Canadian Pacific Kansas City - Q4 2016
January 18, 2017
Transcript
Speaker 4
Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific's fourth quarter 2016 conference call. The slides accompanying today's call are available at www.cpr.ca. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to introduce Megan Albiston, AVP Investor Relations, to begin the conference.
Speaker 2
Thank you, Mike. Good morning, and thanks for joining us. I'm proud to have with me here today Andrew Reardon, Chairman of the Board, Keith Creel, President and Chief Operating Officer, and Nadeem Velani, Vice President and Chief Financial Officer. Before we begin, I want to remind you that this presentation may contain forward-looking information. Actual results may differ materially. The risks, uncertainties, and other factors that could influence actual results are described on slide 2 in the press release and in the MD&A filed with Canadian and U.S. regulators. This presentation also contains non-GAAP measures, which are outlined on slide 3. Today's formal remarks will be followed by Q&A. In light of the announcement this afternoon of Mr. Harrison's retirement effective January 31st, CP's Chairman has prepared some remarks he'd like to share. The details of Mr.
Harrison's separation agreement will be filed with securities regulators over the next few days, and we respectfully ask that you focus your questions today on CP's results. It is now my pleasure to introduce CP's Chairman of the Board, Mr. Andrew Reardon.
Speaker 0
Thank you, Megan, and welcome everyone to CP's 2016 fourth quarter and full-year earnings call. I fully understand that many of you may have questions regarding Hunter's decision to retire and Keith Creel's transition into the role of CEO a few months early, but it's important to remember that we have been preparing for this seamless leadership transition since Keith arrived in 2013. Today's call, however, is about CP's results. That is a strong year and a strong future ahead. From the very beginning of this remarkable transformation at CP, what some have called the greatest corporate turnaround in history, Hunter and his team have been focused on implementing the operating plan, building a strong bench, and preparing for the future. The future is now, and that future is very, very bright.
I've been in this industry for 40 years, and I have never seen such a textbook case of mentoring and leadership development from Hunter to Keith, and now from Keith to his team. The fact is, I've been fortunate to serve on the CP board alongside the two most talented railroaders of their generations and perhaps in the history of the industry. I wish my dear friend Hunter well in his future endeavors, and both proud and happy to welcome Keith to his new role as CEO in two weeks' time. Again, I appreciate your interest, but today's call is about CP's successful earnings and about Keith Creel's leading CP into the future. Keith?
Speaker 1
Okay, thank you, Chairman. I really appreciate those very kind comments, and certainly thank you and the board for your support, your vote of confidence. I'm humbled and honored to lead this company as we go forward. It's with mixed emotions that it's Hunter's leaving. I've worked with Hunter for the last 20+ years. He's been, like you, a close friend and mentor. He's taught me the railroad business. But I can tell you this: if he's taught me anything, he's taught me how this operating model works and how to produce sustainable results, and this team is prepared for this transition. Some people say it's an early transition. When I left the other railroad to come here to work with Hunter back in 2013, we had actually planned this transition this past summer. We're certainly prepared. This team is in place. The foundation is set, and we will succeed.
Let's focus our comments on a great fourth quarter result. Team effort, certainly of operating and marketing. I'm proud of the performance of the operating team, their ability to continue to improve productivity and service levels in light of what's been a very challenging operating environment. The wind came pretty hard in December. In spite of that, though, this quarter CP produced a fourth quarter operating ratio of 56.2, which is a 360 basis points improvement, and a full-year operating ratio of 58.6, 240 basis points better than last year's record. Q4 adjusted EPS was up 12%, full-year adjusted EPS up 2%, and that's in spite of a 7% decline in revenues. Over half the revenue decline came from the lower crude volumes.
Crude certainly was a huge headwind for us in the fourth quarter, as it will still be in the first quarter of 2017, and then we can stop talking about it, at least in those terms. In the fourth quarter, with tougher conditions than last year, the team was able to sustain or modestly improve upon a number of the key metrics which we're showing in our slides. For the full year of 2016, this team produced records across all major metrics: lengths, weights, speed, dwell fuel, all while executing safely, which is the most important part here, the proudest metric that we have, setting record safety performance for the company with the lowest train accident frequency for CP in its history. This story is not over. We've got line of sight to additional opportunities. We're confident in our ability to improve margins in 2017.
As we mentioned in our release, the revenues on the revenue side down 3% this quarter, which was slightly weaker than we originally planned. In fact, we had got it to flat. However, of course, we had the headwind with the later start with the grain as well as the weather we faced in the fourth quarter, specifically more so in December. RTMs were down 3%. Again, the grain volumes, headwinds from the decline in long-haul crude traffic. And it's also worth noting, I think this is critically important, if you exclude crude, RTMs are actually up 5% for the quarter, which is pretty substantial growth. As expected, the impacts of fuel surcharge and currency were negligible for the quarter. The impacts of positive price offset the impacts of negative commodity mix.
Areas of strength such as Canadian coal and export potash have a lower RTM versus the corporate average, which is the effect of the mix there. Looking forward, we're expecting, as I said, RTM decline in the first quarter for the crude and the Canadian grain comps against record levels and moderate conditions. The negative RTM trend will continue into the first quarter. That said, the underlying fundamentals are encouraging and similar to this quarter. If you strip out crude again, RTM growth will be positive, slightly positive in the first quarter, moving to positive the second, third, and the fourth. Beyond the first quarter, the growth prospects, strong bulk fundamentals start to shine through. Grain carryover is plentiful. Coal pricing is supportive.
