Canadian Pacific Kansas City - Q4 2018

Transcript

Operator (participant)

Good afternoon. My name is Jesse, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Canadian Pacific's fourth quarter 2018 conference call. The slides accompanying today's call are available at www.cpr.ca. All lines are in place 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, 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 Maeghan Albiston, AVP, Investor Relations and Pensions, to begin the conference.

Maeghan Albiston (AVP of Investor Relations and Pensions)

Thank you, Jesse. Good afternoon, everyone, and thank you for joining us today. Before we begin, I just want to remind everyone that this presentation will contain forward-looking information and that actual results may differ materially. The risks, uncertainties, and other factors that could influence actual results are described on slide two in our press release and in MD&A materials that are filed with Canadian and U.S. regulators. This presentation also contains non-GAAP measures, which are outlined on slide two as well. With me here today is Keith Creel, our President and CEO, Nadeem Velani, Executive Vice President and Chief Financial Officer, and John Brooks, our Senior Vice President and Chief Marketing Officer. The formal remarks will be followed by Q&A, and in the interest of time, we'd appreciate if you could limit your questions to one, but to follow up if required.

It's now my pleasure to introduce Mr. Keith Creel.

Keith Creel (President and CEO)

Okay, thanks, Maeghan, and welcome to the call today. I think it's appropriate. Let me start by thanking our 13,000 strong CP family that have produced the results that this leadership team has the honor to discuss with our shareholders, with our investors today. As you can see from the release, by every financial measure, literally every financial measure, this has been a record year, both on a quarter basis as well as a yearly basis. Specifically for the fourth quarter, revenues, CAD 2 billion, a CP record, up 17% versus the fourth quarter of 2017. A 56.5 operating ratio, an all-time quarterly record for CP. Adjusted EPS grew 41%. From an operating and safety perspective, the results are equally impressive.

We handled record GTMs, record RTMs on our network this quarter, while we continued to drive improvements across all of our key operating metrics. Train speeds were up 3%, terminal dwells down 6%, field efficiency improved 3%, which is an industry best. And most importantly, above all else, we executed safely, driving personal injury improvement by 14% and train accident improvement 31% versus the fourth quarter of 2017. And with that said, on a full year basis, 2018 was a best-ever year for FRA personal injuries at CP, as well as the 13th consecutive year CP has reported the lowest train accident frequency ratio in the industry. Now, beyond the immediate financial success of the fourth quarter, 2018 was also a very meaningful year across the organization from a sustainability standpoint.

As I highlighted back at our Investor Day, for those that truly understand our CP story, it's a compelling one. We've got the service, the cost structure, the capacity to grow in a profitable and sustainable way. 2018 was an absolute proof point of these facts in spades. The record performance in 2018 was an undeniable example of what our operating model can produce. We grew the top line to record levels by bringing on new customers, while we grew with our existing ones, without compromising our ability to provide capacity and deliver the service they deserve and that we committed. And we brought the new business on at lower incremental costs. Put these two key elements together, the natural by-product is our best-ever operating ratio and record earnings.

But again, from a sustainability point in 2019 and beyond, what continues to fuel my confidence in our CP story is again, fact-based. We've got a committed team of first-class railroaders who know what it takes to execute the precision railroad model, which is a team that continues to get stronger as we challenge each other in the status quo. Rest assured, this is not a team that I'll allow to get comfortable and complacent. What we do and how we do it takes the right talent. They have to be led the correct way, motivated and inspired to make it happen for our shareholders, customers in the North American economy. We continue to build and deepen relationships in our 13,000-strong CP family.

Most specifically, it was a busy and a very successful year on the labor front, not only ratifying our long-term deal with the TCRC Running Trades early in the year, but concluding 2018 with the ratification of a four-year deal with Unifor in December before it expired. The change we've driven has not been easy. We certainly have not gotten it all right, but I'm pleased with the progress that we continue to make. The deals we sign provide mutually beneficial terms that will support our growth strategy while we provide CP, its employees, and our customers with the stability and the certainty we need to continue to execute and grow over the next several years.

I think as a side note, it's also important to remind ourselves, our next major labor contract in Canada doesn't come due until 2021, which gives us a significant, meaningful quiet period to continue to focus on deepening relationships even more at our company. Speaking of the guidance, we enter 2019 with tremendous momentum. Rest assured we're poised for another record-setting year. As you've read in our press release, we're targeting mid-single-digit RTM growth, double-digit DPS growth for the third consecutive year. We did it in 2017, we did it in 2018, and we're confident that again in 2019 we'll meet or exceed those expectations. I've never been more confident in this team's ability to deliver, nor never more excited about the potential for this franchise as we continue to write the next chapters of success in our CP story.

With that said, I'm going to hand it over to John to bring some color to the markets before Nadeem wraps up and elaborates on the numbers, and we save the balance of our time for some robust and meaningful Q&A. Over to you, John.

John Brooks (SVP and CMO)

All right. Thank you, Keith, and good afternoon, everyone.

So total freight revenues were up 18% this quarter to, as Keith said, a record $2 billion, with record growth across every line of business for the second straight quarter. RTMs were up 9%. Fuel and FX were tailwinds of 3% and 2%, respectively. And as expected, same-store price continued to be strong, finishing at the upper end of our targeted 3%-4% range. The pricing environment continues to remain healthy. As Keith stated, 2018 was a tremendous year for CP as we executed our disciplined strategy to deliver sustainable, profitable growth. And look, it didn't happen by accident. On the backs of our industry-best service, we had a plan, we picked our partners, and we executed with precision in the marketplace.

In October, we outlined at our Investor Day, CP's unique strengths that enable us to offer creative solutions to our customers, including our energy train from the Alberta Heartland to Vancouver, our new and expanded transload facilities in major centers such as Vancouver, Minneapolis-Saint Paul, and Hamilton, and leveraging our land holdings to create new auto compounds at Vancouver and Wolverton. We are executing our strategic playbooks, utilizing the principles of PSR, and frankly, the results speak for themselves. Full year total revenues are up 12% to a record $7.3 billion. At the risk of repeating myself again here, revenues were up in every line of business on a full year basis. Let's take a look at fourth quarter revenue results on the next slide. I'll speak to the results on a currency-adjusted basis.

