Canadian Pacific Kansas City - Q4 2014

Transcript

Operator (participant)

Good morning. My name is Kirk, and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific's fourth quarter 2014 conference call. The slides accompanying today's call are available at www.cpr.ca. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. I would now like to introduce Nadeem Velani, EVP Investor Relations, to begin the conference.

Nadeem S. Velani (EVP)

Thank you, Kirk. Good morning, and thanks for joining us. I'm proud to have with me here today Hunter Harrison, our Chief Executive Officer, Keith Creel, President and COO, and Bart Demosky, our EVP and CFO. Before we begin, I want to remind you this presentation contains forward-looking information. Actual results may differ materially. The risks, uncertainties, and other factors that could influence actual results are described on slide two 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 three. The formal remarks will be followed by Q&A. In the interest of time, we would appreciate if you limit your questions to two. It is now my pleasure to introduce our CEO, Mr. Hunter Harrison.

E. Hunter Harrison (CEO)

Thanks, Nadeem, and good morning to everyone. I am certainly nice to be visiting with you given the quarter that this team has put together. I've been doing this a long time, and all things in, this is the best quarter I've ever been associated with, which I think sets the foundation for us going forward in our four-year plan and some of our guidance for next year, which I know we're going to have a lot of discussion about, I would imagine, in Q&A. So let me just highlight a few points that I don't want to overlook. The OR came in at 59.8, which is 600 basis points improvement, and clearly the best quarter performance this company has had in its history. Our earnings were up 40% over 2014.

If you look at the plan for 2014, I think we clearly came in, if you summarize it, two years ahead of the plan with 8% revenue growth and an OR of 64 and a fraction and earnings of $8.50 for the year. So I was obviously delighted with that performance. We're going to touch on the guidance, as I mentioned, but we can just kind of highlight it now that the guidance for next year is 7%-8% revenue growth, operating ratio of better than 62, and we go through a great deal of grinding about how to characterize the OR, but that's our final analysis. And then earnings of greater than 25%. And I would highlight that that does not include any share buyback in 2015.

I know the Board will be addressing this in February, and I would hope and expect that we would continue there, but we certainly did not want to get ahead of the Board in that regard. Overall, it's a great quarter, but it's been a good week for us. A few things that you might not be aware of that I wanted to take a moment to mention. We have had some property in Vancouver that's been in quite a dispute for some period of time with the City of Vancouver, and we got a favorable court ruling this week from the Superior Court, which opens up the value of that real estate, which I would characterize it my appraisal is in the neighborhood of potentially CAD 100 million.

We've had for some period of time an issue that we talked to you about with the encapsulation here in downtown Calgary. With the guidance of Mark Wallace and his team, we finally got that settled to the tune of CAD 60 million this week. We've also been talking to you for some time about our real estate and the potential it possessed, and I think we announced this week a new JV with the Dream Team that we think is going to unlock a whole lot of the real estate potential of the organization.

Then last but certainly not least, we brought on Keith, and Keith will talk more about this, I'm sure. But we brought on a new senior vice president of marketing and sales, who has quite a background to head up the marketing and sales efforts. It's been a good quarter, good week. We look forward to another outstanding year. With that, I will turn it over to Keith.

Keith Creel (President and COO)

Okay. Thanks, Hunter. Well, suffice it to say I'm extremely proud of this operating and marketing team's combined efforts as we continue this journey to making CP a best-in-class, world-class transportation company. Obviously, very rewarding when you take a look at these efforts, improving our train service, our service operating to our customers while we contribute to the bottom line. It's pretty phenomenal. So let me start some comments on the operating side to add some color. The progress I'm most proud of, Hunter, it's not actually the operating ratio. It's more so the improvements we're making in the safety culture because I know the safety metrics, which reflect the improvements in the safety culture, are the foundation of sustaining our success on a long-term basis at CP. I'm a firm believer that our goal is to eliminate all train accidents and injuries.

So to see us produce a 19% reduction in train accidents versus the fourth quarter of last year, about 30% for the year, which has been an industry best-in-class performance for, I believe, the last eight years, it's a strong testament to that we're making progress in this area. But this is an area that I've always said it's not a destination. It's a journey, and it's one that we're going to continue to pursue excellence in. We owe this pursuit of excellence to our communities we operate in and through, to our employees as well as our shareholders and our customers. So let's talk more specifically on the operating metrics side. If I said previously, velocity is the key ingredient to improving our service offering while we unlock capacity for our growth and limit our capital spend.

So as you see in the progress we made the fourth quarter, 10% improvement versus last year is pretty significant. It's substantial. You combine that with running longer, heavier, more fuel-efficient trains, they're all powerful levers that drove our overall performance to the bottom line. As we look forward to 2015 and our continued pursuit of both safety and operational excellence, you're going to see us progress as we evolve our culture, as we convert the investments we made in our franchise in 2014, which will help us drive additional improvements in velocity, train weights, and fuel efficiency, in addition to the investments we're going to make in 2015 to continue to improve this network and improve our core infrastructure. Let's spend a few moments talking on the revenue side. We ended the year with a strong revenue performance in the fourth quarter, up 10% over 2015.

RTMs came in line with what we guided to up 6%, 10% per RTM up 4%, which is driven by strong pricing, favorable currency, offset somewhat by a negative mix. I'm not going to cover all the individual lines of business, but let me go over a few of the highlights from the quarter. On the grain side, very happy that we successfully implemented our new dedicated train program in Canada and in the U.S. for the crop year. This is a significant change in our car distribution. It's driven greater asset utilization and created capacity with our fleet, which are both positives for our customer as well as for the company. In the fourth quarter, we saw strong soybean demand to and from our franchise to the Pacific Northwest. And also on a positive note, our unfulfilled car orders were minimal, of course, compared to 2013.

On the potash side, strong volumes in the fourth quarter, a function of strong export demand and the need to refill customer distribution networks. On the coal side, overall flat revenues. But on the U.S. side, as I mentioned in our last call in the fourth quarter, we were successful in rebalancing our operations with our customers and connecting carriers for the Powder River Basin coal to the Midwest, shifting that tonnage from the St. Paul Gateway to an Iowa Gateway. We expect this to continue to improve our velocity and certainty of coal supply for our customers while at the same time, it's improving the quality of the revenue and this book of business on the U.S. side. On the crude side, we finished the year with 30,000 carloads in the fourth quarter. For the year, our mix was about 55% light and 45% heavy.

This growth was mainly driven by new movements in Canada from Bruderheim and the Hardisty two facilities, which will drive, as we go into 2015, that mix change going to the heavy side versus the light side. On the automotive side, we reflect what you see as a four-year reflection of the loss of the crux of the business starting in Q3 of 2014. Intermodal, again, this is a tale of two stories. We continue success on the domestic side, growing at its fastest pace of the year, up 19% in the fourth quarter versus last year.