Potash outlook is strong, driven by export potash in the first half versus very little shipped this past year as a comp, and UK plus S volumes coming online this summer. We're confident in our guidance, our ability to execute in 2017. The underlying volume trends are improving. We've got a low-cost basis to grow from, and we have a committed team of railroaders ready to produce. With that, I'm going to turn it over to Nadeem to provide some more color to the numbers.
Speaker 3
Thanks, Keith, and good afternoon, everyone. I'm pleased to be walking you through our fourth quarter results and 2017 outlook. In light of what's been a challenging year on the top line, we've worked hard to adapt our cost base. As Keith just noted, revenues were down 3% this quarter. Meanwhile, operating expenses were down 9%, resulting in an operating ratio of 56.2%. Our operating ratio for the year came in at a record 58.6% and an improvement of 240 basis points when compared to last year's adjusted operating ratio. I won't go through each line of the income statement in detail, but there are a few key elements worth highlighting. Comp and benefits was down 15% for $51 million versus last year as a result of a 9% smaller workforce and positive pension income. Labor inflation acted as a partial offset.
We finished the year with a workforce of about 11,700. Fuel expense was up 4% year-over-year as a result of higher fuel costs and an $8 million one-time cost for the settlement of a reciprocal fueling contract paid to another railroad. Purchased services declined 21% to $215 million, largely due to a $45 million in land sales during the quarter. Keep in mind, land sales were $11 million last year, so the year-over-year benefit was $34 million. Lower crew hauling costs and lower contracted services also aided in the year-over-year expense decline. The adjusted effective tax rate was 25.3% for the quarter and 26.2% for the full year, a reflection of some favorable year-end tax adjustments as a result of change in traffic mix as well as other tax planning initiatives.
Adjusted diluted earnings per share grew 12% on the quarter, finishing the year at 2% adjusted EPS growth. A positive result in light of some of the challenging conditions we faced and a testimony to the cost management efforts of the CP team. In terms of 2017 outlook, as noted in our press release, we expect to see positive volume growth this year. We also see opportunities to take out additional costs, which gives us a great deal of confidence that we will deliver high single-digit EPS growth. A couple of key factors to consider as you start modeling 2017. We expect pension income of $180 million in 2017 for our defined benefit and defined contribution plans, which is an incremental benefit of $100 million from the income in 2016. This is driven by higher market-related value of the plan assets.
Headcount should remain relatively flat in 2017, as any volume increases would be offset by further reductions for productivity. We expect land sales of approximately $60 million total for 2017. As a reminder, land sales tend to be lumpy. Many of you will recall that we had $53 million of land sales in the first quarter of 2016. The effective tax rate is expected to be approximately 26.5% without any assumption on potential tax reform benefits in the U.S. Turning to the cash flow slide, consistent with our guidance at the beginning of the year, beginning of 2016, we generated free cash of $1 billion. As many of you know, we increased our dividend 43% last May, completed a 5% share buyback program in September, and we deployed roughly $1.18 billion on CapEx this year.
Looking ahead to 2017, we plan to spend approximately $1.25 billion on CapEx, a 6% increase over 2016. Roughly 70% of our CapEx will be spent on basic replacement, with the balance going towards initiatives focused on improving productivity and service reliability. With over 400 locomotives in storage, we don't see the need to acquire new units for the next several years. However, we do have some funds earmarked in 2017 to modernize and improve reliability of our existing fleet. With expected earnings growth and a disciplined capital plan, we'll have a strong free cash generation again this year. We will continue to be good stewards of capital, committed to maintaining our triple B plus debt rating and naturally delevering, while maximizing the value returned to our shareholders.
I'd also point out that our guidance doesn't make any assumptions around share buybacks, but consistent with past practices, we'll be looking to revisit our capital allocation decisions in the usual spring time frame. With volume fundamentals improving over the course of the year, combined with our ability to manage costs and find incremental productivity opportunities, we're confident in our ability to deliver high single-digit EPS growth this year. With that, I'll pass it over to you, Keith.
Speaker 15
All right. Thank you, Nadeem. With that, we'll turn it over for questions.
Speaker 16
Thank you. If you would like to ask a question, simply press star, then the number one, on your telephone keypad. If you would like to withdraw your question, press the pound key. As previously highlighted, please limit your questions to two. There will be a brief pause while we compile the Q&A roster. Your first question comes from Fadi Shamoun from BMO Capital Markets. Please go ahead.
Speaker 5
Yes. Thank you. Good afternoon. And congratulations, Keith, on your early promotion, I guess. Can we dig a little deeper into the 2017 outlook that you just sort of gave us some color? But what are you assuming for volume and sort of pricing and revenues for 2017? Where are the positives, and where are the negatives in that?
Speaker 1
Yeah. Right now, it's a little bit early. So if I had to guesstimate, we're looking at slightly positive volume growth, and then as far as pricing, 2%-3% would be a number I would put there. As far as the positives, it's really a bulk story, Fadi, except for, obviously, the crude. That's a headwind for us the first quarter, but that fades away. We should have a very strong second quarter, I'd say strong relative to last year's numbers from a bulk standpoint, be it potash, be it grain, U.S. or Canadian.
Speaker 5
Okay. Also related, it feels like coming into the fourth quarter and into this year, the grain was supposed to be a little bit stronger, and I know there's some timing issues and some other issues. But is the overall crop size in your territory what you feel you're going to end up moving? Is it a little smaller than you thought originally, or is it the same? It's just that's going to move this year versus what happened, I guess, last year?
