for both our existing and our future customers that she nor any member of her team has to ever apologize for in the future, one that's going to create value for our customers and for our franchise. Jane, this first quarter was a pretty significant step in that direction. Over to you to provide some color on how our team is converting it in the marketplace.

Jane O'Hagan (EVP and CMO)

Thank you, Keith. Again, we're very pleased to report the best Q1 revenue performance ever for CP and our seventh consecutive quarter of double-digit revenue growth in merchandise. I can tell you our team is in the market. We're visible. We're delivering on our growth plan, and we're benefiting from the strong operating performance by a team who managed winter well. And with that, I want to turn to our revenue results. We reported a solid revenue gain of 9% on currency-adjusted basis, where price, volume, and mix accounted for 8% of the gain, and fuel surcharge was 1%. Our RTM growth was 10%, and carload growth was flat, driven by significant increase in volume of long-haul crude oil traffic and potash exports. Just to let you know, we will begin reporting total RTMs weekly beginning in May.

Our average revenue per car was up 8%, and we deliver our price renewal target of 3%-4% and expect to deliver inflation-plus pricing through 2013. In grain, as Keith said, we had our biggest Vancouver export program ever. We moved more grain than last year with fewer assets, and we moved over 20% more than the previous 3- and 5-year crop averages. We also adjusted to a reduced Canadian Eastern Export program brought about by changes in the CWB, and we remained nimble to increase easternbound corn and U.S. soybean traffic. So with our improved strong service, improved asset utilization, and good crop carryout on our territory, we expect year-over-year Q2 volume increases in the double digits for our grain franchise. Again, it's too early to call the next crop year, but we'll keep you informed as we move along.

In terms of sulfur and fertilizers, the Canpotex export recovery mapped out much faster and stronger than we expected, but our team worked hard to ensure the supply chain geared up efficiently to handle traffic as it came on. The higher volumes of export potash moving in private cars kept average revenue per car gains at a moderate level and decreased overall cents per RTM. But as we look out at Q2, the ramp-up of Canpotex volume signals the potential for a strong year, but second-half upside remains uncertain with seasonal and market volatility. Our near-term focus is taking full advantage of strong rateable volumes throughout the balance of the first half. In coal, our revenue was up 9%, and units were up 4% from strong met coal supply chain management and overall performance.

As Keith said, all our export trains are operating at 152, allowing us to move the same volume with an 18% reduction in train starts. For the outlook, we modeled to Teck forecast, and we're watching global markets carefully for certain signs of volatility. PRB traffic continues to be opportunistic, and we're ready to capitalize should it continue. In Q2, Teck volume unit growth could be offset by softness in the U.S. thermal domestic and export traffic, resulting in total coal volumes being flat year-over-year. In intermodal, I'm pleased with the progress of our rebalancing and renewal as this continues, and our progress is consistent with our expectations. The Q1 results reflect revenue and unit impacts of international contracts we let go, purposeful decisions we made to exit select lower-profit and low-growth markets while focusing on improvement on the quality of our book.

We're very pleased with the progress we're making. We're growing in the right lanes with the right customers, aligned with our service capabilities, and taking advantage of our service improvements by growing where we create competitive advantage, price for value, and improve the operating income of the book. In terms of the outlook, performance reflects focus on sustained profitable growth by creating value through service improvement and disciplined pricing. But the service offerings made in 2012 and the ongoing house cleaning we continue could keep Q2 2013 units flat versus Q2 2012. In merchandise, the strong growth story continues. Our RTMs were up 28% versus a carload growth of 3%. Again, strong gains made in long-haul crude oil. I will remind you that the mix changes increased average revenue per car 12% and decreased cents per ton mile 10%.

As I've told you, we expect this to continue as crude forms a larger part of our book. Of course, a lot of the growth was driven by crude oil. RTMs in this segment were up 36% on gains in long-haul crude oil volumes. This growth momentum continues as loading network expands, our destination network diversifies, and shippers commit to the crude-by-rail model. We have clear line of sight to 2x-3x previously mentioned 70,000 carload run rate, and we believe the 2x target run rate can be likely reached 12 months earlier than our original 2016 prediction. Frac sand shipments from new mines are ramping up in Q1, and other industrial products will trend with GDP growth. Overall for Q2, we expect another quarter of double-digit growth.

In the autos, revenues were down 8%, and carloads were down 17% due to much of the decline being major customer downtime for a major new model conversion. But again, we will benefit as the new model volumes grow. We exited some low-margin short-haul markets to improve the book, but we expect the recovery of the Q1 short-haul over the remainder of the year and the delayed model startup and the book improvements will temper the recovery of growth in Q2. So in terms of summary, our strategic initiatives are delivering value and growth. We're pressing harder and faster on our work to strengthen our book of business. There's multiple opportunities for growth across the franchise, with crude oil remaining the strongest opportunity. And I reiterate my expectation of high single-digit revenue growth for 2013. And with that, I'll turn it over to Brian.

Brian Grassby (SVP and CFO)

Thanks, Jane. And good morning, everyone. I do not use superlatives very often, but I have to say this company, and more specifically the operations group, did an outstanding job this quarter, and our record results show it. The operations team continued to drive efficiency while improving service and dealing with a harsher winter. A job well done. So let me get into the numbers. As Jane mentioned, revenues were up 9%, a record for Q1. Operating expenses were up only 3% despite an increase in RTMs of 10%. Earnings per share were a Q1 record, up 51% from last year. And finally, our operating ratio decreased 430 basis points to 75.8, another record for Q1. Our effective tax rate came in just under our annual guidance of 25%-27% due to U.S. tax credit recognized in the quarter.

For the remainder of the year, you can expect us to be closer to the higher end of this range. A great start to the year, and the improvements we've seen this quarter give us greater confidence that 2013 will be a record-setting year for both operational and financial performance. Turn to the next slide, and I will give you details on our expense line items. Our workforce reductions are ahead of schedule. At our December investor day, we outlined a reduction of 4,500 positions. To date, we are at 3,400, 75% of our target, and we are looking at additional opportunities. Overall, comp and benefits were up $11 million or 3%. Workforce reductions resulted in $40 million in savings due to fewer people, fewer yard starts, longer, heavier trains, and lower new hire training, all while moving 10% more RTMs and improving service.

Stock and incentive comp was up $21 million. This was driven by a $32 increase in our share price and a larger short-term bonus accrual than last year, given our strong start to the year. Consistent with the guidance I gave you last quarter, we also saw headwinds in the form of wage inflation costing $12 million and an increase in pension expense of $12 million. As a reminder, we got into pension expense of $50-$60 million this year. You will recall that I told you Q1 would be an implementation period. We had an expense of $21 million in the quarter, so you can model pension expense to be roughly $10 million per quarter for the remainder of the year.