International was down in the quarter, but if you exclude the year-over-year impact of the loss of the OOCL business, which was essential, I mean, which was material, of course, if you exclude that, we're up 15% year-over-year, which is a reflection of the superior service we're offering to our steamship customers that we are doing business with. So all in all, very positive on the intermodal side. As we look forward to 2015, following two years of 8% revenue growth, as Hunter said, we're guiding to 7%-8% growth in 2015, which is a combination of a lot of moving parts, obviously. Based on the assumptions we provided, we expect 3%-4% RTM growth, about 4% yield per RTM growth. On the fuel surcharge, we're going to have a reduced fuel surcharge, obviously, but that's offset by the FX benefits.

Order of magnitude on the reduced fuel surcharge specific to revenues, it's about a 5% hit. This also assumes the sale of our southern portion of the D&H and the DM&E, four-year effect, reduced revenues is about 1%. Crude outlook, I'm sure that'll be a topic of much interest. I'll point out that we've taken our expectations down for 2015 to 140,000 carloads for the year. We've obviously seen significant price declines for the commodity that were not expected as our original targets were closer to $90. Even in December, I'll point out that this commodity was trading in the low 60s. Even today, we're in a different scenario when we're down to the mid-40s. Bottom line, we feel that this prudent approach is necessary to take down our assumptions to a growth rate of about 25%-30% versus 2014 volumes.

This growth is mainly expected to come from increases in heavy production with our new facilities that are going to come online the second half of 2014 or second half of 2015, as well as two facilities to come up later in the year. We got ExxonMobil coming on second quarter late. We've got Kerrobert Plains coming on in July. Other merchandise outlook, we expect double-digit revenue growth for our forest products, our chemicals, and our plastics and minerals groups. And as we complete our new service offering, it's positioned as well to grow in these markets, providing superior service for our customers, reduced cycle times, and improved transit. We also see potential strength for lower Canadian dollar, which is going to improve our Canadian companies and partners' ability to compete internationally.

The impact of lower energy costs should improve economic prospects in the US and Eastern Canada as we move into the year. Bulk side, we're assuming low single-digit revenue growth. The shipping levels are going to moderate versus 2014 levels. Intermodal side, we expect mid- to high single-digit revenue growth, given we're going to lap our contract losses on the international side and continued strength in the domestic intermodal. Final comment, as Hunter said, I'm extremely excited to add a new team member to enhance the strengths of our bench.

On the marketing and sales side, Tim Marsh is joining us from COSCO. He'll be with us February the 1st, bringing 25 years of experience sales and marketing, certainly with a vast knowledge of the international shipping industry. But those same strengths and talent sets as you develop leading that world-class organization, their sales team will help us leverage growth across our Board as we move to our 2018 goal of taking this revenue to $10 billion. With that said, I'll pass it over to Bart to provide some more color on the numbers.

Bart Demosky (EVP and CFO)

Thank you, Keith, and good morning, everyone. Very proud to be on the call with you and proud to be reporting this quarter's results, which certainly are a record on all counts. Quarterly revenues growing by almost 10% to nearly $1.8 billion. As Keith and Hunter have outlined, a record operating ratio of 59.8, the lowest in the company's histories. Record operating income and adjusted net income of $708 million and $460 million, respectively. All that adds up to adjusted EPS of $2.68, a 40% increase versus last year. The results combined have produced reported EPS of $2.63. I'm sure our shareholders have an appreciation for our strategy to buy back shares to enhance shareholder value. We were very aggressive with our purchases in the fourth quarter when prices were depressed.

To enable that buying, we will be issuing debt, and it's our intent to manage our cost of debt very tightly by issuing the lowest cost way in either Canadian or U.S. dollars. We kicked off this strategy in the quarter with the issuance of U.S. dollar commercial paper. We currently have about $675 million outstanding at an average interest rate of 0.45% or 45 basis points. So very attractive pricing. This debt does attract accounting currency translation. Every penny change in the value of the Canadian dollar means about three cents of after-tax, non-cash accounting translation below the line. If we take on additional U.S. dollar denominated debt for each $100 million, the sensitivity will be about 0.4% after tax. Now, I do want to stress those fluctuations are purely a below-the-line accounting adjustment and non-cash in nature.

So you can expect to see us adjust this out of our earnings going forward. Now, as we've said in the past, we intend to be very strategic with our share repurchases. And I trust our shareholders appreciate our decision to buy aggressively in the fourth quarter when prices were low. To give you an example of the benefit of the approach, in Q4, we bought a total of 5.2 million shares, of which almost half were purchased directly from Canadian financial institutions at an average price of just over $192. That's in comparison to today's share price of about $230. Operating expenses on the quarter were $1.05 billion, down $441 million versus last year. If we exclude the impact of the DM&E West sale, $433 million significant items, expenses were still down by $45 million on a foreign exchange adjusted basis.

That's in spite of a 6% increase in RTMs. Now, I don't want to go into each of the expense categories, but there are a few items worth highlighting. First, we continued improvement in comp and benefits this quarter, driven largely by efficiency benefits and lower stock and incentive comp versus last year. There are a few headwinds on the comp and benefits line in 2015, I just want to highlight for you. First, with falling interest rates, the discount rate we used to calculate pension liability came in lower than the previous year, which pushes up pension expense on an accounting basis. For 2015, this results in a defined benefit pension expense of $45 million. That's about a $90 million headwind versus last year.

As our business performance continues to be very, very strong and has put us well ahead of plan, we are anticipating an increase in incentive comp as we true up some of our performance share unit assumptions later in the year. That's about a $28 million impact. We're also modeling higher stock-based comp sensitivity now with a $1 change in share price having a $1 million impact on the comp and benefits line. Now, that is a three-year rolling program. We're now fully into the third year of the program, so that sensitivity should remain very stable going forward. Lower fuel prices and a 3% improvement in fuel efficiency drove fuel expenses lower year-over-year. Purchased services were up $19 million versus last year, but that's largely a reflection of foreign exchange and lower than usual casualty costs in 2013.

Looking toward this year, we currently expect to see about CAD 25-30 million in land sales, and that's roughly in line with what we've seen in the last couple of years. For the full year, we generated free cash before dividends of just under CAD one billion and free cash flow of CAD 725 million. That's an increase of 37%. Our CapEx was CAD 1.45 billion. As we look out towards this year, we are expecting CapEx to be relatively unchanged at approximately CAD 1.5 billion. Now, consistent with the rapid improvements we've made on the cash flow front, our credit metrics have also continued to improve, resulting in another set of ratings upgrades in the fourth quarter.

That's a two-notch improvement over the course of 2014 and brings our target ratings up to where we want them, which is BBB plus, Baa1, and BBB high, respectively, for S&P, Moody's, and DBRS. The higher rates, of course, allow us to access debt at much lower spreads than where they were just 12 months ago. That's important as we manage our leverage going forward to release cash from the balance sheet for shareholders. Just to finish my thoughts on share repurchases from earlier, we bought back about 10.5 million shares over the course of 2014 at an average price of about $199 versus an average traded price of over $206. So savings of $7 and obviously well below today's share price.

