Canadian Pacific Railway Limited
Q4 2016 Earnings Call Transcript

Published: 19 Jan 2017

[Operator:]

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. [Operator Instructions] I would now like to introduce Maeghan Albiston, AVP, Investor Relations, to begin the conference.

[Maeghan Albiston:]

Thank you, Mike. Good morning and thanks for joining us. I am 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, Hunter Harrison’s retirement effective January 31, CP’s Chairman has prepared some remarks he would 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.

[Andrew Reardon:]

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 the 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 have 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 have 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?

[Keith Creel:]

Thank you, Chairman. I really appreciate those very kind comments and certainly thank you and the Board for your support, your vote of confidence. And I am humbled and honored to lead this company as we go forward. It’s with mixed emotion that as Hunter leaves, I have worked with Hunter for the last 20 plus years. He has been like you a close friend and mentor. He has taught me the railroad business. But I can tell you this, if he has taught me anything, he has 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. So we are certainly prepared. This team is in place. The foundation is set and we will succeed. So, let’s focus our comments on a great fourth quarter result. Team effort, certainly of operating and marketing, I am proud of the performance of the operating team, their ability to continue to improve productivity with service levels in light of what’s been a very challenging operating environment and working 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 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 the 7% decline in revenues. Over half of the revenue decline came from the lower crude volumes as the 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 are showing in our slides. For the full year ‘16, this team produced records across all major metrics

[Nadeem Velani:]

Thanks, Keith and good afternoon everyone. I am 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 have 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 the 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 cost and an $8 million one-time cost for the settlement of a reciprocal fueling contract paid to another railroad. Purchase services declined 21% due to $215 million largely due to a $45 million in landfills during the quarter. Keep in mind landfills were $11 million last year, so the year-over-year benefit was $34 million. Lower crude 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 cost 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 has 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 from productivity. We expect landfills of approximately $60 million total for 2017. And 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 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 will have a strong free cash generation again this year. We will continue to be good stewards of capital, committed to maintaining our BBB+ debt rating and naturally de-levering while maximizing the value returned to our shareholders. I would also point out that our guidance doesn’t make any assumptions around share buybacks. But consistent with past practices, we will be looking to revisit our capital allocation decisions in the useful spring timeframe. With volume fundamentals improving over the course of the year, combined with our ability to manage costs and find incremental productivity opportunities, we are confident in our ability to deliver high single-digit EPS growth this year. And with that, I will pass it over to you, Keith.

[Keith Creel:]

Alright. Thank you, Nadeem. So with that, we will turn it over to questions.

[Operator:]

[Operator Instructions] Your first question comes from Fadi Chamoun from BMO. Please go ahead.

[Fadi Chamoun:]

Yes. Thank you. Good afternoon and congratulations Keith, on the early promotion I guess.

[Keith Creel:]

Thanks.

[Fadi Chamoun:]

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 the negatives in that?

[Keith Creel:]

Yes. So the – right now, it’s a little bit early. So if I had to guesstimate we are looking at slightly positive volume growth and then as far as pricing, 2% to 3%, that 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 very strong second quarter, I would say strong relative to last year’s numbers from a bulk standpoint, be it potash, be it grain, U.S. or Canadian.

[Fadi Chamoun:]

Okay. Also related, it seems like coming into the fourth quarter into this year, the grain was supposed to be longer and I know there are some timing issues and some other issues, but if the overall crop size in your territories, what you feel you are going to end up moving, is it a little smaller than you thought originally or is it the same as just that’s going to move this year versus what happened I guess last year?

[Keith Creel:]

Yes. It’s actually the same or maybe slightly better. About 71 million metric tons is where our number came in and we are in a pretty good catchments area. The challenge with us is, number one, the comps, you got to see what we are comparing to, which was a record fourth quarter last year. So going into South Shore, we also experienced, number one, a late harvest with the wetness in October was a phenomenal, I think a record rain month in Vancouver in the West Coast, followed up with December, another record snow month in Vancouver. Vancouver just simply doesn’t handle snow too well. And the elevators that we serve were on the South Shore Vancouver. So I spent quite a bit of my time, my personal time in Vancouver during December. I am happy to say I was out there again last week and things have dramatically improved. We are working extremely well, turning assets with our growing customers on the South Shore. We actually had our team out there, December 31, January 1 and 2, 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 am very pleasantly surprised with the work that they were able to accomplish during the holiday.