Other of $6 million reflects a bunch of smaller items such as higher track maintenance for snow clearing, some management transition costs, and a change in how we smooth engineering vacation expense throughout the year. Fuel was up $1 million versus last year. Fuel efficiencies saved us $25 million in the quarter, and the savings were offset by higher volumes and a slightly higher fuel price. The remaining expenses have some puts and takes. Materials were up $8 million or 13%. This increase was driven by a $10 million increase in car servicing costs, mostly due to higher wheelset changeouts. I should note that there is a partial offset to this number in purchased services, which I will speak to shortly. This increase was partially offset by savings for locomotive servicing costs, a reflection of our reduced fleet size. Equipment rents were down $4 million or 8% versus last year.

Our focus on asset utilization resulted in savings of CAD 8 million. These savings were partially offset by higher lease rates and lower car hire receipts. Depreciation rose by CAD 14 million due to a higher depreciable asset base and accelerated depreciation of certain legacy IT assets as we continue to renew our IT infrastructure. Purchased services were up CAD 1 million versus last year, but there are a lot of puts and takes. On the unfavorable side, our CAD 12 million insurance recovery in 2012 was a headwind this quarter. As well, property and other taxes were up by CAD 6 million. And finally, we saw other miscellaneous increases in IT expense costs and costs associated with our head office relocation to Ogden. On the positive front, we had a favorable one-time management transition settlement of CAD 9 million. Wheel recoverables were up CAD 6 million.

This is the partial offset to material costs I just spoke to. Land sales were up $6 million over last year. Casualty costs were favorable by $4 million. Finally, we saw $3 million of efficiencies as a result of reduced deadheading costs as we had fewer crew starts. As well, we saw third-party locomotive servicing costs lower. Purchased services can be lumpy, and it does have some seasonality. Land sale guidance remains unchanged at $10 million-$15 million for the year. To wrap up, Q1 was a record quarter, and there is more to come. Our operational improvements are driving real savings while at the same time improving service. Our book of business is strong. We have great momentum and even greater confidence that 2013 will be a record year for CP. With that, I'll turn it back to Hunter.

Hunter Harrison (CEO)

Thanks, Brian. Thanks, Jane and Keith. Well, there's not much more to say except I would refer you back to our guidance that we gave 6-8 months ago that talked about high single-digit revenue growth. We're obviously ahead of schedule there. The OR in the low 70s range, we're clearly ahead of schedule there. If you take the seasonality factor into account, you can do the math. And we're way ahead of schedule with the 40% year-over-year earnings. So that's something that we'll keep an eye out on and watch and keep you apprised as the year plays out. And so with that, Jonathan, we'd be glad to entertain questions of the group.

Operator (participant)

Thank you. And if you would like to ask a question, simply press star, then the number 1 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 Ken Hoexter with Bank of America Merrill Lynch. Your line is open.

Ken Hoexter (Managing Director)

Great. Good morning and congratulations, and welcome, Keith and Nadeem. If I could just jump into, Keith, maybe now that you're on site, you've been there for a couple of months as well as Hunter, can you talk about maybe some of the projects you looked to tackle, how the network was able to adjust so quickly through the rough winter? Maybe just expand on that a little bit so we know what other projects maybe come down the pike.

Keith Creel (President and COO)

Okay. Well, as far as adjusting to the rough winter, I mean, the key is the asset size. The fleets that we've reduced, the locomotives we've taken out, the reliability we've driven up in locomotives, the terminals, the hub terminals that before me kind of effectively shut down 5 across the system has allowed us to turn these assets faster. So effectively, you get less fleet turning faster, not congesting the terminals. You deal with snow, you deal with winter, you deal with weather. All those things, when you have additional assets in the pipeline, impede your ability to recover, and they take out your resiliency that you have in the supply chain or in our pipeline, for the lack of a better term. So with that said, the stage was set. I tried to come in, and effectively, I've spent a lot of my time out on the ground.

I spent the first couple of weeks out in Toronto. That's a place where we'd already closed the hump. But at the same time, to get it to the next level, it took a little bit more fine-tuning and emphasis on sweating the details. And it means rolling your sleeves up. It means getting on the ground. It means understanding traffic flows, looking at the cars that are coming into the terminals. Essentially, for the lack of a better term, again, to oversimplify this, if a car doesn't belong in Toronto and we're not going to service a customer out of Toronto with that particular car, why does it need to be there?

If you take that approach and you cascade that across the property, which is exactly what we're going to be doing in the future, you generate and create some real synergies, both in car savings and crew savings, locomotive savings across the board. It hits on multiple expense levers there to accelerate your progress. So there's more to come on that. We're going to focus on the terminals. We're continuing with coming out of winter. We've got an extreme, intense focus on train speed. Again, train speed, as you drive train speed up, you turn those assets quicker. You get more cycle turns. You reduce your cycle times.

You effectively can move more business with fewer assets, which again allows you to sustain positive service even in the face of some adversities like weather-induced, even like some of the wet weather, the floods we've been dealing with over the past week. Effectively, in the past, I would probably say and suggest that that would have had a meaningful impact to the operation. Certainly, it's not anything that I enjoy doing or that Doug and his team have enjoyed dealing with, but it has not had a meaningful impact to this business. We've still been able to provide consistent, reliable, and a cost-controlled service to our customers. So more to come. I could talk about this all day long, probably more time than you have, but we're just scratching the surface. That's no doubt in my mind about that at all.

Ken Hoexter (Managing Director)

Yeah. Wonderful. And if I can get my follow-up on Brian, maybe just talk on the efficiencies in a workforce number. I mean, Hunter has mentioned maybe even up to 6,500 employees. Does that come out faster? Should we see an acceleration on the, I'm talking more specifically on the comp and benefit line. And thanks for the time.

Hunter Harrison (CEO)

Again, first of all, I don't think I said 65. I might have said 6 months ago. But look, the 4,500 is not the top. That's not the ceiling. That's a number that we, at that point in time when we gave it to you, we felt comfortable with. There are some buckets, for an example, particularly with contractors, for an example. With IT, we've got contractual obligations that says we've got about 300 or 400 people that will not come out on the IT side till the end of 2014. So that's 300 or 400 right there. There's some other initiatives. So will we exceed 4,500? I think so, yes. Will we get to 6,000? Could be. But I mean, I don't quite have line of sight on all that yet. Brian, do you want to add any more?

Brian Grassby (SVP and CFO)

No, I think you covered it well.

Operator (participant)

Your next question comes from Tom Wadewitz with JPMorgan. Please go ahead.

Tom Wadewitz (Senior Equity Research Analyst)

Yeah. Good morning and congratulations on the great results and also on joining the team, Keith and Nadeem. Great to see you guys on board. Keith, you mentioned the exercise or the process you're going to go through in scheduling the cars and spending time on that. Can you give a sense of when you plan to do that and just the timing of that, which presumably would have a material impact?