Starting off, as expected, grain was sort of a tale of two stories. Canadian grain volumes were up 7%, surpassing last year's record levels. This was partially offset by continued weakness in our US grain portfolio, where volumes were down 18%, largely as a result of decreased shipments to the US PNW. So look, as we enter 2019, we expect continued strength in Canadian grain through the first half of the year, given solid crop inventories and strong regulated pricing. And in the US, although January is off to a pretty decent start, we expect ongoing uncertainty in these markets. Strong export volumes from both Canpotex and K+S marked our fourth consecutive record-setting quarter for potash, with revenues finishing up 24%. We had an all-time record year in potash, and we see opportunity as we move into 2019 as global demand remains strong.

The energy chemical plastic portfolio saw a revenue growth of 46%. While certainly crude was a large contributor to ECP growth, with approximately 25,000 carloads moved in the quarter, I would highlight that excluding crude, ECP revenues saw strong growth of 26%, driven by LPGs, biofuels, and refined fuels. As we head into 2019, we expect continued momentum in this line of business. Based on the strength of our service, our Energy Train continues to create opportunities in the marketplace. We've entered into a new multiyear agreement with Suncor, providing service from the Edmonton area to their expanding Vancouver export terminal. Also, in the ECP space, we recently entered into a new multiyear agreement with a new customer to deliver refined fuels into the Southern Ontario market. This business leverages freed up capacity with the closure of our Expressway operations.

As many of you will recall from our Investor Day, where we spoke about this, the Expressway terminal is strategically located with direct highway access and distribution to the Greater Toronto Area. So moving on, as expected, forest products were up 12% as we continue to leverage our Vancouver, Toronto, and Montreal transload capabilities. The automotive business unit revenues were up 4% on the quarter, in spite of weaker demand environment in this space. At the start of 2018, this was an area that I highlighted potential headwinds for the year. So I'm pleased to report total revenues finished up 11% on the year, as our new team focused on leveraging our strong service and customer partnerships to grow our share in this market. Heading into 2019, we see growth in this sector as we continue to attract new business to our network.

Construction of our new Vancouver auto compound, which has Ford as our anchor tenant, is on track to be completed in Q1. This facility, brought on by utilizing our existing strategic land holdings, provides our automotive customers with a new option in the Vancouver market. Finally, on the intermodal side, revenues were up 11%. On a full year basis, I'm extremely pleased with the strong growth we've had in both domestic and international intermodal. On the domestic front, we had a record year over on top of a record year, and I expect continued growth as we move into 2019. In Q1, we will onboard our newest domestic intermodal customer, Dollarama, to our already very strong retail book of business.

Additionally, this team, I can tell you, is laser focused on continuing to leverage our demand management tools to create new valuable capacity on our existing train starts. We are confident that this will drive more over-the-road conversion to our intermodal trains.... On the international side, we're also projecting growth in 2019 as we leveraged our service and the capacity brought on by GCT at Deltaport to grow with both new and our existing customers at the Port of Vancouver. And I'm also pleased to announce that we have recently extended our transportation agreement with our largest intermodal customer, Hapag-Lloyd. So let me wrap things up now. We, as Keith commented, we accomplished a lot in 2018, and I am extremely pleased with how this team is maturing. We're delivering results and strategically executing our playbooks in the marketplace.

The demand and pricing environment, as we see it, continues to be healthy, and I'm extremely encouraged by the energy and momentum we have coming into 2019 and the opportunities I see ahead. With that, I'll pass it to Nadeem.

Nadeem Velani (EVP and CFO)

Thanks, John. It's an outstanding report. I'm proud to announce record results for the quarter. Total revenues were up 17% or 15% on an FX-adjusted basis, driven by RTM growth of 9% in the quarter. These revenues are coming on at a high incremental margin, as evidenced by our fourth quarter operating ratio of 56.5%, an improvement of 370 basis points year-over-year. As our numbers illustrate, and Keith highlighted, the railway is performing extremely well, and we have strong momentum as we continue to drive productivity and grow at high incremental margins. Taking a closer look at a few items on the expense side, as usual, I'll be speaking to the results on an exchange-adjusted basis, which is shown in the far right column of the slide.

Comp and benefits expense was up 10% or $34 million versus last year. A few specifics behind that number. Higher headcounts to support increased volumes, along with wage and benefit inflation, were drivers behind the increase. A key item to note, although the share price declined during the quarter, stock-based compensation was only a $2 million reduction from 2017 levels, as higher accruals were booked for long-term compensation as a result of the strong performance and future outlook. Fuel expense was up 22%, primarily as a result of higher fuel prices and increased volumes. This was partially offset by improvements in fuel consumption of 3%, driven by improved train utilization from higher volumes.

This was a record Q4 fuel efficiency of 0.956 gallons per thousand GTMs, and record annual fuel efficiency of 0.953 gallons per thousand GTMs. Our investment in locomotive modernization and our commitment to the principles of precision scheduled railroading were drivers behind the record numbers. Purchased services and other was CAD 250 million, an increase of 1%. As previously highlighted, we had a land sale close in Q4 for a gain of CAD 35 million. However, this land sale was partially offset by a CAD 20 million contingent claim in the quarter. Moving below the line, interest expense was CAD 2 million lower or CAD 6 million lower, excluding FX. The reduction is primarily driven by savings from our debt refinancing in Q2 of 2018.

Adjusted net income improved 38% overall, while adjusted EPS grew 41% to $4.55. Put that EPS figure in perspective, that is greater than CP's full year EPS in 2012, prior to the transformation, which is pretty incredible to think about how far we've come. Moving on to full year results on the next slide. This record fourth quarter performance rounds out a record year for CP. The plan is clearly working. For the year, revenues grew 12% and adjusted operating income grew 15%, compared to 5% revenue and 6% adjusted operating income growth in 2017. Our full year adjusted operating ratio was 61.3%, which is a 110 basis point improvement over 2017, demonstrating our ability to grow volumes at a low incremental cost.

This led to adjusted income growth of 25%, and the benefits of a lower share count from our share purchase program helped us achieve EPS growth of 27%. Moving on to free cash to wrap things up. 2018 cash from ops increased by 24%, and free cash flow increased by 47% to nearly $1.3 billion. Shareholders are being rewarded as we remain opportunistic in our share buyback, taking advantage of volatility in the equity markets. We have completed around 40% of the buyback program we announced in October at prices below where we are currently trading. Additionally, a 15.5% dividend increase in May marks the third straight year the dividend was raised. Our approach to capital remains disciplined. In spite of currency headwinds and our opportunities for growth, our capital spend finished in line with expectations.

As mentioned in our press release, we plan for the same level of capital investment in 2019. When we give guidance on capital spend, rest assured we have a well-thought-out and detailed internal planning process. You should not expect negative surprises from us. Nowhere is that discipline more evident than in our adjusted ROIC, a record 16.2%. To put that figure in perspective, when we started this journey in 2012, our adjusted return on invested capital was just shy of 10%. Now it's at industry best. As I told you at Investor Day in October, we're focused on generating quality returns for our shareholders, driven by our strategy of sustainable, profitable growth while controlling costs.