To date, we've completed about 85% of our current program, and we're on track to finish that program by its expiration in March. I would be remiss if I didn't reinforce the message that we continue to see repurchasing our shares as a strong value proposition for shareholders going forward. Thank you very much, and I'll turn it back over to Nadeem. Over to Hunter.

E. Hunter Harrison (CEO)

Well, Kirk, with that, we'd be glad to take questions if you reminded us.

Operator (participant)

At this time, I'd like to remind everyone, in order to ask a question, simply press star, then the number one on your telephone keypad. If you'd 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 a line of Fadi Chamoun from BMO Capital. Your line is open.

Fadi Chamoun (Analyst)

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

Keith Creel (President and COO)

Thaddeus, I think it helps. I think you got to understand the two different books of business. On the domestic side, what we're converting in value is based on service. It's based on transit time. So while we may not have a 40% or 45% benefit on fuel costs versus the truck, we certainly still have a service benefit that they can't replicate on the truck side. You still have a shortage of truck drivers, and 40% or 45%, maybe that's reduced to 20% or 25%. It's still very compelling to continue to grow on the domestic side as we improve that book of business. So on the international side, fuel costs come down. I think that's a good thing for our steamship partners.

If you align with steamship partners that start actually to stop slow boating and actually give you some consistency in your arrivals at your ports, that's going to allow us to improve our service and reduce our cost of handling that existing business. So on both fronts, I think it's positive, Thaddeus.

Fadi Chamoun (Analyst)

Okay. Thank you for that. The second question is more sort of big picture question. In October, you told us you intend to double earnings by 2018. And obviously, the energy is sort of a big component of that at the time. And I was wondering, how do you feel about that goal if energy markets remain depressed over that time frame? Can you still meet your goal, your target? Are there levers that you can pull on that would offset that energy component that you have in there?

E. Hunter Harrison (CEO)

Thaddeus, I think we feel comfortable there. The components might change a little bit, but I think the bottom line earnings, we're very comfortable with. We don't expect for crude to stay depressed like this for that period of time. But your question, if they do, we think there'll be some improvement across the Board in the rest of the economy, which will pick up things there. We think the aggressive continuing cost control efforts and efficiencies that we've talked about really in the plan, and we're kind of at the corner turning the corner here, can certainly replace any deficiencies that crude might bring to us.

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

Fadi Chamoun (Analyst)

Okay. Thank you.

Operator (participant)

Your next question comes from a line of Chris Wetherbee from Citi. Your line is open.

Chris Wetherbee (Senior Research Analyst)

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

Keith Creel (President and COO)

About, I don't know if I'd stand that up broader, but it's generally close to that. I know that there was about a 40% difference in, per se, the rate for a container versus the rate for a truck in certain key lanes when I started this journey a little over a year ago. So as that came down, is that going to be compressed some? Sure. Is it going to be 25%? That's just a to me an educated guess, but at the same time, maybe it's a little bit more, maybe it's a little bit less. The key to understand this, though, is you're still going to have a constraint on truck drivers.

They're not going to be able to compete head-to-head transit time, single truck driver coming in these key lanes, which are the most profitable for CP and also the most important to those partners of us that care about service that are service-sensitive. So we've got a reliable product in the marketplace that's head-to-head competitive from a transit time, if not better, than the truck, and there's a cost advantage. So all those play to our strengths.

Chris Wetherbee (Senior Research Analyst)

Okay. That's very helpful. Then when you think about sort of the state of the railroad heading into the first quarter, obviously, with what weather was last year, certainly some disruptions from a service perspective, still some improvement coming from some of your partners. Just want to get a rough sense of kind of how we think about that, particularly relative to last year, maybe from an operating ratio perspective. Just overall speaking, kind of heading into the first quarter, feels like we're in a much better position than we were last year. Want to just kind of get some color around that would be helpful.

Keith Creel (President and COO)

Well, let me qualify my comment. I'll tell you how excited I am about January, but this winter is not over. We still have February and March. Knock on wood, I'd love to stay in assuming that we'd have the same kind of kind treatment by Mother Nature in those two months. I just don't know that. I would say that, yes, you're going to see some benefit. January is very encouraging. Speeds up. Our train links up. Our train rates up. Our service is up. Our business is up. And our cost is down. Those are all good things. Again, we still have February and March to go through.

Chris Wetherbee (Senior Research Analyst)

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

Operator (participant)

Your next question comes from a line of Benoit Poirier from Desjardins. Your line is open.

Benoit Poirier (VP and Industrial Products Analyst)

Yeah. Good morning, gentlemen, and congratulations for the good quarter. Keith, just in terms of RTM expectation, I was wondering if you could provide more color in Q1 given that you might be facing an easy compare given the weather? I know it's still early. Also, if you could provide more color, especially on the grain and then terminal, given that the OOCL loss, you will be facing an easy compare again on that side?

Keith Creel (President and COO)

When you say easy compare on the international side, OOCL loss, we're going to lap that we actually still had some OOCL business in January of last year. So the easy compare piece is not full effect until we get to the second quarter. So there is going to be a little bit of headwind there. When you say RTM, explain a little bit more. I don't quite understand.

Benoit Poirier (VP and Industrial Products Analyst)

Oh, just in terms of I mean, you're looking for RTM close to 3%-4% for the year. But specifically in Q1, would it be fair to expect a higher number, lower number, given the comparison versus last year and the grain situation?

Keith Creel (President and COO)

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

Benoit Poirier (VP and Industrial Products Analyst)

Okay. Perfect. Second question, if you could provide also an update on the hourly agreement, whether there's any change on that side?

Keith Creel (President and COO)

Well, it was put out for vote. It was turned down. On the U.S. side, this is specific to the U.S. operation. So at this point, I still think it's relative. And do I still think it's possible? I'd say yes. It makes too much sense not to be, but not in the immediate future. So it's nothing that we're seized with right now. We're looking at optimizing the way we operate our crews, optimizing.

There's still some gains to be made relative to maybe some consolidations on the multiple agreements that we've got on our U.S. properties that we're looking at. But we'll continue to improve labor productivity in the absence of that agreement. But as time evolves and as people retire and as attrition takes hold and you have a workforce more concentrated with a different set of values, that hourly deal is going to play very well to those values as we go forward. So more to come on that.

Benoit Poirier (VP and Industrial Products Analyst)

Okay. Thanks for the time.

Keith Creel (President and COO)

Thank you.

Operator (participant)

Your next question comes from a line of Bill Greene from Morgan Stanley. Your line is open.