Keith Creel (President and COO)

Yeah. We're going to start the first sessions in Chicago in a couple of weeks, and then we'll have to. You can't do it all at one time. It's a pretty large task. So we'll spend 3 days, pretty long days in Chicago to start this process. And I would envision 4-5 sessions to get the entire railway done. So you'll do one week. You'll wait 2 or 3 weeks, digest the changes, tweak it a little bit. You'll go to the next step. So the process is going to take about 2 months, I would say, to get it all done. And then after that, you've got to get people to start executing it and a little bit of sense of urgency and accountability and discipline, and the results are going to follow.

So I would look more to third quarter, fourth quarter, start seeing some of the impact of those changes.

Tom Wadewitz (Senior Equity Research Analyst)

Okay. So financial impact in second half of the year, probably?

Keith Creel (President and COO)

Yes.

Tom Wadewitz (Senior Equity Research Analyst)

Okay. Great. And then, Brian, in terms of the comp and benefits, there were a lot of moving parts in the comp and benefits this quarter. It seemed, I guess, when I looked at some of the options expense, it was up a fair bit. I'm not sure how that relates to the incentive comp you identified, but how do we think about the step up in comp on a per-worker basis this quarter and what that might look like going forward? Is it a lot more moderate going forward, or is it still a pretty high pace of increase in comp and benefits on a per-worker basis looking forward?

Brian Grassby (SVP and CFO)

Tom, I gave you in my remarks talking incentive comp, we're up $21 million. Let me just give you a bit more color. Of that $21 million, about $15 million is related to our $32 price increase. The sensitivity is a bit less than I've given you in the past, but you could use about $600,000 per dollar change. The balance of that $21 million is roughly $6 million, and it relates to our short-term incentive accrual that, again, I talked to. Last year, we accrued the first quarter at 100%. We have increased that accrual from a percentage point of view, given the strong start, given our outlook for the year. Those are the two main components. The first component, we'll move with our stock price.

The second component is, as we execute to our plan and look to exceed it, should remain for the balance of the quarters.

Tom Wadewitz (Senior Equity Research Analyst)

Okay. Great. Thank you.

Hunter Harrison (CEO)

Thanks, Tom.

Operator (participant)

Your next question comes from Jacob Bout with CIBC. Please go ahead.

Jacob Bout (Managing Director)

Good morning. Hunter, maybe just a question here on the crude-by-rail and strategically how you're looking at this, specifically longer-term in the amount of capital you're willing to commit to this crude-by-rail?

Hunter Harrison (CEO)

Well, most of the crude-by-rail new opportunities are on line segments that we would not have described in the past as our main lines. So there's clearly some catch-up to do there. We're doing that very cautiously, but there will probably be, which is in the book already, but probably $50 million related directly to infrastructure for the crude-by-rail, not only for the crude-by-rail, but driven by that predominantly, which is effectively sidings, the signal systems, and some upgrade to the existing heavier rail. So that gives you a little feel for it, hopefully.

Jacob Bout (Managing Director)

Maybe just a follow-on question on fuel efficiency. Pretty impressive improvement there year-over-year given the tough winter. How aggressive should we be thinking about fuel efficiency and improvements over the next year?

Hunter Harrison (CEO)

Well, I think you will. I think we've taken some big steps. I don't know that there's that much in another block, if you will, but I think we'll see continual improvement. I mean, I think it's jumped up to that, Brian, the 7% range in.

Brian Grassby (SVP and CFO)

8% year-over-year.

Year-over-year. I think that probably there's some initiative that Keith has going about closing some service stations or running longer miles before we have to fuel. We're doing some modeling there. It'll help with working capital. We've obviously probably got too much fuel in inventory. I think that we will probably hit through 10, so maybe 10%, 9%-10% year-over-year.

Jacob Bout (Managing Director)

Excellent. Thank you.

Operator (participant)

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

Fadi Chamoun (Equity Research Analyst)

Good morning. My question is to Keith. You've worked with two CEOs, which from where we sit sort of have a slightly different approach to growth and the supply chain in general. So I was wondering whether first, do you think that the kind of approach at CN that we see on the supply chain side would bring similar benefit at CP, and how far is CP from CN on that front from sort of a supply chain integrated approach that we see at CN?

Keith Creel (President and COO)

Well, let me, Fadi, with all due respect, I think it's inappropriate for me to comment on CN given that I'm not at CN anymore. Let me focus on the opportunities at CP. And I can say right now that this supply chain pipeline, whatever you want to call it, in lean management, that is becoming and has ingrained in some of the success and the way we're moving forward at CP. So it's not about just cutting assets to drive operating improvements. It's about right-sizing assets to drive operating improvements that, at the end of the day, create a reliable and a sustainable pipeline or supply chain, whatever you want to call it, whatever semantics you want to use. So huge opportunities. This is a new front turning assets and managing right-sizing.

It's something that's gaining momentum at CP, and I'm going to expect to see similar results in our customers. Those are the most important sounding boards, so to speak, or proof points. I think they would tell you in large part, and listen, we're not perfect. It's an operating world. We went through a tough winter. We didn't get it all right, but we certainly got a heck of a lot more right than wrong, and we're exceeding our customers' expectations on service offerings. So with all that said, it's ingrained here. It's becoming more and more part of our DNA of our fiber, and it will be an integral part of our success on a go-forward basis at CP, both from a service front as well as operational and financial success front.

Fadi Chamoun (Equity Research Analyst)

Okay. One question to Jane. On the crude-by-rail, I suppose the bigger portion of the opportunity going forward is probably heavy crude from Canada. Can you talk a little bit about some of the larger opportunity you're seeing, the timing of realization? I know you said that you think this could go basically increase quite meaningfully in the next two years, but do you see sort of some of these opportunities for terminal being built happening this year, or this is more like 2014 opportunity?

Jane O'Hagan (EVP and CMO)

Well, I think, Fadi, I think just to go back to what I said earlier, I think that when we look at our 2012 crude volume growth, we remain on track, and we remain where we would like to be in terms of that growth. And as we told you in January, we had our 70,000 car-load run rate, and obviously, we're building off that. Our future view on this volume is really based on the probability of landing some kind of specific and near-term as well as long-term prospects. There are various stages of negotiation, and I'm sure, as you can appreciate, many of these are competitive as well. And this also includes some prospective additional opportunities.

In terms of looking at this on a go-forward basis, I think that what we feel is that judging the appropriate risk, sticking to the basics of our model, which are, again, around mitigating risk by ensuring that those who we partner with are investing for the long-term and crude-by-rail and managing our investments appropriately, this is where we see certainly the long-term aspect of that business and how we intend to grow it. I think it is safe to say, as you did, that the future growth that we see, given the current volume that we have that certainly moves to the Bakken to various locations, is a big part of today's portfolio. But as we move forward, obviously, the heavy crude is the real opportunity for us in the near term.

Fadi Chamoun (Equity Research Analyst)

Okay. Thank you.