John Brooks (SVP and CMO)

I'm extremely pleased with our performance, particularly in the back half of 2018, when we separated ourselves from the pack and demonstrated what a precision scheduled railroad with the best team in the industry can deliver. There's a great deal of momentum at CP, and we are extremely excited for what's ahead in 2019. With that, I'll pass it back over to Keith.

Keith Creel (President and CEO)

Okay. Yeah, thank you, John. Thank you, again, Nadeem, for that color. I think we'll just take it down some more time to open up the Q&A and, and some robust discussion. So over to the operator.

Operator (participant)

Thank you. If you'd like 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 yourself to 2 questions. There will be a brief pause while we compile the Q&A roster. Your first question comes from Ken Hoexter with Merrill Lynch. Your line is open.

Ken Hoexter (Analyst)

Great, good afternoon, and congrats on the phenomenal results and great turnaround. But Keith, maybe you can just delve into a little bit, or John, at the Analyst Day, you talked about the potential for committed contracts in the year ahead, based on things that were expiring. Maybe you can talk about the progress in negotiations, you know, as you built into that 5.5% RTM growth into 2019.

John Brooks (SVP and CMO)

Well, Ken, I can tell you, we're deep into those, every one of them across those business units we spoke about at Investor Day. I could tell you, it's probably too early to get into too many details on it, but I think the neat thing you gotta remember as part of this, a lot of those opportunities set us up for 2021 and beyond. So a lot of that revenue and that opportunity aren't included at all as you look at our 2019 guidance and where we expect to be. So a lot of that, I would consider sort of a future upside.

Keith Creel (President and CEO)

But more specifically, in 2019, Ken, I, I'll draw attention to what we really couldn't say back then, Loblaws closed and renewed. Canadian Tire closed and renewed. Hapag-Lloyd closed and renewed. Dollarama closed and renewed. Those are 4 pretty meaningful proof points of, of our confidence in the story, revenue story at CP.

Ken Hoexter (Analyst)

Are those all ones that renewed or those are not new wins that you had talked about from competitive?

Keith Creel (President and CEO)

Yeah. Dollarama is new revenue, Hapag, Canadian Tire, and Loblaws, all closed and renewed, which were we were in the negotiating process, obviously, during that time.

Ken Hoexter (Analyst)

Got it. And then just as my follow-up, Keith, you kind of came out with some harsh statements in terms of what the government was looking at into the Port of Vancouver and progress. Maybe you can kind of follow up a little bit in terms of where your performance is at the port, and what you think kind of drove that investigation.

Keith Creel (President and CEO)

Okay, well, harsher words, Ken, mine. I think more I try to be fact-based and maybe a little bit pointed, but I think only fair to the hardworking employees of this company that have created record service levels and capacity levels in that whole corridor. You know, we went through some challenges in a capacity-constrained corridor at the point back in the fourth quarter and into the beginning of January. We had to take measures to protect our overall health of our franchise. That's a key corridor for us. Obviously, we have a lot of customers that are serving that corridor. We've got not only the carload side, the chemicals, we've got the grain, we've got the potash, we've got the coal, so it's a key corridor for CP.

When we get to a point where we see certain business lanes with equipment tied up for a number of days, waiting to get their destination at a capacity-constrained location, we have a responsibility for all of our customers to take the appropriate surgical actions, to make sure that we mitigate that damage. We also took immediate actions, not only to curtail some of that pressure, but to do some things ourselves to help our competitor recover quicker in that corridor, because, again, we have entered into agreements. We can be the greatest competitors, but in that corridor, we create capacity together. When one succeeds, both succeeds, and we think that's the right thing to do, not only for our shareholders, not only, for the corridor, but overall, for all the business that goes into and comes out of Vancouver.

So long answer to your question, things have recovered quite nicely, I think, for both railroads. I saw it as an episodic event. It's something that I think we responded well to, and we're gonna go through the process. I think the CTA acted a bit prematurely. I think that we'll go in, the facts will speak for themselves, and I think when it all comes out, that everything that I've said, not only will be what I've said, but what the facts prove to be true. CP is in good shape in that corridor. Our dwells are the lowest they've ever been. Our service is better than it ever has been, and it's driving a lot of these results.

So again, the rhetoric will, will fade away, the facts will get out on the table, and CP is going to bode well when the facts stand on their own.

Ken Hoexter (Analyst)

Wonderful. Appreciate the insight. Thanks for the time, guys.

Keith Creel (President and CEO)

Thanks, Ken again.

Operator (participant)

Your next question comes from Chris Wetherbee with Citigroup. Your line is open.

Chris Wetherbee (Analyst)

Yeah, thanks. Good afternoon, guys. Wanted to talk a little bit about the guidance, so mid-single-digit on the RTM side, presumably pricing is additive to that when you think about the top line, and you're giving us sort of the double-digit EPS growth, which is, I know, a convention you've used in the past. Can you help us sort of, you know, square the circle here to a degree, maybe talk a little bit about the operating ratio, some of the moving parts there, to give us a little bit of sense, sort of where in that double-digit stack EPS potentially could be? Seems like obviously higher than 10%, but just trying to get a sense, a better sense about where that might shake out.

John Brooks (SVP and CMO)

Well, Chris, I'd say that certainly we have strong confidence in the volume outlook.

Some of the unknowns, we'll see what happens with fuel prices, it's been pretty volatile, you know, could be a headwind on fuel surcharge. That being said, it's a non-event from an operating income point of view, for the most part. Currency, we've given you our guidance, which would be pretty consistent with 2018, so at 1.30. So it's, you know, assuming that comes true, at current levels, potentially there's a little bit of upside, but that's been very volatile the last 3 or 4 months as well. So, you know, we've been very positive in terms of our pricing outlook and our cents per RTM. You know, very evidenced by Q4 results, where cents per RTM were extremely strong.

And the renewals and the pricing environment that John spoke to has been very supportive. So, you know, everything I pointed out there, perhaps with the exception of fuel surcharges, could be additive to revenue growth. You know, we're performing well. Our precision scheduled railroading model and our approach towards sustainable profitable growth has helped with our incremental margins. You know, you should expect our operating ratio to improve. We're not going to back off that approach of continually lowering that. And we believe, you know, we believe it'd be a disappointment if we weren't best in the industry in terms of the operating ratio.