Speaker 1
Yeah. It's actually the same or maybe slightly better. About 71 million metric tons is where our number came in, and we're in a pretty good catchment area. The challenge with us is, number one, the comps. You got to see what we're comparing to, which was a record fourth quarter last year. So going into the South Shore, we also experienced, number one, a late harvest with the wetness. October was a phenomenal, I think, a record rain month in Vancouver on the West Coast, followed up with December, another record snow month in Vancouver. Vancouver just simply doesn't handle snow too well in the elevators that we serve around the South Shore of Vancouver. So I spent quite a bit of my time, my personal time in Vancouver during December. I'm happy to say I was out there again last week, and things have dramatically improved.
We're working extremely well, turning assets with our grain customers on the South Shore. We actually had our team out there December 31st, January 1st, and 2nd, making some physical plant enhancements to allow us to turn those assets faster. So I went out last week to visit the team and to see that work and to visit with the customers, and I'm very pleasantly surprised with the work that they were able to accomplish during the holiday.
Speaker 5
Okay. My second question is really just if we go back to, I think, a couple of years ago when you had the analyst day, one of the sort of assumptions or sort of outlook was that as the cost comes off and the service improves and remains consistently strong, there's going to be opportunities for CP to grow a little bit faster in some of the sort of service-sensitive markets. We haven't really seen a lot of tangible evidence of that. I know we're coming off of a freight recession, but I just wonder if you have some color about what do you think of that assumption? Do you see opportunities over the next couple of years to start onboarding new business that is really a function of that lower cost and service?
Can we assume that there could be sort of an above-GDP growth for CP in the next couple of years, or?
Speaker 1
Well, as I said earlier, and it's probably shielded by this crude challenge, we're there now, Fadi. I mean, we're doing what we said we would do. Our intermodal growth, 8% last year, we outpaced the entire industry. Our merchandise growth, excluding crude, 5%. RTM's up. I mean, if it not were for the one-third, and if I take you back to when we did that multi-year plan, it was a third, a third, a third. And the assumption was about 200, correct me if I'm wrong, James, 250,000 car loads of crude, which was in that growth plan, and I think this year we finished at 35,000. So we missed that one. But if you exclude that and you take it out of the numbers and you look at everything else, we're hitting on all cylinders, so we're converting that story now.
It's just being disguised by the crude numbers.
Speaker 16
Your next question comes from Ravi Shanker from Morgan Stanley. Please go ahead.
Speaker 6
Thanks. Good afternoon, everyone. Apologies if I missed this, but could you share your pricing growth number in the fourth quarter, both including and excluding ag? And also, what were your inflation expectations for 2017 and kind of how are you thinking about pricing versus inflation going into next year?
Speaker 5
Yeah. Including ag, we were 3%, and I would assume the same thing for 2017. Excluding ag, I'd have to do the math. It's probably.
Speaker 7
Around the same amount.
Speaker 5
Okay. That's the assumption I would put in your model for 2017 is about 3%.
Speaker 6
Got it. And inflation and how are you seeing your pricing versus inflation in 2017?
Speaker 5
I'm guessing inflation's going to be 2% and a half? I mean, Nadeem, do you have any color on that, or?
Speaker 8
Yeah. 1.8 is where we looked at the planning for the year. But 1.8%, so pricing above inflation. I'd just qualify the ag comment, just the fact that it's kind of split between in terms of the Canadian crop versus U.S. crop. So the regulated Canadian grain is closer to 4%-4.5%. But it's not necessarily a straight line with how you manage the crop and the outlook in terms of how you manage the MRE. It's not a flat line month to month the way we do it. So that does change by quarter depending on how much we move and where you're moving it and so forth. So just be mindful of that.
Speaker 6
Got it. Can you just give us some of the puts and takes on OR and how we think about that in 2017? Obviously, you had a great year in 2016. What are the drivers of upside versus downside for OR in 2017 that you're kind of tracking?
Speaker 5
You can assume an improvement. I'll let Nadeem speak to the drivers. A lot of it's operating synergies. It's talking about controlling what you can control, which is what we did this year in spades, given the revenue was down and we made the improvements that we made. It's more the same. Several initiatives across the board. I mean, we could take it offline, but we have a list of initiatives that we go through for the operating team. We'll get, I'd say, a 0.2 points just off of cost takeout initiatives year-over-year. I don't know if you want to add any more cover, Nadeem, but.
Speaker 8
Ravi, I'd just point out we talked a little bit about some of the one-time items being the lumpier items of land sales. We've got a bit of a headwind there, about $50,000-$55,000 potentially. More than offsetting that is a benefit on pensions of $100 million. The net impact of those two is about a $50 million or three-quarters of a point benefit on the OR. Above and beyond that, as Keith mentioned, is going to be some pure cost takeout with a slight positive volume outlook. We're not assuming a huge amount of operating leverage under that scenario, but rather more pure cost takeout.
Speaker 5
Let me point out, too, to Fadi's point, that operating ratio being low is currency for us. It's leveraging the marketplace for us to grow the top line, too. It's not talking about competing with revenue or with rail share. I'm talking about competing with truck share and taking trucks off the road and putting them on the rail. We've always said that we're going to do that. We've created that currency by having that low cost and that superior service, and we're actually doing that today. We'll do more of that if it makes sense to drive EPS growth as we go forward in 2017.
Speaker 6
Great. Thank you.
Speaker 16
Your next question comes from Chris Weatherby from Citi.
Speaker 9
Hey, great. Thanks. Good afternoon, guys. I wanted to touch back on intermodal a little bit and sort of think about the 2017 outlook. From a competitive standpoint on the international side, how should we think about sort of the progress with volume this year and just kind of get a sense, also updating on sort of the progress on domestic and whether from a modal standpoint, we're going to see a better dynamic from a competitive standpoint with truck, or is that going to still be, in some markets, a challenge?