Bill Greene (Managing Director)

Yeah. Hi there. Good morning. I wanted to come back and just touch a little bit on the OR. Hunter, you sort of hinted already that it could be conservative. But when we think about the puts and takes here, whether it be pension or falling fuel, I assume falling fuel is a bit of a benefit to the OR as well. Can you talk about how to think about those longer-term ORs in a world of lower fuel? We know it perhaps has risk on crude, maybe longer term, but maybe it has a benefit on the margin we didn't think through. Can you speak at all to that?

E. Hunter Harrison (CEO)

Well, I mean, Bill, if you play it out, it's a timing issue. And effectively, the fuel surcharge is going to be a wash. It's going to obviously be a negative hit to the top line. But at the same time, it's kind of a non-event when you look at the overall OR over any extended period of time. So I mean, does it make the industry, the sector, more competitive with pipeline or what? At least psychologically, there's some benefit there. But it doesn't play strongly in the four-year plan either way. We're going to have some adjustments with the DM&E top line. We're going to have some adjustments if we're successful with the sale of the D&H. But all things in, and there's a lot of moving parts. And as I tried to point out earlier, the components might change.

I think the thing we still feel the strongest about is the bottom line doesn't change. It might be made up a little differently. But we're entering a stage, and people tend to forget this, kind of in the four-year plan where we're starting to turn the corner. And this is really this leverage is based on the low-cost carrier team. So we can be much less aggressive. And I hesitate to say that. We can be much less aggressive price given the strength of the OR and not being in a position where we're trying to drive the 57, but we're trying to drive more growth. And that's the key shift that people tend to miss in the overall strategy of the four-year plan.

I mean, I feel very confident that if we look at some of the business we got if you go back initially and look at some of the legacy contracts where people were very concerned about, business that was at the bottom of the book from a margin standpoint, now it's the top. So now you've got much more markets that open up to you that you can really generate growth in spite of what potentially happens with crude over the next two or three years. And I certainly, personally, don't think that crude's going to stay in the mid-40 range. I think you're going to see a shift there. And I emphasize this. None of this plan is dependent upon crude moving to other levels of 75 or 100. It's almost a it's not a huge factor in the plan.

Bill Greene (Managing Director)

Okay. That makes sense. Can I just have one follow-up here just on the currency? And that is, how long do you think it takes for whether it's Canadian manufacturers or producers of any sort to start to benefit from the lower currency? Is that something we should be thinking about? Does that benefit, for example, Ontario manufacturers or whatnot such that it could help CP? Or is that a very long lead that this would come out over years? It's not something to think about for 15?

E. Hunter Harrison (CEO)

I don't think it's a bill, certainly, that's a pretty broad area you're talking about. Some of it, exports will take advantage immediately where there's comparable products north and south of the border. And with the lower dollar, clearly, some of those things will change quickly. Now, there's others that have got contracts and legacy contracts that will see certainly a sea of lag. But I think that will be an additional boost to the overall North American economy that to some degree really hadn't been taken into account north of the border because we can't get our tears out of our eyes here.

Bill Greene (Managing Director)

Okay. Fair enough. All right. Thank you so much.

Operator (participant)

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

Scott Group (Senior Analyst)

Hey. Thanks. Morning, guys. Wanted to first ask about the buyback. And no, it's not in the guidance. And I know you can't get too ahead of the Board. But if I just look, you've bought back 7% of the stock or so in three quarters. So call it on a run rate of buying back 10% of the stock a year. Do you feel strongly about the stock at these levels that that's the kind of buyback you'd like the Board to approve? Or should we be thinking something less aggressively?

E. Hunter Harrison (CEO)

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

Scott Group (Senior Analyst)

Okay. So, kind of the run rate you're on, been doing, you think you can sustain?

E. Hunter Harrison (CEO)

Yes.

Scott Group (Senior Analyst)

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

Keith Creel (President and COO)

Where do I start here? Okay. Pricing on the crude, I can tell you this. We're not going to haul it for free. And we're not going to do it for practice. So we still have a legacy contract in there that is not the most favorable. But as we sign these deals and we lock and load on this crude growth, we're certainly bringing it on at a fair rate that reflects the service that we're providing. So as far as the run rate, 140, we were at 30 fourth quarter of this year. That run rate probably is going to ramp up the second half to get us to the 140 versus the first half. So do the math. That puts us. 160, 180? Yeah. Right at the end of 2015. And that's, again, assuming that oil stays pretty close to where it's at now.

The key to that, of course, is those two facilities we've got coming on, Kerrobert with Plains as well as the ExxonMobil Kinder Morgan facility in Edmonton, which we'll be serving. As far as share, you know what? I think it's a wash. I don't necessarily see anything material on the share side. As long as I believe strongly we can provide a superior service. I believe that we've got an advantage when it comes to transits, reduced mileage going into key markets. I think we're strategically positioned extremely well with partners south of the border for heavy crude growth that's going to enhance this franchise. So I feel fine on the share side.

Scott Group (Senior Analyst)

Thank you, guys. Appreciate it.

Operator (participant)

Your next question comes from a line of Walter Spracklin from RBC. Your line is open.

Walter Spracklin (Managing Director and Equity Research Analyst)

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

Bart Demosky (EVP and CFO)

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

Walter Spracklin (Managing Director and Equity Research Analyst)

So even with two million shares of buyback built in, it's still not working out to 25%. Perhaps I have to come back to you afterwards. But there's nothing I'm missing here. If I'm assuming 8% and even below 61%, I should get to north of 25% earnings growth with a three million share buyback?

Bart Demosky (EVP and CFO)

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

Walter Spracklin (Managing Director and Equity Research Analyst)

Sure. Okay. And then following up on the guidance, your longer-term guidance, I don't know if that, he was asking about. But zeroing in on your revenue growth, the guidance you implied was for 10% CAGR for the next four years. You're at 7%-8% now for, I guess, this will be officially year one. I know you mentioned a lot of it would or could be back-end loaded. Is that what explains it? Or is it rather now crude is dialing you back? I know one-third of your future growth was built around crude. You're dialing it back and kind of hoping to make it up perhaps on a little bit lower end of the operating ratio to get to that doubling of EPS. Is that the right way to frame it?

Keith Creel (President and COO)

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

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

Walter Spracklin (Managing Director and Equity Research Analyst)

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

Keith Creel (President and COO)

That's exactly correct. It was a 4% core in the fourth quarter. You can assume the same thing for the guidance of 2015, 3%-4%.

Walter Spracklin (Managing Director and Equity Research Analyst)

That's great. Okay. Thank you for answering my questions. That's all. Thanks.

Operator (participant)

Your next question comes from a line of Tom Wadewitz from UBS. Your line is open.

Tom Wadewitz (Senior Analyst)

Yeah. Good morning. Wanted to ask you a little bit along the lines of the volume growth. I'm assuming you've expected strong intermodal volume growth and pretty aggressive 10% revenue CAGR over four years. When you had the analyst meeting in October, obviously, to reflect the lower crude oil prices, you say you think you'll get less from crude by rail. Are there places where you say, "Well, we've got a bit more capacity. And even though we were aggressive in our volume growth assumptions before, we can do even more. We can push even harder." Is that possible? Or is that the wrong way to look at it in terms of the kind of expecting less crude volume over the horizon?