Certainly, the back half of 2018, we were far above the best in the industry, and we plan on staying there. So all that to say, you know, some of the negatives in terms of the macro environment, where we are in January, you know, depending on which headline you read, the sky can be falling every now and then, and it could. We think it's prudent at this point to provide the guidance we've provided of 10% or double digits, EPS growth. So, you know, do we feel confident in that number? Yes. Do I wanna—do we wanna give you more visibility than that? I'd say, not at this point.

You know, the last two years, we've been able to outperform and update our guidance accordingly. I'm not saying that that's what we'll do, but we'd rather be conservative and rather put out numbers that we're gonna achieve than the other way around. So, all that to say, I'm not gonna give you more color than what we did in terms of our guidance.

Okay. No, that's super helpful. I appreciate the color. One quick follow-up. Just wanna make sure I understand where CBR, Crude by Rail, sits in the RTM outlook. I most of that, I believe, is take or pay. I just wanted to get a sense, are you seeing any impact on that business based on what differentials have done over the last month or so?

You know, Chris, we hit sort of this, 100,000 unit run rate here in, in fourth quarter. My expectations is we, we hang around there, into Q1, and then we've got some upside as, as the year goes forward. You know, I, I do think certainly some of the actions that have taken place here, most recently in Alberta, have created some, you know, I don't know if it's unintended consequences, potentially uncertainties in the marketplace. We've seen, I would say, some sets slowing, some new additional business slower to come on. Overall, the volume, the, the base volume has, has held in there, but it's something obviously we're, we're taking very seriously, we're, we're watching very closely, and we have stayed in sort of constant dialogue, with the province.

Nadeem Velani (EVP and CFO)

Chris, we—our guidance reflects conservative view on crude, crude volumes.

Chris Wetherbee (Analyst)

Okay. Thanks very much for the time. I appreciate it.

John Brooks (SVP and CMO)

Great.

Operator (participant)

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

Steve Hansen (Analyst)

Yeah, hey, guys. Thanks. Just very quickly on the labor front, how are you feeling about the employee count through the year? The traffic growth has obviously been quite strong through Q4 and even into the early parts of Q1. How do you feel about the hiring front for this year, and how should we think about that in our modeling process as you think about incremental operating margins and leverage? Thanks.

John Brooks (SVP and CMO)

Yeah, I think you should still assume some incremental productivity improvements based on mid-single digit RTM growth. You know, I think it's fair to assume low single digit increase in headcount overall. There's still meat on the bone.

Steve Hansen (Analyst)

Okay, very helpful. Thanks. And just to follow up on the crude commentary then, it sounds like some of the spread closures that have happened might mitigate some of the shorter term upside to that. But as you look into the contracted volumes for the balance of the year, should we expect the cadence to improve slightly or improve. I'm trying to get a sense for that run rate for the balance of the year on just purely what's contracted.

John Brooks (SVP and CMO)

Yeah. So Steve, I think, you know, my expectation would be as we push into Q2, we make a move towards, say, 120,000 car annual sort of run rate. And then, you know, we push into the back half of the year, we'll see what sort of upside that presents. I think the key here is we've set ourselves up well with the right partners. There's a lot of investments that have taken place, not only at CP, but with our partners. We just wanna make sure we've got a level playing field in the marketplace to sort of drive, so we can all reap the benefits of our efforts to date. And again, I'm confident that we're seeing that.

But right now, I'm cautious until the whole thing gets worked out between the curtailment and certainly the government's interest in providing their own crude-by-rail service.

Keith Creel (President and CEO)

No, I think the-

Steve Hansen (Analyst)

Very helpful.

Keith Creel (President and CEO)

part of that whole thing, the government, I know they have the best of intentions, but the reality, some of the unintended consequences, I don't truly think they understand. You know, put yourself in all companies' shoes, how do they plan? How do they do contracts? How do they plan their resources? Put yourself in the railroad shoes, where capacity is critically important to what we do and how we maintain our business model and our service for all players in those market spaces, that deserve and that want that capacity.

You know, if we've committed capacity, committed capital, for instance, to locomotives, based on projected growth, which unintended consequence gets impeded or curtailed as a result of these actions, don't think that I'm just going to spend the money. Don't think that if the money's spent and invested in locomotives, if we have other areas of opportunity and demand by customers, that we're just going to hold it in case. We've got a commitment and a responsibility to those customers to maybe redeploy those assets. And then you wake up six months from now and you say, "Wait a second, what happened here? Railroad, we need locomotives, we need capacity, we need people, or you're hurting the industry, you're hurting the province." Well, you know what? I don't want to hurt anything. But I think we got to think a little bit further out.

We got to think about unseen consequences, and I, and I think there's a piece of that that's either not understood or has not been considered, that's going to come into play.

Steve Hansen (Analyst)

Understood. Thanks, guys.

Operator (participant)

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

Walter Spracklin (Analyst)

Yeah, thanks very much. Good afternoon, everyone. On the capacity, I wanna ask a question on capacity. You had alluded or you indicated mid-single-digit volume growth in your guidance. If you do see higher volume growth than expected, what would you say is your current capacity? How much more could you handle? And at what point do you start to see costs creep as you reach some of your upper capacity limitations?

Keith Creel (President and CEO)

I think it all depends on where it comes. As we've said in the past, we certainly can handle capacity. We could, we could double it if we had to.

I mean, if you look at the RTM growth that we have, I mean, it's, it's conservative, so worst case or best case, however you want to put it, we can handle double the RTM growth and not be capacity constrained, as long as it's not double and, or stacked up, I guess, in one corridor. As long as it's spread out the way we manage our business, there's no one pinch point that, that creates huge concern.

Walter Spracklin (Analyst)

That's great. And now, perhaps, moving over to pricing, you could delineate between what was core. I think you said at the upper end of the 3%-4% range. Just wanna make sure I heard that right. But, going forward, is there any impact, John, that you're seeing from truck rates coming down or anything that could lead to a price pressure, given the competitive environment that wasn't prevalent in 2018?

John Brooks (SVP and CMO)

Yeah. So Walter, yeah, we are right at the top end of that on the same-store basis. Our renewals were a little better than that. In Q4, those contracts actually pushed 4.3-4.5 type numbers. If I look into Q1, I'd say for the most part, we're off to a strong start with sort of similar type numbers. You know, we've obviously staying close to our wholesale customers that give us a good read on the trucking market. We're staying close to our customers and what they're seeing in terms of their demand environment. And as it stands right now, with what I believe is prolonged tighter capacity, I think that pricing opportunity continues.