Speaker 1
Yeah. I would say it's two stories, Chris. So on the international side, you'll see us down slightly. We lost the Yang-Ming contract. We did not win the OOCL contract, which we'd assumed. We put a pretty compelling value proposition in the marketplace, but obviously, it wasn't compelling enough, and I think it showed some pricing discipline on our part. So looking forward, Yang-Ming's gone, so that's a headwind. But we'll offset about CAD 40 million of that CAD 60 million loss with initiatives. So we're still going to see some growth. It's just going to be muted by the Yang-Ming loss and the lack of the OOCL win. But on the domestic side, which is where our network really thrives, the strength of our network is, we continue to grow and outpace the industry.
You'll see more of that growth on the wholesale side as well as working with our domestic partners cross-border in that Montreal, Toronto, to Chicago lane. So expect to see more of that success in the marketplace.
Speaker 9
Okay. That's helpful. I appreciate the color. And then just to step back for a second, take a bigger picture stab at sort of border adjustment taxes and some of the trade dynamics that we've heard recently. I don't know if it's too early to have any feedback from your customer base about how they may be thinking about it or other potential contingencies they're thinking about. Any perspective you can give us would be helpful from where you sit at CP.
Speaker 1
I don't see anything, I mean, net-net, we think it's going to be positive for us. With the currency, it's sort of a hedge naturally against border taxes. We don't know what's going to happen relative to lumber. We don't know what's going to happen relative to intermodal. But I would point out our product makes 85% of our intermodal is actually domestic Canada, so it's not going to be exposed to that. So at the end of the day, our book of business that might be potentially exposed is going to be minimized, and we think the upside relative to maybe the tax implications as well as to the raw materials that are going to move back and forth across the border regardless are net positives for this railway.
Speaker 8
Yeah. Chris, it seems like the focus seems to be on country of origin, which in our case, when we're hauling a lot of more of the raw goods, raw materials, it's not as impactful. And also just the dynamics of how production is done in Canada, to us, it shouldn't be as impactful as well.
Speaker 5
Yeah. More grain and ag, Chris, for us on our profile as opposed to maybe some of the other folks. We're not as exposed to autos as exposed to lumber.
Speaker 9
Yep. Okay. That makes sense. Thanks for the time, guys, this evening. Appreciate it.
Speaker 8
Thanks, Chris.
Speaker 16
Your next question comes from Walter Spracklin for RBC. Please go ahead.
Speaker 10
Thanks very much. Good afternoon, everyone. I guess to start out on the volume side, I think I heard you say that you're expecting kind of slight volume growth there. Going back and understanding the commentary you mentioned on grain, is there anything else that has shifted between now and since your last call that has given you a little bit more concern or uncertainty with regards to any other of the product segments outside of crude, kind of crude grain and the intermodal, the lack of gains that you've got in the international intermodal that you mentioned?
Speaker 1
Yeah. No. Grain would be it, Walter. The only thing I would point out, there's a little bit of a lag. UP had a very large derailment with our U.S. grain franchise. They've been out for about 8 days. They're just now coming back. So that will maybe push some grain that we would have moved from the U.S. side to the second quarter. But in the absence of that, pushed fourth quarter into first quarter, I don't see anything else that shifted.
Speaker 8
Walter, we've been pretty conservative in our view of the energy world, which I think is appropriate. We've probably seen a little bit more optimism recently, but we're not willing to bake that into our guidance at this stage. It's way too early, and we've been burned in the past.
Speaker 1
Got it. To put that in perspective, we moved about 35,000 car loads last year, 17 in the first quarter, and we're assuming about 5 or 6 this first quarter against the 17. That's a pretty strong number to go against.
Speaker 10
Sure. Okay. And so as a follow-up here, if I were to summarize some of the indications you gave behind your high single-digit earnings growth, you mentioned in productivity or expense improvements 1-2 points on cost reduction alone in the OR and then perhaps another 0.75 from some of the items that Nadeem mentioned. So all in about 2-3 points on OR with 3% pricing, up slightly on volume. The high single digit seems to be a little bit on the conservative side. Is there something I'm missing when I kind of look at each one of those main driving factors, or?
Speaker 1
The 2-3 would be quite a challenge with some of the headwinds we have on the OR side. 1-2, I would say, is very doable. We don't know what the revenue's going to do. It's so early to tell. I don't know if you want to.
Speaker 8
Yeah. No. I think it's appropriate, Walter, at this stage and where we are to have a conservative view. So if you want to call it conservative, that's fine. We're confident in our ability to achieve it.
Speaker 10
Okay. No. Fair enough. Thank you very much, everyone.
Speaker 1
Thank you, Walter.
Speaker 16
Your next question comes from Scott Group from Wolfe Research. Please go ahead.
Speaker 5
Hey. Thanks. Afternoon, guys.
Speaker 6
Hey, Scott.
Speaker 5
So, wanted to just ask maybe just for your thoughts on first quarter and kind of RTM and operating ratio outlook. Can we have slight RTM growth and margin improvement in first quarter, or is that not first quarter? It starts in second quarter.
Speaker 1
Yeah. It's going to be more second quarter story, Scott, not first quarter. It's just too challenging with the comparisons versus last year on grain and crude that won't be here this year.
Speaker 8
Yeah. And the headwind from land sales in Q1 is pretty significant. We had a very, I mean, it was nonexistent winter last year.
Speaker 1
We're having winter.
Speaker 8
Yeah. And believe you me, we've got a winter this year.
Speaker 5
Okay. So we should see some pressure on both RTM and margin in the first quarter.
Speaker 8
Yes.
Speaker 1
Yes. Yeah.
Speaker 5
Okay. Now, on grain, so we've seen the other, so CN has been growing their grain volumes. How do we know that this is not just a market share shift in grain?