E. Hunter Harrison (CEO)

Tom, let me make this comment. I've tried to and I've been really unsuccessful in decoupling us so much from crude. Now, we've talked about that all in, it's potentially 10% of the business if you look at frac sand and pipe and the crude and all that. The first answer is this. We don't know where crude's going. And I'd like to know the person that does. And I could be more definitive in my answer. But I know we have a plan A and a plan B and a plan C if crude would stay here. We've got a lot of capacity. We've got a lot of improvements in service that will be continuing.

The big leverage is we've got a lot of leverage on the cost side, which can be converted to the top-line volume side, which equals a strong or stronger bottom line than we've indicated going back to the four-year plan. There's a lot of moving parts here. It gets into high-level detail, which we'll be glad to go through at some point in time with all of you or any of you. The bottom line of it is that we're highly confident that in four years, the EPS will be where we sit in.

Tom Wadewitz (Senior Analyst)

Right. Okay. I appreciate that. How should we think about headcount opportunities if you look at 2015? Does headcount go down 1%, 2%? Is it flat? Can you kind of frame that? And I guess maybe looking at 2016 as well, how do you think about the headcount side?

E. Hunter Harrison (CEO)

I think the headcount, the latest numbers I saw, we figured it will be down around 500-600 this year. Then in the out years, there are similar-type numbers given that the sensitivity and the shift in the book of business doesn't change. One of the things that some have missed is this. As we bring on additional tonnage, it doesn't necessarily bring on additional heads or cost. The big leverage that Keith has been able to create is with train size. If we're operating some train, for an example, at 12,000 tons and our average is six or seven, we've got a lot of leverage there that we can bring on incremental business without bringing on additional heads and T&E and the associated cost that people kind of straight-line, which is the wrong assumption to make.

Keith Creel (President and COO)

Let me add to that, Hunter, if I can. Order of magnitude, if you think about this physical plant we said this. We've inherited a physical plant that was underinvested in, that's not optimized, still to this day with our existing business to run long trains. This past year, we're seeing the benefits of about 16 siding extensions that we invested in in 2014. Now, we've got 30 on the books for 2015. Now, some of that, we can pull back if we want to in the absence of crude growth. But still, the order of magnitude, it's going to be 20-to-1 upside.

So if you take that, continue to invest in and expand upon this franchise even with today's book of business, that gives us incremental gains, some would argue quantum leaps in train size and weight and train speed to bring it off the bottom line based on today's revenue. So that's just order of magnitude, some of what we're talking about and the level of detail that we have in front of us to play this plan A, B, or C.

Tom Wadewitz (Senior Analyst)

Okay. Yeah. Great. That's very helpful. Great results in fourth quarter. Thanks for the time.

Keith Creel (President and COO)

Thanks, Tom.

Operator (participant)

Your next question comes from a line of Cherilyn Radbourne from TD Securities. Your line is open.

Cherilyn Radbourne (Managing Director and Equity Research Analyst)

Thanks very much. Good morning. Wanted to ask a question about fuel surcharge programs that's become a recent investor concern, whether they're based fully on highway diesel or whether there's still some WTI-based programs lingering. Can you just speak to your confidence as to the robustness of your programs?

Bart Demosky (EVP and CFO)

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

Cherilyn Radbourne (Managing Director and Equity Research Analyst)

Okay. Great. And then just with respect to the train size opportunity that was just referred to, can you just give us some color on to what extent that's an opportunity in bulk versus merchandise versus intermodal?

Bart Demosky (EVP and CFO)

Well, I'd say that it's on all fronts because when you look at our network in all the corridors, we're investing the southern region, which is going to benefit us on train size, on merchandise, on bulk, as well as on intermodal. We've got some limitations and some restraints on our productivity because of the absence of CTC in those corridors, the absence of long sidings to reduce train starts, which allows you to increase train speed and increase train and track capacity. It's a similar story in the West. As we continue these investments, you'll see some opportunities on bulk in the southern region. The stuff going westbound, I think we're pretty right-sized when it comes to coal and to potash. However, as we continue to invest in the out years, you're going to see a pickup on grain, which we don't benefit from now.

And then in the northern territories and across the East, you're going to see, again, a pickup in grain, a pickup in potash. We don't run any coal East. So that's not a benefit but definitely a pickup on the merchandise side. So we're well-positioned across the Board to see some synergies relative to train length, train weight, and train size.

Cherilyn Radbourne (Managing Director and Equity Research Analyst)

Great. Thank you. That's my two.

Operator (participant)

Your next question comes from a line of Allison Landry from Credit Suisse. Your line is open.

Allison Landry (Senior Equity Research Analyst)

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

Keith Creel (President and COO)

Yeah. Hi, Allison. I'd go back to what Hunter said earlier, that obviously, we're very confident in the program. We're confident in the future of the company and the way we're going to perform. And so we really do believe that continuing to buy back shares makes great sense. We had a very strong year in repurchases in 2014. We do have lots of debt capacity. And we'll continue to build debt capacity. I think you've probably got that modeled in. So is there some flexibility around the numbers? Yes, absolutely. If we saw very favorable prices, you could see us be a little bit more aggressive. But obviously, we do need to get back with our Board in February and have a good discussion with them about it first.

Allison Landry (Senior Equity Research Analyst)

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

Keith Creel (President and COO)

Excellent. Allison.

Nadeem S. Velani (EVP)

Keith, and as far as velocity?

Allison Landry (Senior Equity Research Analyst)

Right.

Bart Demosky (EVP and CFO)

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

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

Allison Landry (Senior Equity Research Analyst)

Okay. Fair enough. Thank you. Thank you.

E. Hunter Harrison (CEO)

Let me add this.

Sure.

In a crude way, no pun intended, to look at crude, if you cut down to it, it's got a relatively high operating ratio relative to the order book of business. So as we lose crude revenues, we don't lose as much at the bottom line. And there are a lot of unknowns with crude going forward, a lot of potential liability issues and our liability coverage and our insurance and what's going to happen legislatively. And so all things in, if we get hit and we've been, I think, pretty conservative in looking at units of crude, it's not all going to go away. And it's not a linear equation there to look at the potential loss.

Allison Landry (Senior Equity Research Analyst)

Understood. Okay. Thank you very much.

Operator (participant)

Your next question comes from a line of Brandon Oglenski from Barclays. Your line is open.

Brandon Oglenski (Director and Senior Research Analyst)

Good morning, everyone. Congrats on the quarter. Hunter or Keith, I think a lot of the confusion here, obviously, stems from the fact that the 10% CAGR was built off of a lot of energy growth. Your confidence always seems pretty high that you're going to hit it with some potential offsets even if energy isn't quite the contributing factor you thought it was. Are we thinking about it the wrong way?