Operator (participant)

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

Fadi Chamoun (Equity Research Analyst)

Good morning. Jane, maybe just a follow-up question. When we think about the high single-digit revenue guidance for the year, you have kind of easier comps as you move forward, and certainly, it looks like the grain business is going very well for you and crude clearly as well. You have the RTM growth there. I guess I just want to make sure I understand maybe what some puts or takes are around that high single-digit revenue target. Seems like it could potentially be exceeded at least in the next quarter or two. Just want to get a sense of how you think about that.

Jane O'Hagan (EVP and CMO)

Well, yeah, I think, Chris, it's safe to say, as you indicated, that I am expecting some ramp-up in volume as the year progresses, both on the crude side and the other commodities such as potash and frac sand. Some of the traffic is coming on a little sooner than we expected, but we did have some slower growth in some of the other sectors that we look at. As you said, we're going into good Q2 with some good carryover in the grain, and we have excellent asset utilization cycles that will help propel that growth. And if we see a gradual improvement, certainly, in the U.S. economy, this will help us in the industrial products. But on a net basis, we're on course to meet our 2013 guidance, and I think that there is still some uncertainty in the economy.

Grain is always a wild card because, as I said, it's too early to comment on where the crop is. The big part of this story, obviously, is a cost takeout story. Back to where we are, I feel that our challenge, again, is to meet that head-on and to beat it. But I don't feel that we're at a place where the economic picture or some of the puts and takes I talk about really merit a reconsideration of my guidance at this point in time. So all I can say is watch our car loads and know that we're working it hard.

Chris Wetherbee (Managing Director)

Okay. No, that certainly makes sense. Then just a follow-up, just back to Hunter and Keith, maybe just quickly on the headcount. I know you kind of talked about maybe what you could potentially get, and there's some things that could come in the later period. Just when we think about this year, you guys are so far along on the path to the guidance you had given us. Can you just give us a rough sense of maybe how headcount reduction looks in the next couple of quarters? Is it going to slow down a little bit, or is there still a steady pace left to go here?

Hunter Harrison (CEO)

No, I think it's a steady pace. If you want to put a number on it, I think my guess is by year-end, we'll probably be at 4,000. And there's a lot of things going on there because, for an example, we had two shops that were effectively leased out that were run by Progress Rail, but they were CP employees. They were CP employees from a pension obligation standpoint, but they weren't in our headcount, if you will. Well, we've taken those shops back in because, net-net, it's the best thing to do to operate it. Well, as we bring those two shops in, that's a plus on the headcount side. It's really not any additions, but if you look at the count and where you start with it. So there's some additions that you have to take into consideration.

I think by year-end, 4,000 is probably a safe number to use. Am I still comfortable with the 45? Yes. Do I think we're going to exceed it? Yes. And that takes into consideration what Keith has talked about. I mean, this whiteboard exercise is going to bring another level of opportunity. So there's a lot of initiatives that we have on the drawing board that hadn't kicked in yet, which is the reason why, to some degree, I'm extremely excited about the future and some of our guidance and so forth. So I think for the year, 4,000 is going to be not far off for your modeling purposes.

Chris Wetherbee (Managing Director)

Okay. That's great. Thanks for the time. I appreciate it.

Operator (participant)

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

William Greene (Country Head Germany and Austria)

Yeah. Hi there. Good morning.

Hunter Harrison (CEO)

Morning.

William Greene (Country Head Germany and Austria)

Jane, I was wondering if I could ask or actually, maybe even Hunter, you may want to weigh in on this as well. But as we look at the improvements in service levels, how long does it take to translate that into a better pricing opportunity?

Hunter Harrison (CEO)

Well, it takes a while. My experience in the past, as we've gone through transformational change like this, is it doesn't happen overnight. We don't expect that overnight. We have to prove. It's one thing to say it. It's another thing to do it. So I think that once we see 12-18 months that we've accomplished these service commitments, we've showed the market we can do it, then we'll start to see some impact on price beyond what we have talked about. Now, at the same time, Bill, if you start to try to fine-tune the number, there's some discipline we're going to impose. We have imposed, for example. As I've said to you, we're not chasing business for chasing business. We've got a certain hurdle rate that's got to be met.

We're proud of this service, and nobody will take our service and make it a commodity, not as long as I'm around. But to answer your question, I think at least a year to 18 months, generally. Kind of before you can real see the start to see the real impact there.

Fadi Chamoun (Equity Research Analyst)

Okay. Makes sense. And then, Hunter, on the labor side, you have, I guess, a couple of deals you're still working on, but maybe you could just give an update there about what do we have to think about? Do we have to worry about any work stoppages? I know one of the unions gave you a gift when you arrived. So can you just talk a little bit about just the tactical side of the labor agreements?

Hunter Harrison (CEO)

Well, we had the unfortunate right before I arrived work stoppage that was settled through effectively arbitration. We have signed five agreements with various collective bargaining units. And I think I'm correct here. There's only one left, which is effectively the CAW. I think it's comfortable to say that Keith and I both have established a pretty good relationship with that group. They're very demanding, and they're tough, and they should be. But I think there's some mutual respect there. And so the CAW is coming up. We just sat down with them about three or four weeks ago with their committees, kind of exchanged some ideas on what we saw coming in the future, talked to them about some opportunities of insourcing. And so it was a positive dialogue. So I don't see any bumps in the road looking out over the next three or four years with labor.

William Greene (Country Head Germany and Austria)

Okay. That's great. Thanks for the time.

Hunter Harrison (CEO)

Thank you, Bill.

Operator (participant)

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

Steve Hansen (Managing Director)

Oh, yes. Good morning. The crude-by-rail opportunity continues to be pretty dynamic here and strong momentum shaping up in terms of Canadian loading infrastructure. Jane, I was just hoping you could provide us some context around the growth from your current run rate of business and out to your future line of sight goalposts and really what that means in terms of revenue per carload growth or just length of haul over time and trying to get a sense for how the business will transition aside just from the carload count itself.

Jane O'Hagan (EVP and CMO)

Well, I think that I think what you need to do is you need to follow in terms of the information that we provide about where the markets are. I think that certainly, the volume's going to change. It's going to move around as the market and refinery demand for different crude evolves. And there is some sort of impact as well in terms of the spread. The majority of the volume right now goes to the Gulf, but the other markets continue to develop pretty quickly. And our approach where we started off working with primarily marketers, we've now expanded that to producers and transloaders to make those markets. So it's likely that in the Eastern markets and the Western markets, they'll start to attract the light, and the Gulf will attract the heavy.

But it's really hard for me to predict in terms of where that market's going to go over the long term. We do know that in terms of what we've seen so far is that we've been able to, obviously, establish and build that market out into the U.S. Northeast. And obviously, we're going to start to move that as we think about the expansion to the Gulf. So you are going to see movement around in the average revenue per car. I think that, again, when we look at that overall with the model in terms of modeling that, what you're going to have to do is basically, we'll give you certainly reliance on how the volumes will move. We'll provide you visibility in terms of what the next major parts are working with our customers on how it evolves.