Then, you know, Walter, we get back into the back half of 2019, and then you start to introduce ELDs and that potential mandate coming on early in 2020, and, you know, what sort of effect does that sort of bring into play? All of which, I think, supports a continued robust pricing environment.

Walter Spracklin (Analyst)

Okay, that's all my questions. Congrats on the great quarter.

John Brooks (SVP and CMO)

Thank you.

Keith Creel (President and CEO)

Thanks, Walter.

Operator (participant)

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

Thomas Wadewitz (Analyst)

Yeah, good afternoon, and also, you know, congratulations on the really strong results. Wanted to see if you could lay out what you think is the likely path on the curtailments in Alberta. Is it, I mean, I guess you're implying, maybe, John, with your comments, that, you know, the curtailment fees need to get up to 120,000 run rate. Is that the right way to view it? What are some of the puts and takes on the way, you know, things might play out, given what you know today, given what you think might change on the, you know, the government actions there?

John Brooks (SVP and CMO)

You're putting me in an area of the ultimate guesswork, Tom. You know, guessing what, between free markets and governments, the output is tough. You know, look, if the spread stays where it is now, at $8-$10, I think I saw today, there's gonna be ongoing pressure. You know, I think the government has said they're gonna revisit, curtailment, sort of on a monthly basis. February's, I believe, its requirement is the same as what January is. So, I think right now, we expect a little bit of that ongoing pressure to continue through February....

You know, I would say for the most part, the crude shippers in our terminals, though, are bullish that that's gonna get itself sorted out, and we're gonna get back to sort of the heavy demand profile that, you know, we had leading into it. You know, in the midst of all this, I'd, you know, we moved, I think close to 80 crude by rail trains, last month, and I think we're gonna do similar type number here in January. So, you know, I expect that sort of run rate to continue, and then we'll, as we've got some additional opportunities, coming on in Q2, we'll go from there.

Thomas Wadewitz (Analyst)

Does your comment on Q2 going up to 120,000, that assumes that the spread widens out, or does that happen even if you stay at, you know, $8-$10 a barrel spread?

John Brooks (SVP and CMO)

Well, look, if this stays at 8-10, there's probably gonna be some challenges. You know, look, we've purposely structured the right contracts that have some backstops against this business for us. So it's not like the- there's nothing if those contracts don't start up. But our expectation right now, in terms of resource planning, is to have those start up as we come Q2. Now, the other thing is, you know, those aren't gonna just all click in overnight on April 1st. There's gonna be a ramp-up period through Q2, you know, to build ourselves up to that run rate.

You know, the other interesting sort of, I don't know, unintended consequence is the right way to look at it, but we've actually seen quite a bit of an uptick in activity out of the Bakken as a result. And my energy team is somewhat deep into those opportunities now, assessing that potentially, again, we'll take a very disciplined approach as it relates to any sort of capital or people or locomotive needs to handle that business. But actually, that could present either further upside or a backstop if some of this is delayed in coming out of Alberta.

Thomas Wadewitz (Analyst)

Okay, great. Thank you for all the perspective. Appreciate it.

John Brooks (SVP and CMO)

Yeah.

Operator (participant)

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

Brian Ossenbeck (Analyst)

Hey, good afternoon. Thanks for taking my question. John, just to follow up where we left off on the Bakken. Obviously, the spreads have come down pretty significantly since October. But I know you've been pivoting some frac sand into that region to take up some of the capacity you left when that crude by rail dried up. Does that limit you in any way from turning that back around, putting some capacity back in the ground if that market were to pick up, as you just mentioned?

John Brooks (SVP and CMO)

No, I think it's an area, and Keith can comment on it, that we've got pretty strong capacity in that area. You know, you look at it, our US grain has been significantly off, right? And certainly, the China tariffs have limited the flow of our soybeans out of that region. So, you know, frankly, if we can backfill that with frac sand and a little bit of Bakken crude, that might actually fit our resource planning for that area quite well. And you know, the team has done a heck of a job re-honing our frac sand. Certainly, it's an area that we see some headwinds in 2019 as in-basin sand continues to fill some voids in the Permian. But we have been successful.

I think we had about 15% of our frac moving into the Bakken a year ago, and we're moving close to 50% of our frac sand into the Bakken now. So it's been a pretty successful story for us.

Brian Ossenbeck (Analyst)

All right. Thanks, John, for that color. Maybe just a quick one on the margins. Going back to yesterday, we're looking at 100 basis points of improvement year-over-year through 2020. Clearly, you're looking at some good operating leverage from better volumes, excuse me, not volume growth. On the operating side, though, and productivity gains, what are some of the specifics that you're targeting there to help drive some of that improvement?

John Brooks (SVP and CMO)

Well, certainly operating leverage is something that, in this kind of volume environment that we're describing, will be supportive. You know, we've made some very strategic investments very recently. For example, in Alyth Yard here in Calgary, where we've spent probably $40-$50 million of capital in the fourth quarter of 2018 to optimize not only that facility, but some of the blocking and some of the work up in Northern Alberta and Edmonton area, that's gonna be kind of benefiting from that investment here in Calgary.

So, you know, that's gonna help us allow us to improve our train speed, improve our train length, and overall, our ability to move through the yards much more effectively and improve our overall labor productivity as well. So, you know, there's a number of these items that are gonna be helpful. You know, one thing I'd point out from a headwind point of view, you know, our guidance doesn't assume any land sales, so that's, you know, about a $40 million headwind, about 40-50 basis point type of headwind to the OR. But yeah, we certainly expect to improve the OR irrespective of that.

So, you know, some of the other, things we talked about in terms of, robotic process automation, some of the benefits from our investment in locomotive modernization, et cetera. Rest assured, we're the pipeline of productivity opportunities are still plentiful.

Brian Ossenbeck (Analyst)

All right, appreciate the color. Thanks, Nadeem.

Nadeem Velani (EVP and CFO)

Thanks, Brian.

Operator (participant)

Your next question comes from David Vernon with Bernstein. Your line is open.

David Vernon (Analyst)

Hey, guys. Thanks for taking the question. Nadeem, similar kind of question, but I think at the Investor Day, you were laying out an expectation for something like a 75% incremental margin. It sounds like things worked pretty well, but you kind of fell short a little bit on what that incremental would have been. Can you talk about what maybe didn't go as well as you would have liked in the quarter, and how that kind of relates to the outlook for the incremental margin guidance you gave last fall?