Speaker 1
I would look at the total volume of grain that shipped. I mean, to compare versus what we moved last year was a record amount, and we're almost up against it again this year. So I think if I go back and look at last year's numbers, we moved a little bit more grain, a little bit more share than our competitor did. But listen, every year, it's plus or minus 2% or 3% or 1% or 2%. They serve their markets well. We serve our markets well. As long as we stay fluid and they stay fluid, we're going to move similar amounts of the crop harvest. It's about a 50/50 split normally.
Speaker 8
The actual grain markets aren't equivalent. They're not completely comparable. I don't think they split out their U.S. and Canada numbers like we do, so it's maybe not, you're comparing apples to oranges.
Speaker 1
I'd say this too, Scott. If you understand our grain network in Canada, I'm pretty proud of our high throughput elevators as we continue to work with our partners to build new ones, 134-car unit trains that we're running this year, which the margins are much better on, more efficient, moving more grain at a lower cost. I'm pretty proud of our grain franchise.
Speaker 5
Okay. That's helpful. And then just one last question. I know you want the focus to be on kind of the results, but I just had one question about some of the language in the press release on Hunter. So it talked about a limited waiver of his non-compete. Can you just clarify what a limited waiver is?
Speaker 2
Yeah. We're not going to add any additional comments on that, Scott. We will be filing a copy of the separation agreement with the securities regulators in the next few days.
Speaker 16
Your next question comes from Tom Wadewitz from UBS. Please go ahead.
Speaker 6
Yeah. Good afternoon and congratulations also to you, Keith. We're expecting this, but still great news for you, and congratulations.
Speaker 1
Thank you, Tom.
Speaker 6
I wanted to ask you a bit about the competitive dynamic. It seems like there was optimism that on the international intermodal contracts, that some of the business over time could come back to you. And I think on the auto side, there's been some shift to CN over the past, I don't know, year or so. And do you think that's kind of indicative of maybe just a challenging competitive environment for rails that may persist? Is that kind of a natural equilibrium now, or how would you look at that? Because it just seems that that's not some of the business we thought might go back to you just hasn't, and it's unclear how that should affect our outlook in terms of competitive pressures or opportunities.
Speaker 1
Yeah. I would say there's a couple of stories there. When you talk about international intermodal, number one, the margins are pretty low. So you've got to be competitive for the business, and we're competing with a very capable competitor that has a network with a bit more reach than what we have. So what we're doing to offset that, part of our strategy is extending our reach. And we're deciding where our network and what partners we should be partnering with, where our strengths are to their business model. So these things come in waves. I'm not going to tell you a story. I was a bit disappointed that we didn't get an opportunity to earn some of OOCL's business. But you know what? We made a decision. We're going to focus on the business we make money in. We're going to have pricing discipline.
We're going to help our carriers, our steamship lines, grow their business with the strength of our franchise. And we're going to do well in that marketplace and make a buck or we're not going to do it. On the automotive side, some of that is just a reset of business that never should have been on this railroad in the first place. And quite frankly, very valued customer, I'm not going to suggest they're not. But when you're not making a whole lot of money and you're asked to do things that effectively don't recognize the strength of your networks, again, we said we're not going to be a commodity. We're going to be a service. And the contribution on that business that we walked away from was not that meaningful, not that significant to the point that it justifies compromising your principles.
Speaker 6
Okay. So that makes sense. What do you think about the look forward? Would you say you're pretty confident that we have stability now and we aren't going to see more of these competitive losses? I mean, it's not hard to say that definitively, but do you think we'll have stability, or is that something where there still might be some share shift on the rail side and then you got to make that up by taking share in the truck side?
Speaker 1
I'd say this year on the international intermodal, we should be in a steady state. I mean, there's no crystal ball, but what I know now, I feel pretty good about. I'd say that long term, all these alliances realigning. There's a lot of question marks out there. Different steamship companies are consolidating. Where's the ball finally going to land? I'm not certain. But I'd say for now in 2017, we'll be fine. 2018 and 2019 may be another wave of consolidation but also another wave of opportunity. In the meantime, we continue to invest in our physical plant. We're doing some things from a service enhancement standpoint, some things like at Portal, North Dakota, where we come through the border. That's an irritant for some customers having containers that customs sets off.
Effectively, you might get 10 car loads of containers that are stranded because of one that needs to be inspected by customs. Well, we've not had a benefit or an ability in the past to be able to offload that one container, something that our competitor enjoys. I know a little bit about from when I was there. We're giving our team some of those same service enhancements this year. Our customers will get the same experience. If you look at our franchise, our length of haul from Vancouver to Chicago is faster if we partner and extend our reach east of the Mississippi to reach into the Ohio Valley, to reach into Detroit, to reach into some of those markets. We've got a superior route if you partner with the right person.
That's something we're looking at from a strategic standpoint for this next round of consolidations in 2018 and 2019.
Speaker 6
Right. Okay. Makes sense. Thank you for the perspective.
Speaker 1
Thanks, Tom.
Speaker 16
Your next question comes from Brandon Oglenski from Barclays. Please go ahead.
Speaker 8
Hi. This is Eric Morgan. I'm for Brandon. Thanks for taking my question. And Keith, congrats on assuming the new role a bit earlier here.
Speaker 1
Thank you.
Speaker 8
Keith, I wanted to ask, as you step into the new seat, obviously, you've had the major role here for several years, but just wondering if you could provide some color on kind of your vision for the company and the future and what your biggest opportunities are looking forward and anything you might do differently?