That'll give you a better representation in terms of how you can start to model those distances and basically how average revenue per car will move in each of the markets.

Steve Hansen (Managing Director)

Okay. That's helpful. Just as a follow-up to that, it seems conspicuously absent, at least thus far, that the Canadian majors or the large Canadian heavy oil producers have not really fully embraced the model as yet. There's been indications in the press and by one of your competitors. They seem to be evaluating the model pretty seriously. Just wanted to get a sense whether or not you can provide any color on just the broader sort of large-cap universe in Canada and whether or not they are starting to embrace this model.

Jane O'Hagan (EVP and CMO)

Well, what I would say to you is that I think it's fair to say that, obviously, the marketers and the transloaders came faster to the market than the major producers. But when you look at the dynamics of heavy crude and how important it is to get that product either to a point at export, which I expect will evolve over time because getting it to tidewater, obviously, gets you to global price, I think the other thing that we are really having, obviously, intense dialogue, a lot of it being confidential, is that producers are obviously looking for end markets because refiners need this product. So I expect that you need to kind of watch our progress as we move forward.

I think it's safe to say that the next generation of developments you're going to see will be dealing with producers and refiners as we expand that marketing opportunity beyond the point at which we started, lies largely around the resource that was in the market.

Steve Hansen (Managing Director)

Okay. Very helpful. Thank you.

Operator (participant)

Your next question comes from Scott Group with Wolfe Research. Your line is open.

Scott Group (Managing Director)

Hey. Thanks. Morning, guys. So I want to start just a couple of things on the cash flow side. CapEx was down, I don't know, 13% year-over-year. Maybe if you just have some updated thoughts on CapEx for the year? And then along with that, if you have any updates in terms of timing and magnitude of some asset sales you've talked about? And Brian, anything in terms of updated thoughts on when we should start thinking about returning some cash?

Brian Grassby (SVP and CFO)

Okay. Let me take that. Was that one or three questions?

Hunter Harrison (CEO)

Good one.

Brian Grassby (SVP and CFO)

All right. Scott, let me take them first. CapEx down 13%. Q1 last year, we did take delivery of locomotives, and they're in the range of 71%. So we've got it to CapEx of $1 billion for the year. And over the longer term, $1.1 billion. Sorry. We've got to $1.1 billion. So that's just a reflection of the locomotives we purchased Q1 last year. In terms of asset sales, I did on the routine sort of the smaller transactions, I did mention $10 million-$15 million from my comments. Part of what Keith and Hunter are going to be doing in the whiteboard session is really looking at the yards as well. And so that's something that, over time, will give you more color in terms of sort of the larger surplus land sales that we've talked about. And I guess, finally, returning cash.

I mean, our first priority, and Hunter and I have both said it, is investing in the core franchise. Second priority is strengthening the balance sheet, improving the credit metrics, moving to mid-investment grade. And then finally, we're looking forward to the discussion with the board on other possibilities in terms of returning cash to shareholders around dividends, share buybacks, all that. I think we're looking forward to that conversation. But our first two priorities are investing in the franchise and improving our balance sheet strength.

Hunter Harrison (CEO)

Brian, you might comment on just where we are with the DM&E and the expressions of interest and so forth there. I'm sure they're.

Brian Grassby (SVP and CFO)

Yeah. I think from the DM&E, there's been strong interest. We've received preliminary expressions of interest, and we're presently going over them. And then in short order, we're going to be deciding next steps and narrowing down the number of people we're going to be talking to. So again, on that front, I'll be able to give you more updates as the year unfolds.

Hunter Harrison (CEO)

Thanks.

Scott Group (Managing Director)

Okay. That's really helpful. And then just maybe a bigger picture question. We've talked over the past year at length about kind of structural differences between CP and some of the other rails. And Hunter, we've gotten your thoughts over the past few quarters but haven't really heard from Keith on this discussion. So maybe, Keith, if you can give us your thoughts on that. And Hunter, if you do have anything to add now that you've been through your first winter at CP just in terms of some structural differences.

Keith Creel (President and COO)

I guess I can bottom line it. There are puts and takes at every railroad. We all have our challenges. It's an outdoor sport, but I see nothing of any meaningful structural difference that should have an adverse impact on our performance. In fact, I see some structural opportunities on some assets, some particular rail lines that previous management, in my mind, have not utilized properly. Case in point, we've got a North Line that runs up to Edmonton. You can take that route. Go west to Edmonton comes south to Calgary and to the coast, and it's about 200 miles shorter than the current or previous route we were running with some of those potash assets and grain assets and eventually will be oil assets. So as we convert that structural opportunity, we're going to see cycle times reduced.

We're going to see crew savings, and we're going to see fleets turn and revenue go to the bottom line. So I'm pretty excited about the structural opportunities, not very concerned at all about the structural challenges.

Hunter Harrison (CEO)

Proposition has not changed at all. This is a strong franchise. I think over time, you're going to see the seasonality factor level even more and more. And we're always going to have it. We're always going to have winters to deal with. Sometimes they're going to be worse than others. That's part of our job. We'll deal with it. We'll deal with it more effectively. And I guess to get best case in point is to produce the OR that was produced this first quarter. I don't want to make an excuse about weather, but the winter was a little harsher than normal this year. And if we could produce those kind of operating results, that gives you some indication of what the potential is on the other three quarters when you don't have that factor involved. So I love the franchise.

I don't see any structural issues that we can't deal with.

Scott Group (Managing Director)

Okay. Great to hear. Thanks, guys.

Operator (participant)

Your next question comes from Chris Ceraso with Credit Suisse. Your line is open.

Chris Ceraso (Managing Director)

Thank you. Good morning. Wanted to come back for a second to the discussion about crude. And Jane, you mentioned how as the business evolves and more of the growth in coming years is going to be the heavy crude in Western Canada, and you start to think about destinations for that. How do you feel the CP is positioned in terms of the share of that business over time? I think currently, maybe you're doing a little bit more crude than the other Canadian rail. But if we look out over the next two or three years as the origin and destination pairs shift, how do you think the market share is going to shake out?

Jane O'Hagan (EVP and CMO)

Well, I think that, first of all, where we come from as we think about heavy crude and how we evolve our markets is obviously in two ways. I mean, first of all, you build on the model that you have in terms of manifest and building that into unit train opportunities. And you use that to expand your footprint. Secondly, I think there's obviously there will probably be some inherent advantage that CN may have that gets them up into the north. But the models that we're developing now and that we've talked about as we grow our volumes have been basically working with producers, working with marketers where we are pulling volumes off of pipelines. I think that I've spoken to this before is that it's one thing to build a manifest facility.

It's a next step to build the infrastructure that puts in place loop tracks and other efficiencies that builds you to unit trains. But there's also great opportunities to work with customers on a supply chain basis, develop very, very core and important objectives that they are investing in. Certainly, our announcement that we had in Hardisty is one that substantiates the ability to work with the customers to find options where you can build into the pipelines and use that as the ability to drive unit train volume on a daily, weekly basis. So when I look at that opportunity, I think that we have a great franchise. I think that we've got, certainly to Keith's point, some excellent opportunities with respect to our north main line.