Nadeem Velani (EVP and CFO)

Well, I wouldn't say that there was something that I'd point to that didn't work out well. Maybe, you know, maybe you and Maeghan can compare notes after the call. But in terms of your calculation, you know, we certainly see in excess of 70% incremental margins in the quarter. You know, we had some one-time negatives as well that I pointed to, if you read my comments. For example, we had a contingent liability and purchased services of $20 million that was accrued, and there was also, you know, some higher accruals for stock-based comp that was to the tune of, you know, $15 million-$20 million. So it's probably—that's probably where the differences lie between

you know, our calculation and maybe where, where you're seeing things, you know, quickly since-

David Vernon (Analyst)

I take it out the land sale as well, so.

Nadeem Velani (EVP and CFO)

Right. Right. So, I think those are probably the key figures and, you know, depreciation is something that we back out as well. And, so I, you know, I don't think there was anything there that I would apologize for or any excuses to be made. We're very confident in our incremental margins and, you know, in excess of 70%.

David Vernon (Analyst)

Okay. But that, that was excluding the... That, so that would be excluding the depreciation on land sale then?

Nadeem Velani (EVP and CFO)

Right.

David Vernon (Analyst)

Right. Okay,

Nadeem Velani (EVP and CFO)

Depreciation, land sales, stock comp. Yeah.

David Vernon (Analyst)

All right. And then, maybe just as a quick follow-up, any commentary on what you're hearing from customers on the export coal outlook would be great. Obviously, with all the concerns about global slowdown, wondering if you're hearing anything from Teck about sort of demand for metallurgical coal off the West Coast of North America?

Nadeem Velani (EVP and CFO)

No, things look pretty strong. We just recently updated our projections with them in line with what our guidances and our expectations are for 2019. You know, Teck is an efficient pipeline. And they've got a long-standing strong book of existing customers, and actually, they seem pretty. I don't know if bullish is the right word, but expect a pretty stable 2019.

David Vernon (Analyst)

All right. That's helpful. Thank you.

Nadeem Velani (EVP and CFO)

Thanks, David.

Operator (participant)

Your next question comes from Matt Reustle with Goldman Sachs. Your line is open.

Matthew Reustle (Analyst)

Yeah, thanks for taking my question. Just back to the cost side, Nadeem, you mentioned land sales. Are there any other cost headwinds that stop you from achieving the sub-60 OR that you've had as a run rate for the second half of the year?

Nadeem Velani (EVP and CFO)

You know, fuel surcharge is always one of those unknowns, right? So, you know, when fuel surcharge comes on at a 95%-100% kind of OR, that can affect the math. You know, that's something that I always point to. Stock-based comp, you know, we expect the stock to go up. We've seen it come up since year-end, and our expectation is, you know, we'll execute on our plan and that the stock will continue to increase over the course of the year, and that will create some headwinds on comp and benefits. A couple things I'd point out to.

Matthew Reustle (Analyst)

Okay, understood. And then, Keith, if you step back and just compare the demand environment today to where you were at the Analyst Day, are you seeing any slowdown in your end markets besides, you guys mentioned the uncertainty around crude, but besides that, are you seeing any change in tone or shift from customers versus where we were just a couple months ago?

Keith Creel (President and CEO)

Yeah, no negative sentiment. It's we're obviously concerned in and around the crude space. That's the greatest degree of uncertainty outside of the the macro environment uncertainty we have with all the rhetoric that's going on about where, what may or may not happen in the U.S. But no material impact. We still have very, optimistic and robust demand reports from our customers. You know, until and unless I see consumer confidence really take a hit and consumer spending really slow down, I don't see it. Now, you know, obviously, the big concern remains for us, the gray U.S. piece. There's some uncertainty in that, but that was there in 2017 as well. We think we found the bottom, but who knows? We'll see what happens the second half of the year.

But at this point, outside of those couple places, we see underlying strength and opportunity, you know, optimism and no pessimism yet.

Matthew Reustle (Analyst)

Very helpful. Thank you.

Keith Creel (President and CEO)

Thanks.

Operator (participant)

Your next question comes from Fadi Chamoun with BMO. Your line is open.

Fadi Chamoun (Analyst)

Thank you. Just a couple of clarifications. So, John, you mentioned the backstop in the crude by rail contract. I'm just trying to understand, like, you know, the take or pay and the backstop. I'm assuming if you move you prefer to move the volume, but if we do end up in kind of spread remaining uneconomical, what is this backstop relative to moving the volume? Do you recover your fixed costs? Do you—like, how should we think about that relative to moving 100,000 carload a quarter a year?

John Brooks (SVP and CMO)

Yeah, so you're right, Fadi, I wouldn't characterize it as take or pay. You know, as typical with our contracts that have what we call a minimum volume commitment, we also have a sort of the give and the get, the commitment we ask them to make, it has a liquidated damage associated with it. So that's what we would have as part of these contracts. And as we certainly would always prefer to haul the traffic and earn the full revenue, but if we don't, the backstop, the liquidated damage, and those liquidated damages are designed to underpin and support, you know, whatever investments we've made towards that particular contract.

Fadi Chamoun (Analyst)

Okay, but there's no way for us to kind of think about it in terms of number. Is it recovering half of what you would have made moving the volume or more than that, or kind of any range that you can hang on that?

John Brooks (SVP and CMO)

Fadi, it's kind of tough. Part of the issue is that it varies a little bit from contract to contract, depending on the origins and the destinations, and certainly the customer and the amount of other business they have relative to it. I guess, my only guidance would be, be assured that if we've brought on locomotives to support a contract, we've made sure that financially, whatever we got out of that contract, if nothing moved, would support those capital investments. I have to leave it at that.

Fadi Chamoun (Analyst)

Okay, great. One other clarification. So it looked like you ramped up resources quite a bit in the back half of 2018. I think the headcount is just under 13,000 coming- kind of exiting the year. Is that the kind of workforce you think is needed to handle the 5%, or should we think that number goes up a little bit as well as a year ago? In the context of the- in the context of the RTM guidance.

John Brooks (SVP and CMO)

Sure. So you might see a very small increase, you know, as Keith mentioned, kind of a, you know, if we're doing mid-single digit RTM growth, maybe low digits-low single digit headcount growth. But, you know, one thing to keep in mind, it's usually a long lead time, as you know, to hire and train, et cetera. The last year, you know, first half of the year, we were ramping up a lot of training, but there was an unproductive workforce. We had some stop and starts with the labor disruption and a very difficult winter. So there was some noise in the 2018, certainly the first half of the year.