[Fadi Chamoun:]

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 assumption or sort of outlook was that as the cost comes off and the service improves and remain consistently strong, there is going to be opportunities for CP to grow a little bit faster than some of the sort of service sensitive markets. And we haven’t really seen a lot of tangible evidence of that. I know we are coming off of a freight recession, but I was just wondered if you had some color about what do you think of that assumption, do you see opportunities over the next couple of years to start on-boarding 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…?

[Keith Creel:]

Well, as I have said earlier and it’s probably shielded by this crude challenge, we are there now, Fadi. I mean we are 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 is up. So I mean if they are not 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 am wrong James, 250,000 carloads 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 are hitting on all cylinders, so are converting that story now. It’s just being disguised by the crude numbers.

[Operator:]

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

[Ravi Shanker:]

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, where are your inflation expectations for 2017 and kind of how you think about pricing versus inflation going into next year?

[Keith Creel:]

Yes. Including ag, we were 3%. And I would have said the same thing for 2017, excluding ag, I have to do the math probably. So that’s the assumption I would put in your model for ‘17, is about 3%.

[Ravi Shanker:]

Got it. And inflation and how you are thinking about pricing versus inflation in 2017?

[Keith Creel:]

I am guessing inflation is going to be 2.5%. I mean Nadeem do you have any color on that?

[Nadeem Velani:]

1.8% is where we – when we looked at the planning for the year, but 1.8%, so pricing above inflation. I disqualify the ag comment just the fact that it’s kind of split between in terms of the Canadian crop versus the 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 are moving it and so forth. So just be mindful of that.

[Ravi Shanker:]

Got it. And can you just give us some of the puts and takes on OR, how we think about that in ‘17, obviously you had a great year in ‘16, what are the drivers of upside versus downside for OR in ‘17 that you are kind of tracking?

[Keith Creel:]

You can assume an improvement and I will let Nadeem speak to the drivers. But a lot of its operating synergies that’s talking about control and what you can’t control, which is what we did this year in States, given the revenue was down or maybe improvements that we made. So it’s more the same. Several initiatives across the board, I mean we have got – we can take it offline, but we have a list of initiatives that we go through for the operating team, but we will get, I would say a point, two points just off of top costs takeout initiatives year-over-year. I don’t know if you want to add any more color, Nadeem, but.

[Nadeem Velani:]

Ravi, I would just point, we talked about a little bit about some of the one-time items being the lumpier items of land sales. We have got a bit of a headwind there of about $50 million, $55 million potentially. And offsetting that, more than offsetting that is a benefit on pensions of $100 million. The net impact of those two is about $50 million or 0.75 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 are not assuming a huge amount of operating leverage under that scenario, but rather more pure cost takeout.

[Keith Creel:]

And let me point out too to Bobby’s point, that operating ratio being low is currency for us. Its leverage in the marketplace for us to grow the top line too and it’s not talking about competing with revenue over the rail share. I am talking about competing with truck share and taking trucks off the road and putting them on the rail. We have always said that we are going to do that. We have created that currency by having that low cost in that superior service. And we are actually doing that today. So we will do more of that if it makes sense to drive the EPS growth as we go forward in 2017.

[Ravi Shanker:]

Great. Thank you.

[Operator:]

Your next question comes from Chris Wetherbee from Citi.

[Chris Wetherbee:]

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 the sort of the progress on domestic and whether from a modal standpoint, we are going to see a better dynamic from a competitive standpoint with truck or is that going to still be in some markets challenged?

[Keith Creel:]

I would say its two stories, Chris. On the international side, you will see us down slightly. We lost the Yang Ming contract. We did not win the double OOCL contract, which we would assume we have put a pretty compelling value proposition in the marketplace. But obviously, it wasn’t compelling enough. And I think it showed some pricing discipline in our part. So looking forward, Yang Ming is gone, so that’s a headwind, but we will offset about $40 million of that $60 million loss with initiatives. So we are still going to see some growth. It’s just going to be muted by the Yang Ming loss and the lack of the double OOCL win. But on the domestic side, which is where our network really thrives, the strength of our network is, as we continue to grow and outpace the industry, you will see more of that growth on the wholesale side as well as working with our domestic partners cross-border in that Montréal, Toronto to Chicago lane. So expect to see more of that success in the marketplace.

[Chris Wetherbee:]

Okay, that’s helpful. I appreciate the color. And then just to step back for a second to get bigger picture stab at sort of border adjustment taxes and some of the trade dynamics that we have heard recently. I don’t know if it’s too early to have any feedback from your customer base about how they maybe thinking about it or other potential contingencies they are thinking about. Any prospective you can give us would be helpful from where you sit at CP?