Speaker 1
I would say it's a continuation of what we started four years ago. Hunter brought me here with a vision, with a plan to take this company. We had a mandate for change. It takes time to implement this precision railroading operating model, which we've done. We fixed the engine. The next stages is to grow at the top line, which we're starting to do. You'll start to see the color of that much more vividly as this crude fades away, and it's not disguising at all. So as we go into 2017 and 2018, you'll see top line growth. You're going to see bottom line control. You're going to see this team, which the bench is extremely strong and a lot of some of the same players. But essentially, we've got a very young, aggressive, progressive, talented team. We look forward to competing.
We look forward to producing earnings for our shareholders as we go forward. So I would say that's the short-term vision. Long term, stay tuned. Certainly, I'm going to work with the board closely with our leadership team on our strategic vision as we go forward. But as I've always said, eventually, there's going to be consolidation in this industry. I don't know if it's going to be 2 years, 3 years, 5 years, but it's inevitable. Volume growth is going to come. Railways are not going to be built. Consolidation will occur, and I can certainly see that happening within my career.
Speaker 8
All right. Appreciate that. And just wanted to ask one on the macro too. We've seen industry volumes come up a little bit recently. I'm just wondering if you could elaborate on how you're currently viewing the health of the economy and then maybe somewhat related how you're thinking about some of the risks and opportunities related to the new administration in the U.S.
Speaker 1
I would say we're cautiously optimistic on both those questions. So we're starting to see positive signs like everyone else is. We're seeing things to recover, both Canadian and U.S. We think, given that we're a North American network, we'll benefit from what I hope to be the Trump effect that continues as he takes office in 2017 with the U.S. piece.
Speaker 8
All right. Thanks for the time.
Speaker 1
Thank you.
Speaker 16
Your next question comes from Turan Quettawala from Scotiabank. Please go ahead.
Speaker 9
Yes. Good afternoon. Keith, congratulations on the role.
Speaker 1
Thank you.
Speaker 9
I guess I wanted to just ask, firstly, on whether you can comment a little on how you think about the future leadership team here at CP. Obviously, you've got a strong CFO in place now, but just in terms of the other hats that you've been wearing, should we expect some additions here, or are you comfortable with sort of adding the CEO hat?
Speaker 1
Well, I would say that I handpicked or had a large part in handpicking everyone that's on this team. So I feel very comfortable and confident with the team that we have. You'll see some tweaks. There's a few more pieces that will adjust as I sort of take my COO president hat off and put more of my CEO hat on. But stay tuned for that as soon as we get those finalized over the next week or two. And I've got a chance to brief my internal team. Then we'll certainly come to the market and let you know about those.
Speaker 9
Perfect. That's helpful. Thank you. And maybe just one more on the guidance on the volume side. So our TMs are growing. I think you said about 5% sort of X of the crude. Crude will obviously tail off here after Q1. You've got some pent-up grain. I understand that intermodal, you've lost the Yang Ming contract, but up slightly. Doesn't that sound a little too conservative just based on also the fact that the economy seems to be getting a little bit better?
Speaker 1
You've got a pretty good handle on it.
Speaker 9
Thank you.
Speaker 1
Thank you.
Speaker 16
Your next question comes from Ken Hoexter from Bank of America Merrill Lynch. Please go ahead.
Speaker 10
Hey, Keith and Nadeem. Congratulations, Keith, on the new role. Let me extend that as well. But let's go back just a couple of years. As you talked about it over and over here, you've positioned for growth, and yet you talked today about losing some of the share on international intermodal autos. Yet you've built a network that obviously can handle a lot more room. Maybe your thoughts on CapEx, but really, how do you pivot back to that growth? Is there something you need to do to gain that back? Are we seeing a more competitive market in Canada that's going to keep that maybe a little bit more muted than otherwise could be?
Speaker 1
Well, as I said, Ken, we've got a very capable competitor. But I'd say the thing you do is you focus on growing where you're going to make money and where you can win in the marketplace to the strength of your network, which is this franchise needs to grow more on the merchandise side. So that's where we're going to focus. The other piece, which we have been growing exponentially and better than anyone else, is domestic intermodal. You make money in domestic intermodal. Now, certainly, we're going to continue to participate in international intermodal, but as far as it being part of our long-term growth, a big piece, we're not going to, I guess, for the lack of a better term, bet the farm on it.
There's still a tremendous amount of carload growth out on this railway that if we provide service, we implemented trip plans this past fall. We give our marketing team a tool to go into customers so that they'll trust us with their assets, turning their assets. We can show them how to save money with the length or the short lengths of our lanes that we operate in. That's a pretty compelling value proposition. We'll continue to develop the marketing team to be able to do that, and you'll continue to see us win market share and grow with our existing customers as well as take stuff off the road with this low-cost situation that we have with our operating ratio.
Speaker 10
I know you want to understand that you want to keep away from the discussion, but I'm just being pinged so much. The Hunter discussion says, "This has been going on for a while." Did he come to the board with a particular end target, or was it, "I need to move on"? Any comments that you can care to give out to?
Speaker 1
Unfortunately, we really can't.
Speaker 0
Yeah. This is Andrew Reardon, Chairman. At this point, we really can't. We'd like to keep the focus on our earnings and on the future with Keith.
Speaker 16
Your next question comes from David Vernon from Bernstein. Please go ahead.
Speaker 6
That's kind of a hard one to follow up on, but I guess Nadeem, could you talk a little bit about where you expect kind of free cash flow to run for the rest of this year and what we can expect on the share repurchase side of the house?