We've got excellent connections, and we've proven the quality of our crude-by-rail model in terms of its consistency and reliability into some of these core markets. I think, at the end of the day, those are the things that are going to be able to allow us to build the game plan that we've set out for ourselves.

Hunter Harrison (CEO)

Let me comment on that. Let me tell you what bodes well for us. We get to certain markets. Competition gets to certain markets. This is a competitive world. In the final analysis, it's the people that produce the best service and create the best cycle times. That's who's going to win as we approach crossover day. That's the group that's going to win. The suppliers today are starting to understand and appreciate the cost of rail cars because they're buying them. And they understand the power of cycle times. And it's the provider that provides the quickest, fastest cycle time and turns on assets that's going to win the business, which is a game that we like to be in.

Chris Ceraso (Managing Director)

Okay. And then I guess just to follow up really on the same subject, you've shown that the revenue per unit in this business is very strong. As you go forward, do you think more of the business that you pick up will be competitive where maybe the revenue per unit won't be as strong because it is a competitive bid?

Jane O'Hagan (EVP and CMO)

Chris, I think that really, it boils down to really kind of a combination of what Hunter just indicated. We make our opportunities in this market. We pursue those that make the most sense. Again, we price for the value of the service that we put into the market and the value of rail to these customers. Again, we partner with customers that are investing in the crude-by-rail model and those who are investing in their own infrastructure to grow it. And so the way that we look at it is that there's many varied factors that cause a customer to think about crude-by-rail. And our focus is basically to make sure that we're commanding the value for the service we provide.

We mitigate the risk by managing the investment and that we do this in a judicious way where we see other benefit and lift for other business that we want to operate on those corridors. For me, it's all about sticking to the game plan. We feel we have a good one, but it's all about pricing for value. As Hunter said, showing those customers we don't only build consistent, ratable supply chains, but we do it in an efficient way where they can manage their assets.

Chris Ceraso (Managing Director)

Okay. Great. Thank you very much.

Operator (participant)

Your next question comes from the line of Jason Seidl with Cowen Securities. Please go ahead.

Jason Seidl (Managing Director)

Thank you. Good morning, everyone. Jane, I wanted to focus a little bit on coal. You obviously had a decent quarter here in 1Q. You're calling for flat 2Q. It looks like your comps are a little bit easier. I think in your commentary, you mentioned something about some weak thermal numbers in the U.S. Can you give us a little more color behind that and sort of more color behind what you expect out of your exports in 2Q?

Jane O'Hagan (EVP and CMO)

Well, I see on the met coal side, obviously, we have really three franchises. The first one that we have is obviously our export one. We have a smaller portion that's made up of our U.S. thermal market. And then we have the opportunistic side, which we would call our PRB traffic that we move out of Ridley Terminals up at Prince Rupert on a joint line basis. When I look overall and I look at the performance of our team on our supply chain on export, obviously, we model to Teck forecasts. There's always volatility. But when we look at that market, we perform and manage the supply chain very, very well. I think, obviously, on the U.S. thermal side, there's always some volatility or that there could be some softness there given those markets because they're subject to change.

I think that the PRB market is going to depend on the economics. Largely, we're available to move that. When I look overall, I think our export is going to be strong. I'm just signaling that I feel that for it to be flat, we ought to anticipate perhaps some weakness that we would see in the U.S. markets on the thermal side and on the thermal export PRB.

Steve Hansen (Managing Director)

Okay. Thanks. That's all I had for today, guys. I appreciate the time as always.

Jason Seidl (Managing Director)

Thanks.

Operator (participant)

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

Cherilyn Radbourne (Managing Director)

Good morning. As I looked at your expenses in the quarter, it seemed to me that labor expense was a little bit higher than I would have expected, and the purchased services was a little bit lower than I would have expected. I know you've talked about insourcing jobs as sort of a philosophy. I just wondered to what extent we were already seeing that kind of a shift in your numbers this quarter.

Hunter Harrison (CEO)

Yeah. Cherilyn, you're seeing a partial shift. I mean, we did outsource or insource. Hunter talked to it. So there is a small shift from that. Part of that shift would also actually be into materials as well because part of it is insourcing the work we do around wheels. But it was affected during the quarter, so it wouldn't have been sort of a full quarter impact. But yes, you are seeing it. And going down the road, you also see the shift that we talked about from an IT consulting point of view and bringing stuff in-house. So that's really where you almost have to look at two lines in unison as opposed to just trying to model them separately.

Cherilyn Radbourne (Managing Director)

Okay. And second one, I suppose if someone wanted to kind of poke holes in the quarter, your safety metrics did compare unfavorably on a year-over-year basis. So I just wondered if you could give us a bit of perspective on severity there.

Keith Creel (President and COO)

Well, when you say severity, as far as just overall raw numbers?

Cherilyn Radbourne (Managing Director)

Well, I'm just alluding to the fact that statistics can be misleading, so.

Keith Creel (President and COO)

Okay. Well, I can tell you raw numbers year-over-year, I think we've had two more reportable derailments than we had last year. Severity is actually less than it was last year. It's the cost per day. And I can tell you that operating safely has been and always will be priority number one at CP. It's our moral obligation and a commitment to our employees, the customers, the communities we operate in and through, and that focus is not going to change. And we're going to focus on rules compliance. There's a level of opportunity there that I'm convinced we haven't seized yet. So as we do that and as we continue to change this culture and this evolution, not only are we going to perform well from the service side, we're going to perform well on the safety side. So there's more progress there to be made.

Cherilyn Radbourne (Managing Director)

Okay. Thank you. That's all my questions.

Operator (participant)

Your next question comes from the line of Walter Spracklin with RBC. Your line is now open.

Walter Spracklin (Managing Director)

Thanks very much. Good morning, everyone.

Hunter Harrison (CEO)

Very well.

Walter Spracklin (Managing Director)

Just want to ask you, Hunter, you had mentioned CUR ownership and how the incentive is put in the right place when you have some of your customers owning more of your CURs. And I know that with a lot of your customers, certainly your larger ones, you do own your own CURs. You own their CURs or the CURs that you use for them. Are you considering it all, or is there an opportunity here for a major switch on some of your larger customers to their own CUR ownership and drive some of that incentive?

Hunter Harrison (CEO)

Well, I think that, in our view, that's more up to the customer. I mean, we're willing to own rail cars, and we get rewarded for that to some degree. There's obviously an upfront cost. At the same time, if they would prefer (and most of them appear to today, and I'm not sure I understand that) but prefer to own their own fleets and control them and so forth. We're happy to do that. It's just it's one price if you furnish the equipment. It's another price if we furnish the equipment. We're effectively indifferent there.