You know, I would expect, at this point, you know, a very small level of hiring in that 1%-2% right now, type of number, Fadi. And, you won't see the same dynamic in terms of an unproductive workforce. So, you know, all these, as you know, you've been around long enough that, the attrition is always there in your back pocket to support you, and then attrition is always there, it's something you need to replenish. So, you know, we're always hiring, but we're not gonna overhire. And, I think, you know, we've done a good job of being able to forecast and plan and not get caught, whether it's from a people resourcing point of view or from an asset resourcing point of view.

And so we feel good about the visibility we have into the volumes and what we're resourcing to support that.

Ken Hoexter (Analyst)

Great, and, congratulations on the strong results. Thanks.

John Brooks (SVP and CMO)

Thanks, Fadi.

Fadi Chamoun (Analyst)

Thank you.

Operator (participant)

Your next question comes from Ravi Shanker with Morgan Stanley. Please go ahead.

Ravi Shanker (Analyst)

Thanks. Good evening, everyone. The first question, can you give us a sense of what you guys see in terms of the impact of trade and tariff headlines internationally, and any impact you've already seen in the international Intermodal business in terms of people building up in inventory in 2018 that could potentially lead to an overhang in 2019, or any sign of nervousness that you may see a decline in ordering in 2019?

John Brooks (SVP and CMO)

Yeah, so Ravi, I, I guess, I think we did see a little bit of, late Q4 surge in, in international volumes, as a result of, of the tariff. But I could tell you this, my, my team convinced me to take my January numbers and February numbers down a little bit, and we haven't seen that happen at all. The, the volume continues to, to be, I would say, where we expected or slightly stronger. I, I think the thing I'd, I'd point out is, you know, part of this depends on the partners you pick to associate with in that space, and in, and the operating performance you have for that business. And, you know, at the end of the day, we're, we're secure in that area. We have- we have no major contracts coming up for renewal.

We just renewed Hapag-Lloyd. They've been a very strong performer. The O&E business continues to grow with us. So, you know, we expect a tailwind to continue despite, you know, some of that rhetoric and noise. And then, you know, as I look ahead, and this goes back to some of the earlier questions, there's opportunities for us to grow in that space, you know, as we move along in 2019 and into 2020.

Ravi Shanker (Analyst)

Got it. Thanks for the color. Just to follow up, thanks for the additional detail in the slides this time. If I can just ask you on slide 10, where you have the pie chart on your merchandise breakdown and energy chemicals is 47%, do you have a sense of what that number was 12 months ago?

Maeghan Albiston (AVP of Investor Relations and Pensions)

I don't think it's moved materially, Ravi, but I can follow up with that number after the call.

John Brooks (SVP and CMO)

Great. Thanks, Maeghan.

Operator (participant)

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

Allison Landry (Analyst)

Thanks for taking my question. Maybe just first going back to the comments about, you know, Nadeem, your comments a couple of questions ago in terms of right-sizing the resources, and, Keith, I think you mentioned earlier being able to handle 2x RTM growth. Should we take this to mean, you know, in terms of there being some latent capacity in the network, you know, if the macro does unwind, maybe sooner than expected, will it take a little bit longer to right-size resources, or is that a non-issue in your opinion?

Keith Creel (President and CEO)

That's a non-issue. If, if any of that were to happen and these opportunities were to reverse, you'll see this railroad adjust and, and right-size resources the other way quicker than anyone else in this industry. We keep our finger on that routinely, daily. It's part of the DNA, it's woven into our blood, and we breathe and eat it from a planning process, be it going up, be it going down. I'll make a case in a down market, and I'll say this with firm conviction, this railroad will do better than the other railroads in this industry.

Allison Landry (Analyst)

Okay, and then as my follow-up, I wanted to ask a little bit about the U.S. regulatory environment and specifically, if you have any sort of insights on the potential regulatory implications of PSR in the U.S., given the change in Congress and the Transportation Infrastructure Committee. Do you think that the misunderstood notion that PSR is a cost cutting and a CapEx reduction strategy, along with, you know, maybe the fact that more rails are revenue adequate versus years past, does this add a layer of risk from the regulatory standpoint that, you know, maybe the industry and the market hasn't seen in a number of years? And how worried are you about that, and how worried should we be?

Keith Creel (President and CEO)

Well, I think we have to be cognizant there's always a risk, and we have to manage that. And I think you manage that by educating the regulators as well as the customers with the facts. You can look at our case in point, Allison. I mean, we started this journey with PSR in 2012. We fixed the engine, it's running like a sewing machine, and we're a growth engine now, we're not a transformation engine. So we started going through the cycle and continue to evolve and keep continuing to improve. We're not perfect, obviously, but at the end of the day, I think by and large, talk to our customers, that may have resisted the change in the onset.

Those are happy customers today because we've created precious capacity that's allowing those customers that have partnered with us to win in the marketplace. You look to some of the rhetoric and some of the concern about investment in infrastructure. We've never invested more money. You look at our safety record. It's never been better. So if you want a case in proof that PSR works, if it's executed properly, there's a case study out there. Now, with that said, I know and I respect the other CEOs of these railroads. They understand some of those nuances. I see what the STB is doing. The STB is asking questions. They're trying to learn, trying to get educated.

I also believe that, with the prudent voice, based on fact, if they think that action is necessary, then they'll act. But the reality is, it proves itself out. I mean, CSX, again, I don't have to advocate for CSX, the results advocate for themselves. They implemented PSR. There was obviously growing pains. Change is never easy for anyone, but at the end of the day, they've created capacity, created service, and by and large, if you talk to their customers overall, I think they would support those statements. So again, if it's fact-based and we educate and try to curtail some of the rhetoric and just speak to points of fact and points of experience, I think that's gonna outweigh the rhetoric that's out there and balance and offset the risk.

Allison Landry (Analyst)

Okay. That was helpful context. Thank you.

Operator (participant)

Your next question comes from Seldon Clarke with Deutsche Bank. Please go ahead.

Seldon Clarke (Analyst)

Hey, thanks for the question. Just in regards to your volume guidance for this year and just the different opportunities you've laid out for growth, how resilient do you think mid-single digit volume growth is next year in a more sustained macro slowdown?

John Brooks (SVP and CMO)

How resilient?

Seldon Clarke (Analyst)

Yeah, I mean, just like, could you give us some context around, like, some of the different opportunities that you see are—that are more insulated from, you know, if we continue, like, hovering around 1% GDP growth? You know, I'm not talking about a recession or anything like that, but just maybe what the opportunities are that are less macro sensitive versus like the typical industrial production carloads that, you know, the Class Is move.