Speaker 8
Sure. So we haven't assumed anything on the share repurchase. It's something we'll go to the board over the next several months. Our NCIB that we announced last year in May, we completed very quickly, and the intent of it was to buy back stock at a cheap price, which we think we did at $175. So we think it worked well. I think that's a premise that we're going to have going forward as well. We likely want to make consideration on the dividend and so forth. But as far as a buyback kind of wait-and-see, our free cash of $1 billion when operating earnings are coming down, it's a pretty strong testament of what we can generate, what this model can generate. So we're talking about the OR going lower. We're talking about revenues going higher.
We're not going to be in that same scenario from an operating cash flow point of view. So we'll have stronger operating cash flow, maintain relatively the same level of CapEx up slightly, $50-$60 million. So you can assume some pretty strong free cash generation. $1 billion-plus is a very safe assumption. And we're not going to sit on cash. We talked about delevering, naturally, but you can assume we're not going to sit on cash.
Speaker 6
Do you have any expectations for where you want to take the dividend or what kind of growth rate you want to put in there as far as I'm just trying to back into what sort of rate of repurchase we should assume or if we can give us any color on what kind of dividend growth expectations you have? That would help.
Speaker 8
Yeah. We don't give you the numbers, so you want to back into it. I got it. I used to do IR too. I think, David, I think we're.
Speaker 6
It's fully transparent, Nadeem. It's fair.
Speaker 8
No. I mean, you got to. I think that's something that we'll—it's going to be somewhat dependent on the stock price too. We're not going to just buy back stock for the sake of it. I think we're still in this growth stage. I think that we want to do something with the dividend. We want to balance our shareholders. It's something that we think is the appropriate thing to do. But it's certainly something we'll have a recommendation to the board in the spring. Work with Megan to model it out, but I don't want to say anything more than that, to be fair.
Speaker 6
All right. Thanks for the lack of color, I guess.
Speaker 8
Anytime, David.
Speaker 16
Your next question comes from Justin Long from Stephens. Please go ahead.
Speaker 10
Thanks and good afternoon. So first, you're guiding for slight volume growth this year, and it sounds like the philosophy is that demand has been tough to predict over the past year, so you don't want to be aggressive in calling a pickup. But if we look back a year from now and growth outperforms and we see something like 3%-5% volume growth in your business, what do you think are the most likely commodity groups that drive that upside?
Speaker 1
I would say the upside, if that were to happen, would probably have to come from somewhere like crude. I just don't see any other location. And I don't necessarily think that the spreads are going to support that. So you've captured the essence of the way we feel about this. I mean, we're assuming pretty substantial growth on the bulks. We're assuming growth on merchandise. We're assuming growth in a lot of areas. That crude piece is just the big headwind that we have to work up against. So if that turned around for us, is there some upside? Sure, there is. But unless it does and frac sand does to a higher degree than it has, I think we're taking the prudent approach, a conservative approach, and the responsible approach with our guidance.
Speaker 8
Justin, I would just add, if some of the impacts of the new administration were to play itself out in the latter half of 2017 and provide a boost to overall infrastructure spending, etc., I would expect that that could be potential upside areas in line with the merchandise side of the house, plastics, and so forth.
Speaker 10
Okay. That's helpful. And maybe as a follow-up to that, as we hopefully transition out of this great recession that we've been in in 2017, maybe I'll ask a bigger picture question on the longer-term volume growth outlook. If you look out over the next several years, how do you think CP's volumes will perform relative to the U.S. rails? I know there's a lot of moving pieces, but big picture, do you feel the volume opportunity is worse, better, about the same? How would you answer that?
Speaker 1
I would say my view would be it depends on what bulks do and what crude might do. And I mean, I would naturally think if the domestic spend, a significant amount of manufacturing comes to the States, that they might outpace Canadian GDP. But that's just my gut feel. I don't, Nadeem, if you got a.
Speaker 8
No. There's a lot of variables. I mean, the U.S. dollar is very strong, and that's going to be impactful to the U.S. rails, I think. Canadian dollar, the weakness, I don't think we've seen some of the benefits of trade as a result of a weaker Canadian dollar. It does take time for that to add to the amount of output on the Canadian side. I mean, we've gone through a pretty meaningful dip in Canada in terms of what took place from an energy point of view and the impact that had on us in Alberta and so forth. So there's a lot of moving parts. What does Metcoal do for the U.S. rails as well? So I think that it's difficult to speak on a relative basis.
I think we feel confident that for our story, that we can grow faster than the economy and that we can grow faster than gain back share from trucks and so forth. That's kind of where our focus is.
Speaker 10
Okay. Great. I know it's a tough question, but appreciate that color.
Speaker 8
Okay. Thanks, Justin.
Speaker 16
Your next question comes from Bascome Majors from Susquehanna. Please go ahead.
Speaker 11
Yeah. Thanks for taking my questions. Keith, the plan has really been in place for some time, as you said earlier, and you're still mostly the deck is set for management, as you kind of commented earlier. But Hunter's presence clearly cast a long shadow. I'm curious if there is an opportunity here with him being gone six months earlier for you to pull forward anything or any initiatives or something else that we could see happen a little earlier than expected.
Speaker 1
Well, Hunter's never stood in my way. So his shadow, he's always supported me, and he's trusted me for a long time. And I've done this transition with him once before in my career. So I guess the short answer would be no, or I'd be doing it. We're going to do the right things. He's taught us well. We know the fundamentals. We clearly understand how we work and why and how we sustain our success. And you can expect more of the same. My style's a bit different than Hunter's, obviously. Maybe my shadow's not as great as his, but certainly, if he's done his job and he's done it well, I've learned a lot from that gentleman over the years, and we know how to railroad this company, and we're going to make money for our shareholders.
Speaker 0
Thank you. I appreciate that.
Speaker 1
Thank you.