Walter Spracklin (Managing Director)

Okay. So it's not part of your asset sale kind of?

Hunter Harrison (CEO)

No, no, no. Not at all. Not at all.

Walter Spracklin (Managing Director)

Okay. Second question here is more toward Jane, I guess. Yields, you've often got at us on kind of same-store pricing trends of around the 3%, 3.5% mark. Average yields down this quarter. And I'm just curious to what extent mixed effect, if that is the reason - I know you got a lot of moving parts with crude and certainly on potash varying quite a bit quarter to quarter - if when we look at for the rest of the year based on the volume metrics you've kind of been pointing us toward, should we be modeling, therefore, negative average yields despite your same-store sales in the 3.5% range?

Jane O'Hagan (EVP and CMO)

Well, I think, first of all, I think we should go back to just talk about the quarter for a second. ARC was up 8%, and our cents per RTM was down 1%. I think the question is, is this weakening? I mean, I think, first of all, it's that these aggregate price measures mask a lot of variation that we see, including some of the mixed change. So as I indicated, at a high level, there's a large increase in the long-haul volume of traffic such as crude and export potash, basically kind of get us consistent with those two messages. I think that those were obviously the dominant gains in the quarter and expect some of the differences that really explain that.

I think, overall, as I've said, when we look at ARC, I've signaled that the growth and certainly double-digit growth that we're expecting in the IP portfolio, specifically from crude, is going to move that around. But I think that, obviously, as we look at cents per RTM and we look at that substitution or that movement into the longer-haul markets, we're going to see some fluctuations that are largely as a result of unit train, ship-released cars moving in long-term lanes. But I think when you look at overall price, our focus is, number one, to achieve our price strategy and, again, deliver to that 3%-4%. And per Hunter's comment, is to continuously work on improving the quality of the book, which we have underway. So I would not be concerned about that.

Walter Spracklin (Managing Director)

Revenue-per-revenue ton-mile basis, at the end of the year, do you expect it to be up or down generally?

Jane O'Hagan (EVP and CMO)

I think we expect to be up. But again, it's certainly an impact as we go through, as we bring our crude on. As I said before, it comes on faster. I think, certainly, if I talked about if there's some upside on the export potash side, obviously, if it's rateable and something that we can see that's sustainable, profitable growth, we're going to pursue that. But I would say, yes, you could expect it to be up.

Walter Spracklin (Managing Director)

Great. Thank you very much.

Operator (participant)

Your next question comes from the line of Brandon Oglenski with Barclays. Your line is now open.

Brandon Oglenski (Director)

Yeah. Good morning, everyone. And thanks for squeezing us in here at the end. Congrats, Keith, on joining the team here. And Hunter, with Keith now in place and running the operations, just wanted to ask you a longer-term strategy question. As you realize these efficiencies and cost improvements, you're obviously going to have what supposedly will be better free cash flow in the future. So what are the capital priorities going forward? Are there any acquisitions that could be additive to the network or potentially open you up to new market exposures that you're looking at down the road? Or does it just become a story about increased repurchases, higher dividend? Where are your priorities looking ahead?

Hunter Harrison (CEO)

Well, I think the priorities are this. Number one is to be a low-cost carrier and provide the best service.

And if you do that, you're going to have a lot of opportunities open up for you. You're going to have opportunities for M&A activity if you so desire. You're going to be something that others are looking at and learning from. So those opportunities potentially will present themselves to us. At the same time, there's not those opportunities here. This is pretty exciting. Doing what we're doing here, making money and rewarding shareholders and paying dividends. And if we get in that mode, buying stock back and all the things. I think the key is that we don't go in with a booked plan and get locked into it, that we maintain our flexibility. And always, what we're going to focus on is being the low-cost carrier, providing the best service.

As long as we do that, okay, all these other opportunities will be in a better position as a result of that.

Brandon Oglenski (Director)

Well, thank you. It's been a long call. Keep it to that.

Hunter Harrison (CEO)

Thanks.

Operator (participant)

Your next question comes from the line of Keith Schoonmaker from Morningstar. Your line is now open.

Keith Schoonmaker (Director)

Thanks. Longer-term question about intermodal. Historically, your largest and still second-highest revenue segment. Broadly, Canadian-U.S. markets were up 4%-5% intermodal. Yeah, your quarterly units and revenue declined about 4%. Balancing this higher selectivity of sensible business off of your new faster service, can you share current thinking on sort of addressable, attractive intermodal market growth, please?

Jane O'Hagan (EVP and CMO)

Yeah. I think that what we've been doing—and I think it's been pretty clear—is that we have basically made some pretty clear choices about needing to tighten up our intermodal network, basically taking out some of the higher-cost, low-growth segments. Within that mix, there was also some contractual adjustments that we needed to make on the international side. When we look at growing that business, the one thing that makes me very pleased about where we are and the direction that we're heading is that we are seeing growth on the domestic side. Clearly, our plans are to grow with market leaders. We have a new retail reality coming into place into Canada. I think that, overall, when we look at the U.S. and the cross-border, there's obviously some opportunities to target new customers.

Certainly, in many respects, this is really about going out to the marketplace with an improved, competitive service where, quite frankly, we weren't competitive before and showing and demonstrating our consistency and reliability to grow with customers that represent solid prospects that are making choices around, obviously, service. I think there's other lanes that, obviously, we're working on as pertains to trucks. I think as we get more competitive and we've renewed our product that we put into the market on our Expressway product between Toronto and Montreal, and we're seeing that product build up. So I think we've got lots of strategic initiatives. But again, it's kind of a dual balancing act for us internally around making sure that we're growing with the right customers, that we're improving the operating income of the book, and that the prospects we bring on represent sustainable, profitable growth.

Keith Schoonmaker (Director)

Thank you.

Hunter Harrison (CEO)

All right. We've got five more questions in the queue. We'll take those five questions. I don't want to cut anybody off. Then we'll close out.

Operator (participant)

Okay. So your next question comes from the line of Benoit Poirier from Desjardins Capital. Your line is now open.

Benoit Poirier (Managing Director)

Yes. Thank you very much. I'll try to be quick. Jane, just wondering about the spread between RTM and carload going forward. I understand you'll provide more numbers starting in May. But given the outlook provided on the call, should we expect the spread to maintain at a high level in the next few quarters?

Jane O'Hagan (EVP and CMO)

Yeah. I think that I mean, I'm not going to predict, obviously, given the fact that we don't have our grain crop in and a number of other things for the rest of the year. But I can say, given some of the growth that we're expecting, certainly on our merchandise portfolio, that we should expect that given the fact that we're indicating double-digit growth. So that would be a pretty safe assumption.

Benoit Poirier (Managing Director)

Okay. Quickly, given we are entering into the spring season, any color about any potential flood, especially close to your DM&E network?