[Keith Creel:]

I don’t see anything – I mean, net-net, we think it’s going to be positive for us. I don’t – with the currency sort of the 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 mix, 85% of our intermodal is actually domestic Canada. So, it’s not going to be exposed of 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, they are going to move back and forth across the border regardless or net positives for this railway.

[Nadeem Velani:]

Yes. Chris, it seems like the focus seems to be on country of origin, which in our case, when we are 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.

[Keith Creel:]

Yes, more gain and ag, Chris, for us on our profile as opposed to maybe some other folks. We are not as exposed to autos as exposed to lumber.

[Chris Wetherbee:]

Yes, okay. That makes sense. Thanks for the time guys this evening. Appreciate it.

[Keith Creel:]

Thanks, Chris.

[Operator:]

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

[Walter Spracklin:]

Thanks very much. Good afternoon, everyone. So, I guess to start out on the volume side, I think I heard you say that you are 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, gain and the intermodal, the lack of gains that you got in the intermodal – international intermodal that you mentioned?

[Keith Creel:]

Grain would be it. Walter, the only thing I would point out, there is a little bit of a lag. EP had a very large derailment with our U.S. grain franchise. They have been out for about 8 days. They are 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, we pushed the fourth quarter into first quarter. I don’t see anything else that shifted.

[Nadeem Velani:]

Okay. And Walter, we have been pretty conservative in our view of the energy world, which I think is appropriate. We have probably seen a little bit more optimism recently, but we are not willing to make that into our guidance at this stage. It’s way too early and we have been burned in the past.

[Keith Creel:]

Got it. To put that in perspective, we moved about 35,000 carloads last year, 17 in the first quarter. And we are assuming about 5 or 6 this first quarter against the ‘17. That’s a pretty strong number to go against.

[Walter Spracklin:]

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 or 2 points on cost reduction load in the OR and then perhaps another 0.75 from some of the items, non-operating items that Nadeem mentioned, so, all in, about 2 to 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 am missing when I kind of look at each one of those main driving factors or...

[Keith Creel:]

The 2 to 3 would be quite a challenge with some of the headwinds we have on the OR side. 1 to 2, I would say, is very doable. I just don’t – we don’t know what the revenues are going to do. It’s so early to tell. I don’t know if you want to...

[Nadeem Velani:]

Yes, 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 are confident in our ability to achieve it.

[Walter Spracklin:]

Okay, fair enough. Thank you very much everyone.

[Keith Creel:]

Thank you, Walter.

[Operator:]

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

[Scott Group:]

Hey, thanks. Afternoon, guys.

[Keith Creel:]

Hey, Scott.

[Scott Group:]

So, I 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?

[Keith Creel:]

Yes, it’s going to be more second quarter story, Scott, not first quarter. It’s just too challenging with what the compare is versus last year in grain and crude that won’t be here this year.

[Nadeem Velani:]

And the headwind from land sales in Q1 is pretty significant. We had a very – I mean, it was non-existent winter last year and believe you me we have got a winter this year.

[Scott Group:]

Okay. So, we should see some pressure on both RTM and margin in the first quarter.

[Keith Creel:]

Yes.

[Nadeem Velani:]

Yes.

[Scott Group:]

Okay. On grain, so we have seen the other – CN has been growing their grain volumes, how do we know that this is not just a market share shift in grain?

[Keith Creel:]

I would look at the total volume of grain that shift. I mean the compare versus what we moved last year was a record amount and we are 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% and 1% of 2%, they serve their markets well, we serve our markets well as long as we stay fluid and they stay fluid. We are going to move similar amounts of the crop harvests. It’s about a 50-50 split normally.

[Nadeem Velani:]

The actual grain markets aren’t equivalent. They are not completely comparable. And I don’t think they split out their U.S. and Canada numbers like we do. So, it’s maybe not that you are comparing apples to oranges.

[Keith Creel:]

And I’d say this, too, Scott. If you understand our grain network in Canada, I am pretty proud of our network, our high throughput elevators as we continue to work with our partners to build new ones, 134 car unit trains that we are running this year, which the margins are much better on, more efficient, moving more grain at a lower cost. So I am pretty proud of our grain franchise.

[Scott Group:]

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 you talked about a limited waiver of this non-compete, can you just clarify what a limited waiver is?

[Maeghan Albiston:]

Yes, I don’t think we are not going to add any additional comments on that, Scott, but we will be filing a copy of the separation agreement with the securities regulators in the next few days.

[Operator:]

Your next question comes from Tom Wadewitz from UBS. Please go ahead.