You guys structurally have a shorter distance from some of the West Coast ports into inland U.S. and inland Canada. I think our view is that you historically just haven't leveraged that with the velocity that the system should be moving at. How much of the plan is really predicated that you were just underserving the markets to begin with, inefficient, and now you're going to bring efficiency up for the customers that you're serving today, be more competitive with highway moves? It's not really contingent that much on energy or even the economy for that matter.

E. Hunter Harrison (CEO)

So that's the point of the whole plan. It's based on the leverage of the low-cost, most efficient carrier. And if I can continue to lower my cost and keep my price the same, if I don't even take price increase, okay, allows me the opportunity to grow the business at the bottom line. And that's the basis for the plan. As we get stronger and stronger in a cost control standpoint, the juice to the leverage of the service, which turns the assets faster, and you start growing at the top line, even if you impose flat rates, you get some if you want to model that, the numbers will run all over you with cash. That's the foundation of the plan that people seem to be missing because their model doesn't support that strategy. So you got it.

Brandon Oglenski (Director and Senior Research Analyst)

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

Keith Creel (President and COO)

Well, we're seeing velocity improvements, obviously, with an improved network and improved Chicago versus last year. But when I say it's improved versus last year, you got to be careful what you compare it to. It's always going to be fragile. We have not had, not even close to the weather we had last year. So I'm cautiously optimistic right now, given the weather conditions about Chicago. We do have, again, cautiously optimistic, this industry expert team that the industry has put together, this think tank that's looking at ways to improve fluidity in Chicago. The thing that I do get a little bit apprehensive about, though, and I raise this as an issue for my colleagues in the industry, just because we're experiencing maybe a breath of fresh air now compared to last year, we can't forget how sensitive that city is.

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

Brandon Oglenski (Director and Senior Research Analyst)

Appreciate it.

Keith Creel (President and COO)

Thank you.

Operator (participant)

Your next question comes from a line of Tom Kim from Goldman Sachs. Your line is open.

Tom Kim (Senior Industrials Equity Research Analyst)

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

Bart Demosky (EVP and CFO)

From the back of the assumptions, Tom, I think it was closer to $90 WTI. We can pull out the deck, but I'm pretty sure it was $90.

E. Hunter Harrison (CEO)

Well, that's right.

Bart Demosky (EVP and CFO)

That's right. And so.

Tom Kim (Senior Industrials Equity Research Analyst)

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

Keith Creel (President and COO)

Absolutely. Well, I mean, just in terms of absolute fuel cost savings, it's obviously going to be much more significant than what you probably had envisioned earlier given that $90 WTI assumption. Let me just ask also another question. Obviously, with oil prices where they are, one would have to think some of your shippers are approaching you for rate concessions just given that that period of supernormal profits has sort of faded, at least for now. I'm under the impression, I'm sure many of the investors on the call would believe, that you price based on your value proposition, not based on the relative cost of oil. So I just wanted to just make sure that our thought process here is correct. Is that right? And then if so, if you did get pricing pressure, are you comfortable enough to walk away from that business? Thanks.

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

Tom Kim (Senior Industrials Equity Research Analyst)

Great. Thanks very much.

Operator (participant)

Your next question comes from a line of Stephen Paget from FirstEnergy Capital. Your line is open.

Steven Paget (Director and Institutional Research Analyst)

Good morning. Thank you. You answered one of my questions on fuel surcharges. I'll skip that. It seems you've had some success increasing your per-car load charges in grain. Can we expect to see per-car revenues in the $3,500 range in the coming year?

Keith Creel (President and COO)

The success on the grain side has been centered on our growth in the Pacific Northwest. So taking Canadian product, taking U.S. product over the Pacific Northwest export terminal, we're getting a longer haul and a better quality of revenue. So as long as those trends sustain themselves, then you'll see continued strength in that regard.

Steven Paget (Director and Institutional Research Analyst)

I assume a little bit of US dollar uplift as well. Thank you, Keith. A question from either Keith or Hunter. After 2+ years of the shippers working with the new CP, have you seen shippers change their behavior now that CP has better and more reliable transit times? I mean, I could use the words supply chain management or some other thing to describe it. But are shippers behaving in a more constructive way?

E. Hunter Harrison (CEO)

Keith can comment. I would say this. Number one, we clearly have a much better service offering than we had before. Clearly, we have a much better reputation of doing what we say we're going to do. I think it's clear we've gained some respect of the shippers that maybe the organization didn't possess before. Now, was some of that hard? Was some of that change? Was some of that a different way of doing business? Yes. But I think Keith can bear this out, hopefully. But as we interact with customers today as opposed to two and a half years ago, it's a much more pleasant experience.

Keith Creel (President and COO)

And I would echo those comments, Hunter. And I would say that you're starting to see some of the fruits of our labor in our increased merchandise non-crude, if I exclude crude, some of the growth that we're seeing there. And I'm most encouraged by as we bring Tim on Board. I mean, Tim's coming into an environment where we've done great things, improving our engine, so to speak, which is producing a much superior service offering. I'm excited about the leadership and the expertise he's going to bring to the table, enhancing our team's strengths and abilities to convert that to marketplace. So all very good things in that regard.

Steven Paget (Director and Institutional Research Analyst)

Excellent. Thank you, gentlemen.

Keith Creel (President and COO)

Thank you.

Operator (participant)

Your next question comes from a line of Ken Hoexter from Merrill Lynch. Your line is open.

Ken Hoexter (Managing Director)

Great. Good afternoon. Congrats on the sub-60% OR. Hunter or Keith, maybe just to dig into that for a second, how do you think about this in your long-term balance of revenue growth with the low hanging cost? Seems like you've still mentioned a lot of programs that exist at lower costs, whether it's the leftover whiteBoard sessions, train lengths, and other. Is there structurally still a lot more room to go? When you think about your long-term kind of targets, do you still kind of see the operating ratio maybe going beyond those targets just given what is structurally left when you look at the network?

Bart Demosky (EVP and CFO)

I'd say the structural opportunities are there to take it to a different level or a more improved level if we so choose. But to Hunter's point, the game is shifting. We want to grow at the top line. So it gives us an ability to decide if we want to play in markets. There's certain markets a couple of years ago I couldn't play in because I couldn't make a buck doing it. That game's changed. And our toolkit has changed and improved dramatically.

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

E. Hunter Harrison (CEO)

Yeah. I think I would just add this. Look, the operating ratios are a hold card, okay? It's going to make this thing tick one way or the other. We can go either way we need to go strategically. If there's not, and I believe there will be, top-line opportunity and the only thing to focus on is cost, people are going to squirm when I say this, there's a lot of runway left. Look, we just went through a 59.8 fourth quarter. From a seasonality factor, the fourth quarter is not your best quarter with the holidays and some weather factor.