Speaker 16
Your next question comes from Konark Gupta from Macquarie. Please go ahead.
Speaker 12
Good. Thanks and congratulations, Keith.
Speaker 1
Thank you.
Speaker 12
Just a question on MEX first. So did you include MEX when you said pricing would be 2%-3%, roughly, in 2017?
Speaker 1
No. No. That's just a 3% price. Yeah.
Speaker 12
Just the core pricing. Okay. And what do you think about MEX in 2017 because the volumes are coming back in most of the segments? So should we expect the MEX to sort of improve as well?
Speaker 1
Slightly down.
Speaker 8
Yeah. There'll be a bit of depending on the quarter, Q1, it's such a dramatic decline in crude in Q1 with the comps. So that might be a little different, a little more impactful. But beyond that, we should net out, like Keith said.
Speaker 1
You think about the things that we move a lot of. When we move a lot of it, the cost per goes down a little bit, like coal and like potash. On a cents-per-RTM basis, the more that we move, the more adverse impact it has on mix on price.
Speaker 14
They also have a lower average cents-per-RTM versus the rest of the book, which we've seen play out over the last two quarters as well.
Speaker 12
Right. So when you said positive volume growth, like slight positive, did you allude to RTMs, or were you alluding to car loads?
Speaker 1
Yeah. No. We're talking RTMs, RTMs, RTMs, RTMs.
Speaker 12
Perfect. Okay. Thank you. Then just a quick follow-up on I think you have previously mentioned about repatriating about a $200 million-$300 million business from trucks, mostly. Where do you stand on that, and do you anticipate some of that materializing in 2017?
Speaker 1
Yeah. Well, it's actually 200-300 repatriating from the strength of our network, some from trucks, some from rail share. I'd say we're probably a third into that if you look at it. And there are some gains that we're looking at in 2017, we've assumed. Certainly, we just signed a contract with one particular customer on the strength of our franchise and our service. We're shifting about 10% of the business to our rail that wasn't there before. So on a $111 million contract, 10%, you do the math, that's $10 million or $11 million. So again, it singles and doubles and triples. It's not any big $450 million or $200 million accounts. But again, what we bring to the table, we put it straight to the bottom line. It's a pretty compelling value proposition.
Speaker 8
Sometimes you got to recall that when you have these big, lumpy contracts, they don't come on as the same level of contribution. So for us, our focus of gaining those $5 million, $10 million here and there comes out at a much better margin to the net bottom line.
Speaker 12
Okay. Thanks for the color. Appreciate it.
Speaker 1
Thank you.
Speaker 16
Your next question comes from David Tyerman from Cormark Securities. Please go ahead.
Speaker 13
Yes. Hello. My first question's just on the OR and the productivity. I just wanted to actually clarify. So on the productivity guidance that you gave, 100-200 basis points, does that include or not include the impact of the net of the pension and the change in land sales?
Speaker 8
That does not include that.
Speaker 13
Okay. So it's going to be more than that in theory, and then you should be able to get some from pricing too since your core price is larger than inflation. Is that the way to think of it?
Speaker 8
Yes. Yes.
Speaker 13
Okay. Just wondering, if your headcount isn't actually changing this year, where are we likely to see the bigger buckets of those kinds of improvements on the core side?
Speaker 1
It's across the board on the operating improvement side. It's absorbing the additional RTMs we're talking about without increasing headcount, with running longer trains, with having fewer train starts. It's just the way we run our business. It's taking switches out of the track. It's upgrading our locomotive fleet so that they run better. They break down less. It's going into like on operating maintenance, when I'm talking about taking out switches, I'm not cutting my operating maintenance. I'm taking out the workplaces that I have to do work, so I cut my operating expense. So it's initiatives like that across the entire board that this operating team, every year, we challenge them and push them. We haven't converted this thing overnight. There's a top 10, and we fix those 10, and there's 10 more to go after. So it's something that we focus on. We challenge expense.
We're always looking for better ways to improve this railway, be it process, be it culture, be it safety, be it waste elimination. That's sort of how you continue this story. It worked in the past, and it's working now, and there's still many more chapters left to come.
Speaker 13
Okay. Fair enough. That makes sense. And then just on the domestic intermodal, your RTMs were actually down, and your revenues were actually down in 2016. That sounds like it's a fairly big focus area. Just wondering what the difference is between the actual and.
Speaker 1
Well, the revenues were down overall, but the RTMs were up second half. And again, the focus is wholesale. We put a product in marketplace that had about 8% growth, I guess, effectively between Toronto, Montreal, and Chicago, across the border, domestic, which is what outpaced the industry. So again, it's just a further evolution of us growing our book of business on the domestic side. We've got the shortest routes between Toronto, Calgary, the major markets. We're developing the market across the border, working in partnership with trucking companies as partners as opposed to competitors, and we're winning market share. So it's working well for us.
Speaker 13
Okay. It's really a second half and moving into this year kind of comment.
Speaker 1
Yeah. It's a much better demand situation in 2017. You had a lot of additional capacity out in the marketplace in 2016 that was a headwind for us.
Speaker 8
David, I would just point out in terms of the OR, keep in mind as fuel prices go up and you add back revenues at effectively 100% OR, that has a negative impact on just the math of that. Keep that in mind as well.
Speaker 13
Right. Okay. Helpful. Thank you.
Speaker 8
Finally, there are no further questions at this time. I will now turn the call over to Keith Creel.
Speaker 1
Okay. Well, thank you very much for your time this afternoon, for the meaningful questions. We look forward to a very positive first quarter. Our first quarter together as a senior team, and we look forward to sharing those results soon. Have a safe day.
Speaker 16
This concludes today's conference call. You may now disconnect.