John Brooks (SVP and CMO)

Yeah, well, the, you know, certainly a big part of our business remains our, our bulk franchise. And, you know, I, I expect, you know, for the most part, our grain business would fall in that category. You know, although we set record, you know, had a record year in, in potash, I think all the signals remain very strong in that marketplace. As I already spoke about, you know, I think Teck is, for the most part, expecting a pretty strong, 2019. So that part of the business is, is, is pretty stable, and I, I look for growth opportunities there. You know, we've already spoken about the, the crude by rail and where, where we expect ultimately that to go.

Then you sort of layer on, you know, we've got a proven track record in our domestic space. We've been growing at close to double digits, the last now 2-3 years in that area. We're gonna layer on, Dollarama, which will be now a significant new member to our strong retail portfolio in that book. That, that's gonna provide a pretty nice tailwind, and I think pretty much insulate us from any downturn that could affect domestic. I spoke about international, and then, you know, I still think we've got some tailwinds, certainly in the first half of the year around ONE, and we expect growth with our existing customers.

You know, really, I go down the list, and I feel pretty good, unless the sky completely falls, that you know, we're gonna be able to achieve that guidance.

Seldon Clarke (Analyst)

Okay, that's really helpful. And then just last one for me: Do you have a target for free cash flow this year?

John Brooks (SVP and CMO)

Yeah, we should see, You know, we don't have some of the land sales that we achieved in 2018, so you should see kind of marginal improvements in overall free cash.

Seldon Clarke (Analyst)

Okay. So, you know, we're one point, around $1.3 billion in 2018, should see a modest increase in that, you know, kind of low single digits. Okay, even with, I guess, you have a little bit of a headwind from CapEx?

John Brooks (SVP and CMO)

Yeah, I mean, modest. Okay. Was there any—I guess, was the, the CapEx number you guide to is all gross, and then the difference between obviously, net is the land sales. But is that—is, was there any investments that were pushed out or, or delayed or anything like that, or is it just strictly the land sales that makes a difference? It's really the land sales, yeah. Okay, I appreciate it. Thanks a lot. Okay.

Operator (participant)

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

Scott Group (Analyst)

Hey, thanks. Afternoon, guys. So is there any way to just quantify the size of Suncor and the domestic intermodal contract? And then on this no land sales in 2019, have we sort of run our course on real estate, or are we just being conservative?

Keith Creel (President and CEO)

I'll let John speak first.

John Brooks (SVP and CMO)

Yeah. So, you know, the domestic intermodal opportunity with Dollarama is, you know, a $30 million-$50 million opportunity. The Suncor opportunity will phase itself in through 2019, and carries with it some developments that'll really sort of be in the bear its maximum fruit as we get into the 2020. You know, it's probably a $20+ million dollar opportunity near term, growing, doubling, as you get into the out years. And on the land sales, Scott, you know, sometimes it can be very difficult to predict what, you know, they're still lumpy, and you're dealing sometimes with some government entities or councils that can be difficult to move along, as we've seen in the past.

So difficult to predict, you know, some of the smaller land sales. As far as the larger pieces, you know, one key area that we had originally highlighted as an opportunity as part of the longer term kind of divestiture, you know, we might target to utilize for internal kind of railroad ops, that could create a good tailwind for our growth strategy going forward. So, you know, we've revisited that book of business to see what makes sense today and what makes sense with our current growth strategy and profile of business. So, you know, we still see opportunities on that front, but they're longer term. That's how I'd catgorize our forecast on land sales.

Scott Group (Analyst)

Okay, that's helpful. And then, John, if I could just ask one, just quick last one on, on crude. So at what level of volume run rate would the liquidated damages kick in? Meaning, if we're in a 100,000 run rate and we go to 90,000 run rate, do we get liquidated damages on that 10,000 shortfall, or is it, we need to see a more material drop-off before liquidated damages kick in? I just want to understand, like, at what level we're really protected at.

John Brooks (SVP and CMO)

You know, it's, Scott, it's contract by contract. So it would be really... Well, it would probably be confidentially wrong, number one, but really difficult to sort of guide you to that, other than to say, again, we've built these on the premise of supporting any sort of resources that the company has had to acquire to support it. So, and it's not dependent on that, but we would be backstopped on those fronts.

Scott Group (Analyst)

But are those contracts running above those levels today?

John Brooks (SVP and CMO)

Scott, I mean, some of those contracts haven't even kicked in yet, right? So some of these, That's the difficulty in answering it as well.

Scott Group (Analyst)

Understood. Okay. All right. Thank you, guys.

John Brooks (SVP and CMO)

Thanks, Scott.

Scott Group (Analyst)

Thanks.

Operator (participant)

The last question that we have time for today comes from Bascome Majors with Susquehanna. Your line is open.

Bascome Majors (Analyst)

Yeah, thanks for, thanks for squeezing me in here. Keith, about a month ago, you negotiated some updated employment terms and compensation with the board. Clearly, the performance of the business has been really great as of recent and looks forward to carrying into 2019. Can you just give us a little color on what led to the revisiting of the employment terms? And, since the whole agreement wasn't filed, you know, for any investors who were worried about, you know, how long you're gonna be at CP, kind of some of the commitments that you have made to the firm in related to that agreement. Thank you.

Keith Creel (President and CEO)

Yeah, I guess in simple terms, number one, the material terms of the deal relative to how long I'm committed to CP have not changed. I'm committed on my current contract through first quarter of 2022. I'm telling you right now, I'm having a great time. This is something magical that we've created with this team and with this opportunity leading this company. So I have no intention of doing anything any differently. And relative to my compensation, I think it was just a recognition of some shareholders' concern, as well as the market criteria out there, that if we're gonna be the best performing railroad, it's probably pretty fair that myself, as well as my team, are compensated fairly relative to the market. So that's all it was, is closing the gap between what I currently make with the market.

In light of that, it wasn't only I. Obviously, I'm the only one who gets filed, but we took steps as well to recognize the record performance of this team, mid-level management-wide, senior level management-wide, across the board. This isn't just Keith Creel, this is a collective effort for this entire company, and we're taking steps to make sure we protect the talent that's making this happen.

Bascome Majors (Analyst)

Well, I appreciate that color, and, well deserved. You know, thanks for taking my question, guys.

Keith Creel (President and CEO)

Thank you. Well, with that, I guess we're gonna wrap the call up. I wanna thank everyone for their time this afternoon. Certainly, as you have an opportunity to digest these results, I think you'll share in our confidence. If you have anything to clear up, then obviously reach out to Maeghan and her team, and they'll be happy to provide any more detail that they can. And with that said, have a safe and productive afternoon. We look forward to reviewing what we believe will be very strong first quarter results as well when the time comes.