Keith Creel (President and COO)

So currently, as I mentioned earlier, last week, I guess it was this past weekend, we lost the railroad at Davenport, Iowa. However, the river has dropped down. And we're literally pumping right now. And we expect to be back in service tonight. So maybe there's something on the horizon I'm not aware of. But at this point, that was our immediate concern. We've dealt with it quite well, quite aggressively. And I'm pleased with the response. And I don't see any material impact to our service this time.

Benoit Poirier (Managing Director)

Okay. Thanks for the time.

Hunter Harrison (CEO)

Thanks a lot.

Keith Creel (President and COO)

Your next question comes from the line of Jeffrey Kauffman with Sterne Agee. Your line is now open.

Jeffrey Kauffman (Managing Director)

Well, thank you very much. Well, congratulations, everybody. And my question's largely been asked, so I'll be brief. Brian, following up on Scott Group's question, you're now two quarters in with better-than-expected results. As we look at the free cash flow and the free cash flow opportunities, is there a general level of cash that you just kind of want to have in the box before you start considering alternatives? Or is it more based on the whiteboard session and kind of where we go this fall?

Hunter Harrison (CEO)

Yeah. Jeff, that's the same question you asked me in December. But.

Jeffrey Kauffman (Managing Director)

Good memory.

Hunter Harrison (CEO)

No. No. I'm very pleased with the progress. I mean, from a free cash flow point of view, the first quarter is always lower just in terms of we build up inventories for the track season. We also insourced some inventories. Again, we talked about insourcing some work. As well as a good news story is our receivables are up. So that's a draw. That's why you see in our free cash flow the increase in uses of working capital. But I'm very pleased. We've got CAD 350 million or close to CAD 350 million cash on the balance sheet. And Hunter, before he jumps in, we will not have a lazy balance sheet. But Jeff, as I mentioned to you, we've given you our priorities. And I'm looking to have that discussion first with the board.

Then we'll share that with you either later this year or early at the beginning of the next year. Jeff, let me add to that. This is a relatively new issue to deal with at CP. We have a board that's had a tremendous amount of turnover. We have, I think, three or four members now, maybe five left from this time last year. So we're trying to develop. The board is looking. They're looking at consistency. Can we produce this on a consistent basis? And I think when they see that we can consistently do this and perform this way and can produce these levels of free cash flow, we'll be in a position to do the appropriate thing, as Brian has described earlier.

Jeffrey Kauffman (Managing Director)

Wishing you more of these high-quality problems. Congratulations.

Hunter Harrison (CEO)

Thanks, buddy.

Operator (participant)

Your next question comes from the line of Steven Paget from FirstEnergy. Your line is now open.

Steven Paget (Analyst)

Good morning. Thank you. My first question is on service improvements. Could you talk about car order fulfillment or switch window compliance for us to put these improvements into perspective?

Brian Grassby (SVP and CFO)

Yeah. Car order fulfillment to the first quarter, neighborhood of 92%, 93%. Depends on the fleet. Of course, there was some squeezing or some tightening of available capacity on, for instance, some of the pulp customers. We had huge demand ramp up. We had winter effect just a little bit. But we pretty much worked through that. So that's not an issue anymore. So those are the neighborhood of the numbers. And what was the other question?

Steven Paget (Analyst)

Switch window compliance. But either one or the other is fine.

Brian Grassby (SVP and CFO)

Yeah. Yeah. Switch window compliance is not a measure that we've enacted here at CP. We've got a lot more to get at before we get to that level of granularity. Right now, as long as we get these trains we schedule, as we've talked about with this whiteboard exercise, those assets are turning in, the terminal dwells going down, we'll be meeting our customers' expectation on the switch windows on a day-to-day basis.

Steven Paget (Analyst)

Thank you. Second, if I may, when Tier 4 locomotives come mandatory, the fuel efficiency of these new locomotives might slip. Are you looking at stocking up on, I guess, Tier 3 locomotives prior to the changeover?

Brian Grassby (SVP and CFO)

I can tell you now. We've got enough locomotives to KRS through 2017, which are grandfathered for the Tier 4 application that comes into effect in 2015. And to your point about efficiency, we're working very closely with the OEMs to push them and lead them and work with them and partner with them to create locomotives that are Tier 4 compliant that, at the same time, don't cause us to lose any fuel efficiencies. And that's what the objective is. The leading indicators now are they're going to give us locomotives when we do get back to the market that maintains their level of fuel efficiency that we enjoy today.

Steven Paget (Analyst)

Thank you very much. Those are my questions.

Hunter Harrison (CEO)

Thanks.

Operator (participant)

Your next question comes from the line of David Tyerman with Canaccord Genuity. Your line is now open.

David Tyerman (Analyst)

Yes. My question's on purchase services. They did come in lower in Q1, and especially relative to the second half of last year. I was wondering if you could shed some light on what we should be thinking in terms of modeling going forward on this line.

Brian Grassby (SVP and CFO)

I think in terms of purchasers, as I mentioned, can be lumpy. So if you look at this quarter, there were some favorable items that we do not expect. There was the CAD 9 million one-time management transition settlements. Land sales were a bit higher in Q1. So I would factor out those. But at the same time, you can get some lumpiness in terms of we do have a locomotive overhaul program or whatever. But clearly, I would factor out those items and use a higher number for the coming quarters.

So does that translate into something like $220 million-$230 million as a better kind of run rate to think about?

I think I've given you a lot. I'm not going to do your models for you. But there are some items that took it down this quarter. So it will trend up in future quarters. Thanks.

David Tyerman (Analyst)

Can I ask then, what would be the net unusual in Q1 then?

Nadeem Velani (Head of Investor Relations)

So if I looked at sort of the one-time, so I would say I guess you're pinning me down to an answer here. But in my comments, I gave you that. But we had the $12, sorry, in terms of the one-time, the $9 million, the wheel recoverables were in there, the land sales. So all added, you're looking at around $20 million.

David Tyerman (Analyst)

$20 million. Okay. Thank you.

Operator (participant)

Your last question comes from the line of Turan Quettawala from Scotiabank. Your line is open.

Turan Quettawala (Director)

Hello. Good afternoon. Just one quick question here for Keith. I was just wondering, Keith, now that you've looked at the network, when we look at the CapEx forecast over the long term for 14%-16% of revenue, do you think that's enough with the requirement to maintain, obviously, the network as well as looking at the book of business growth here over the long term? Thank you.

Keith Creel (President and COO)

Yeah. Short answer, I would say yes. But at the same time, if we have compelling book of business opportunities that present themselves that require capital, we won't hesitate to make the right business decision and use our cash to invest in that.

Turan Quettawala (Director)

Okay. Great. That's all. Thank you very much.

Hunter Harrison (CEO)

Well, thanks very much for joining us. I look forward to talking to you with the second quarter results and talking about, hopefully, a record performance again. And we appreciate your patience. This was a little longer than normal. But we didn't want to cut anybody off and wanted to give respect and let everybody have their moment. So thanks for joining us. And have a good, safe day.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.