With the initiatives that Keith has talked about here, with some of the headwinds we've got that are going to be tailwinds and reverse, I don't think the crude situation, my personal view, is going to get much worse. I think there's much more upside than there is downside. So I'm pretty pleased at where we are positioned. But as I've said before to this group, it's a simple formula. Be the low-cost carrier with the best service, and the rest of it will take care of itself.

Ken Hoexter (Managing Director)

Okay. Great takeaways. Hunter, maybe just to expand on we went through a lot of discussions over the last two quarters on your thoughts on acquisition, on discussions. It's quieted down through the new year period here. Is that something you want to revisit at some point in the future? I mean, obviously, you keep talking about spitting off amazing amounts of cash and your desire to grow. What are your thoughts about re-entering discussions, especially if the fear before was the industry was scared of where the service metrics were. But if we start to see without weather, service metrics for the industry may be improving a bit, does that take some of that off the table, and is something that could be revisited? What can I think?

E. Hunter Harrison (CEO)

I think we're always going to be opportunistic. And if we see opportunity look, we're not obsessed with trying to create some merger. But if there's a fit, if we're in a position and there's opportunities there to enhance shareholder value from our strategic plan, we're certainly going to take a look at that. Now, it appears today that there's nobody that wants to dance. So it takes two. But look, we've got a great agenda here. We've got a great plan. And if someday, whether it's six months or six years, there's an opportunity that comes up and it meets that criteria of enhancing shareholder value, we're certainly going to be nimble and in a position to react to it.

Ken Hoexter (Managing Director)

Appreciate the insight. Thank you.

Operator (participant)

Your next question comes from a line of David Newman from Cormark Securities. Your line is open.

David Newman (Director and Equity Research Analyst)

Good afternoon, gentlemen.

E. Hunter Harrison (CEO)

Good afternoon, David.

David Newman (Director and Equity Research Analyst)

Very good. Bart, I guess you're quite happy to be working for a railroad versus a producer at this juncture. Just looking out on your free cash flow, you didn't give specific guidance on it. But if I do the math on it, it looks like it's around $1.1 billion-$1.2 billion next year before dividends. Is that in the ballpark?

Bart Demosky (EVP and CFO)

Yeah, David. You'd be in the right area. We came in just under $1 billion this year. We're forecasting greater than 25% earnings growth. So you know the correlation between the two in terms of how that's going to produce more free cash. So we'd be comfortable with where you're viewing things.

David Newman (Director and Equity Research Analyst)

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

E. Hunter Harrison (CEO)

Well, I mean, we're over the hurdle one, which took a lot of dotting the i's and crossing the t's and lawyers, which I don't have a lot of patience for. We got that time. I mentioned the other two that are going to be agreed day one. I know that the Dream Team has a great reputation. Both of us do not want to sit on opportunities. So I would expect that possibly by year-end, you'll see the first transaction and starting to see some things hit the income statement, whether it's below the line or above the line given the rules. But certainly, from a cash flow standpoint, I would think you're going to see those things start to kick in certainly within the next year.

David Newman (Director and Equity Research Analyst)

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

E. Hunter Harrison (CEO)

I think what gives us the best return. In my world, cash is king. Nice to have it. Gives you a lot of flexibility. Gives you a lot of latitude. And we're certainly going to take a look at it and say, "Okay. Now, if we're in this cash position, we're in a position to do something that maybe we couldn't have otherwise." So it just opens up more doors of opportunities.

David Newman (Director and Equity Research Analyst)

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

E. Hunter Harrison (CEO)

I mean, Keith can comment further. I still think that we think that across the Board, we can get better in all accounts. Now, if you pick one place that we're spending a lot of time on, and Keith and I spent yesterday afternoon and half the night on this, the one that we're focusing on this year a great deal is terminal cost. So I think you'll see some improvement there. But I know people think there's a wall that we're going to hit. There's still a lot of opportunity out there to further become more efficient.

Whatever we do with that efficiency as far as leveraging, there's still a lot more to be done on the side. We're a long way from being a perfect operation. And so there's a lot of opportunities on the asset side. There's opportunities on the terminal side in spite of the fact that we've made huge improvements there. It just shows you what the opportunities were.

David Newman (Director and Equity Research Analyst)

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

E. Hunter Harrison (CEO)

Yeah. I think that there's one line segment, effectively, most of it's in North Dakota, that if we saw that crude was going to get worse and not going to bounce back and our volumes are not going to be at where we expected, there's several siding projects. But it's not a huge number. Maybe it could be $8 million-$10 million, some would describe as a rounding error. But it's not as significant because we basically think that all the line segments that we have put a substantial amount of capital in are supported by grain, potash, and other commodities.

And it's not just related to crude. And I'm convinced, one thing, worst case is that we put some of these sidings in too early, that over some timeframe, crude is not going to stay at $45, okay? I mean, look, I got here crude was $22. I saw it go to 140. We've done pretty well between 22 and 140. We can deal with $45 hold.

David Newman (Director and Equity Research Analyst)

Very good. Thanks, guys. Congratulations.

Operator (participant)

Your next question comes from a line of Jason Seidl from Cowen and Company. Your line is open.

Jason Seidl (Managing Director)

Thank you very much, gentlemen. Congratulations on a good quarter. First question, the West Coast port issues here in the U.S., has Vancouver seen any benefit from that that's noticeable?

Keith Creel (President and COO)

Yeah. We've had a pickup on the international side, of course, both at all three terminals, really.

Jason Seidl (Managing Director)

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

Keith Creel (President and COO)

No. I wouldn't say it's not material enough to quantify. But I'd say some pickup. Again, it's not something that we expect long-term. So with that increased business also comes some increased headaches that have driven some operational costs that I'm not very happy about. We were actually reviewing that yesterday, looking at Vancouver's terminal. So I would much rather have something that's rateable, that's sustainable, that we can plan for, that I can control the costs on. So there's positives. There's negatives. I'd just say it's net neutral.

E. Hunter Harrison (CEO)

I think one of the things that it's focused our attention on even further is the fragileness of Vancouver Gateway. We had some shift of business to Keith's point, not a huge amount, but just pick a number, 10%-15%. It's created a whole lot of problems. You think out in the future and say, "If we're going to have growth over the next five, 10, 15 years, where's it going to be?" We got to do something at Canadian ports to be more competitive.

Jason Seidl (Managing Director)

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

E. Hunter Harrison (CEO)

No. I don't see that we need to do any additional investment. I think people are probably sitting in rooms right now trying to figure this whole thing out. And if it's long-term, what do we do? What's the political response? What's individual corporations' response? What's their risk issue? And so until they figure things out, it's not going to give a lot of indication to us. But I think all in, I think what we miss is this is supposed to help the overall economy. Now, those of us that are related to energy and energy-related companies have got some big headaches. But overall, to Canada as a whole, this should be a plus. And depending on which side of the ledger you're on, but with the weaker Canadian dollar, certainly from an export standpoint, it strengthens the economy more.