[Tom Wadewitz:]

Yes. Good afternoon and congratulations also to you, Keith. We are expecting this great news for you and our congratulations. I wanted to ask – I wanted to ask a bit about the competitive dynamic, it seems like there was optimism that on international intermodal contracts that some of the business over time could come back to you. And I think on the auto side, there has been some shift to see and over the past year, I don’t know a year or so. And I just – do you think that’s kind of – is that 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 like that’s not, some of that business we thought might go back just hasn’t and it’s unclear how that should affect our outlook in terms of competitive pressures or opportunities?

[Keith Creel:]

Yes. I would say there is two – there is a couple of stories there and when we talk about international intermodal, number one, the margins are pretty low. So you got to be competitive for the business. And we are competing with a very capable competitor that has a network with a bit more reach than what we have. So what we are doing to offset that part of our strategy is extending our reach. And we are 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 ways, I am not going to tell you a story. I was a bit disappointed that we didn’t get an opportunity to earn some of the low sales business. But you know what, we made a decision. We are going to focus on the business we make money in. We are going to have pricing discipline. We are going to help our carriers, our steamship lines grow their business with the strength of our franchise. And we are going to do well in that marketplace and make a buck or we are 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 am not going to suggest they are not. But when you are not making a whole lot of money and you are asked to do things that effectively don’t recognize the strength of your networks, again, we said we are not going to be a commodity, we are going to be a service. And the contribution on that business that we walked away from was not that meaningful or not that significant to the point that it was justify as compromising your principles.

[Tom Wadewitz:]

Okay, so that makes sense. When you think about the look forward, would you say you are pretty confident that we have stability now and we are not going to see more of these competitive losses, I mean it’s hard to say that definitively, but do you think we will have stability or is that something where there still some share shift on the rail side, I mean you got to make that up by taking share on the truck side?

[Keith Creel:]

I would say this year on the international intermodal we should be in a steady state. I mean, there is no crystal ball. But what I know now, I feel pretty good about. I would say that long-term, all these alliances realigning. There is a lot of question marks out there of different ship steam companies are consolidating, where is the ball finally going to land, I am not certain. But I would say for now in 2017, we will be fine, 2018 and ‘19 may be another wave of consolidation, but also another wave of opportunity. In the meantime, we continue to invest in our physical plant. We are doing some things from the service enhancement standpoint, some things like a portal North Dakota where we come to the border. That’s a narrative for some customers having containers that custom sets off. And effectively, you might get 10 carloads of containers that are stranded because of one that needs to be customs. We have 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. So we have given our team some of those same service enhancement 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 Mississippi to reach into the Ohio Valley, to reach into Detroit, to reach into some of those markets. We got to superior out if you partner with the right person. So that’s something we are looking at from a strategic standpoint for this next round of consolidations in ‘18 and ‘19.

[Tom Wadewitz:]

Right, okay, it makes sense. Thank you for the perspective.

[Keith Creel:]

Thanks Tom.

[Operator:]

Your next question comes from Brandon Oglenski from Barclays. Please go ahead.

[Eric Morgan:]

Hi. This is Eric Morgan on for Brandon. Thanks for taking my question and Keith, congrats on assuming the new role a bit earlier here.

[Keith Creel:]

Thank you.

[Eric Morgan:]

Keith, I wanted to ask as you stepped into the new seat, obviously you have 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 on the future and what your biggest opportunities are looking forward and anything you might do differently?

[Keith Creel:]

I would say it’s a continuation of what we started 4 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 have done. We fixed the engine. The next stage is to grow the top line, which we are starting to do. You will start to see the color of that much more vividly as this crude fades away and it’s not disguising it all. So as we go into ‘17 and ‘18, you will see top line growth. You are going to see bottom line control. You are going to see this team, which the bench is extremely strong and a lot of some of the same players. But essentially, we have got a very young, aggressive talented team, we look forward to competing and 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 am going to work with the Board closely, with our leadership team and our strategic vision as we go forward. But as I have always said, eventually there is 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 build. Consolidation will occur. And I can certainly see that happening within my career.

[Eric Morgan:]

Alright, I appreciate that. And just wanted to ask one on the macro too, we have seen industry volumes to come up a little bit recently, I am just wondering if you can elaborate on how you are currently viewing the health of the economy. And then may be somewhat related, but how you are thinking about some of the risks and opportunities related to the new administration in the U.S.?