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

Jason Seidl (Managing Director)

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

Operator (participant)

Your next question comes from a line of Matt Troy from Nomura. Your line is open.

Matt Troy (Executive Director)

Great. Thanks. Running long. I'll try and keep it short. I guess the question centers around the real estate JV. Just curious, was it the magnitude of the opportunity, the desire to accelerate, why you chose to go with a JV structure, which is fairly uncommon, at least at this size, in the industry? And then have you dimensionalized what will be in this JV, i.e., the discrete number of properties specifically identified or a dollar amount? Or is it really more of an open-ended and flexible ongoing agreement?

E. Hunter Harrison (CEO)

I think it's to your last point. It's an open-ended, flexible agreement. I think the reason is that we clearly made a decision that we did not possess in-house expertise to deal with this. I think also, as a result of the rationalization that came from the operating plan, some properties that were of great value became available where before we were looking at valuations that weren't near where they are potentially today. I mean, when you start looking at properties of 75 acres, that's not a stone's throw from O'Hare. You're talking real money here. So I think that given those things, is that we could bring something to the table in the way of the assets. Those people could bring the expertise that they have. We thought it was a good fit, the best way to generate and create value.

Matt Troy (Executive Director)

Okay. Sure. Again, it's open-ended as in it's not just 30 properties per se with.

E. Hunter Harrison (CEO)

No. It's open-ended.

Matt Troy (Executive Director)

It's open-ended.

E. Hunter Harrison (CEO)

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

Matt Troy (Executive Director)

Got it. Thank you, Hunter.

E. Hunter Harrison (CEO)

Yes, sir.

Operator (participant)

Your next question comes from a line of John Larkin from Stifel. Your line is open.

John G. Larkin (Managing Director and Equity Research Analyst)

Thank you, gentlemen, for taking my question. Congratulations to Hunter and Keith for sweeping the Railroader of the Year awards. That was rather impressive, I thought.

E. Hunter Harrison (CEO)

Thank you.

John G. Larkin (Managing Director and Equity Research Analyst)

First question is for Keith. It relates to the improvements in velocity and weight per train that you were able to accomplish in 2014. Quite impressive, up 10% on velocity, 6% on weight per train. As you go forward into 2015 and 2016, can we think of that same magnitude of improvement? Or does it get progressively harder as you move forward and the railroad becomes even closer and closer, to use Hunter's words, perfect?

Keith Creel (President and COO)

Well, we're not anywhere close to perfect. I can tell you that. Train speed, you'll see large leaps again this year. I'm looking at double-digit expectations on train speed improvements from investments. But when you get to train length and train weight, we're approaching industry best. We're not too far from it. So you won't have those same quantum leaps. You're limited by the technology. You're limited by the locomotives and the knuckles and all those things we had to concern ourselves with to make sure we don't push the envelope too far and compromise safety because that's paramount. So on train weight and train length, probably mid-single-digit improvements year-over-year.

John G. Larkin (Managing Director and Equity Research Analyst)

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

Keith Creel (President and COO)

Yeah. There was a little bit, but not really material. Order of magnitude, about $10 million benefit.

John G. Larkin (Managing Director and Equity Research Analyst)

Okay. That's very helpful. Thank you very much.

Operator (participant)

Your next question comes from a line of Jeff Kauffman from Buckingham Research. Your line is open. Jeff Kauffman, your line is open. You may have yourself on mute.

Jeff Kauffman (Director)

Oh. Sorry about that. Thanks. Hey, guys. I think I'll give Hunter and Keith a break and ask Bart a question here. Bart, I'm going to follow up on Cheryl's question. You talked a little bit about who knows what the Board's going to do. But from your perspective, what's the right amount of cash that you should be holding on the balance sheet? And when I look at your cash flow statement, can we talk about some of the cash drags that aren't as visible in operations? So, for instance, cash funding of the pensions, things like that. How are those assumptions changing?

Bart Demosky (EVP and CFO)

Yeah. Thanks. Good question. Our view on cash is pretty straightforward. It's a form of liquidity. And when you've got a well-run organization that's performing exceptionally well time and time again, the need to have excess liquidity on your balance sheet in the form of cash just falls away. So our view is simply that cash is something that's available to enhance shareholder value. And so we're going to keep minimum cash on the balance sheet going forward. We do have very strong liquidity in the form of backstop credit facilities. And we carry about CAD two billion there. So from a liquidity point of view, we're in great shape. But we're not going to sit on a bunch of cash. In terms of cash usage, there's two real areas in 2015 where we're seeing material bumps in the need for cash beyond the normal use of it.

If you think about pensions and pension expense, cash expense, as you know, we went through pre-funding exercise some years ago. We're going to continue to see the benefits of that over the next few years. Cash contributions there remain very, very stable. We guided in the MYP to about CAD 50-CAD 100. We think we'll be in the CAD 80-CAD 100 range this year just because we've seen higher expense there. There's no other big buckets that I see where we're going to see draws on cash. If anything, we're going to work very hard to reduce our working capital by running things much more efficiently and hopefully be able to free up some cash that way as well as through the real estate initiative. I think we're in great shape.

Jeff Kauffman (Director)

Okay, guys. Thanks. My other questions are answered. Congratulations. Thanks.

Bart Demosky (EVP and CFO)

Thank you.

Operator (participant)

Your next question comes from a line of David Tyerman from Canaccord Genuity. Your line is open.

David Tyerman (Director)

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

Keith Creel (President and COO)

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

David Tyerman (Director)

Okay. Very good. That's helpful. Thank you.

Operator (participant)

Your last question comes from a line of Keith Schoonmaker from Morningstar. Your line is open.

Keith Schoonmaker (Director and Institutional Research Analyst)

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

Nadeem S. Velani (EVP)

I'm not certain about the gas drilling versus the oil. I think we're serving both markets. I think we are very well-positioned with our suppliers. We've got strong, low-cost producers on the frac sand side. So while we saw a growth last year which exceeded our expectations, I think we'll probably come in pretty close to the same volume level, maybe down a little bit, maybe 3%-5% back. Those are the assumptions that we're making. But I think we're well-positioned. And quite frankly, there could be upside back to the low-cost producer side as you see consolidation in the industry. Fewer players in the game, so to speak. If you're partnered with a strong, low-cost provider, you could see some growth there, some upside.

Keith Schoonmaker (Director and Institutional Research Analyst)

Thank you, Keith.

Operator (participant)

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

E. Hunter Harrison (CEO)

Well, so thanks very much for joining us. We are still celebrating this quarter. We'll be for the remainder of the day. Then we'll move on to other things. So we look forward to talking to you after the second quarter.

Keith Creel (President and COO)

Thank you.

Operator (participant)

This concludes today's call.