[Keith Creel:]

I would say we are cautiously optimistic on both of those questions. So we are starting to see positive signs like everyone else says, we are seeing things recover both Canadian and U.S. and we think given that we are North America network, we will benefit from what I hope to be the Trump effect that continues as he takes office in 2017 with the U.S. piece.

[Eric Morgan:]

Alright. Thanks for the time.

[Keith Creel:]

Thank you.

[Operator:]

Your next question comes from Turan Quettawala from Scotiabank. Please go ahead.

[Turan Quettawala:]

Yes. Good afternoon and Keith congratulations on the role.

[Keith Creel:]

Thank you.

[Turan Quettawala:]

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 have got a strong CFO in the place now, but just in terms of the other hats that you have been wearing, should we expect some additions here, are you comfortable with sort of adding the CEO hat?

[Keith Creel:]

Well, I would say that I handpicked or had a part, a large part in handpicking everyone that’s on this team. So I feel very comfortable and confident for the team that we have. You will see some tweaks. There is a few more pieces that we 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. We will – it seems we get those finalized over the next week or two weeks. And I have got a chance to brief my internal team, then we will certainly come to the market and let you know about those.

[Turan Quettawala:]

Perfect, that’s helpful. Thank you. And maybe just one more on the guidance on the volume side, so if your – like RTMs are growing, I think you said about 5% sort of ex of the crude, crude will obviously tail off here after Q1, you have got some pent-up grain, I understand at intermodal, you have lost the Yang Ming contract, but up slightly, isn’t that sound a little too conservative just based on also the fact that economy seems to be getting a little bit better?

[Keith Creel:]

We got a pretty good handle on it.

[Turan Quettawala:]

Thank you.

[Keith Creel:]

Thank you.

[Operator:]

Your next question comes from Ken Hoexter from Bank of America/Merrill Lynch. Please go ahead.

[Ken Hoexter:]

Hi, Keith, 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 are positioned for growth and yet you talk today about losing some of the share on international intermodal autos, yet you have 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?

[Keith Creel:]

Well, as I have said Ken, we have got a very capable competitor. But I would say the thing you do is you focus on growing where you are 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 are 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 are going to continue to participate in international intermodal. But as far as it being part of our long-term growth, that big piece, we are not going to, I guess for the lack of a better term, bet the form on it. There is still a tremendous amount of carload growth out in this railway that if we provide service, we implemented trick plans this past fall. We give our marketing team a tool to go into customers, so that they will trust us with their assets, turning their assets. We can show them how to save money with a length or the short lengths of our lanes that we operate in. That’s a pretty compelling value proposition. We will continue to develop the marketing team to be able to do that. And you will 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.

[Ken Hoexter:]

And I know you want to understand that you want to keep away from the discussion, but I am just being pinged so much. Was the Hunter discussion has this been going on for a while. Did he come to the Board with a particular end target or was it a need to move on? Any comments that you can care to give out?

[Keith Creel:]

Unfortunately, really can’t.

[Andrew Reardon:]

Yes, this is Andrew Reardon, Chairman. At this point, we really can’t. We would like to keep the focus on our earnings on the future, Keith.

[Operator:]

Your next question comes from David Vernon from Bernstein. Please go ahead.

[David Vernon:]

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?

[Nadeem Velani:]

Sure. We haven’t assumed anything on the share repurchase. It’s something we will go to the board over the next several months. Our NCIB that we announced last year in May, we completed very quickly. And that was – the intent of it was to buyback stock at a cheap price, which we think we did at $175. So I think it worked well. I think that’s something premise that we are going to have going forward as well. We likely want to make consideration on the dividend and so forth, but as far as buyback, we 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 are talking about we are going lower. We are talking about revenues going higher. We are not going to be in that same scenario from an operating cash flow point of view. So we will have stronger operating cash flow, maintain relatively the same level of CapEx, up slightly $50 million, $60 million. So you can assume some pretty strong free cash generation, $1 billion plus is a very safe assumption. And we are not going to sit on cash. We talked about de-levering naturally, but you can assume we are not going to sit on cash.

[David Vernon:]

Do you have any expectations to where you want to take the dividend or what kind of growth rate you want to put in there as far as I am just trying to back into what sort of rate of repurchase we should assume or if you can give us any color on what kind of dividend growth expectations you have that would help?

[Nadeem Velani:]

Yes, we don’t give you the numbers. So, you want to back into it. I got it. I think, David, I think we are – I think that’s something that will – it’s going to be somewhat dependent on the stock price too. We are not going to just buyback stock for the sake of it. I think we are still in this growth stage I think that we want to do something with a 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 will have a recommendation in 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.

[David Vernon:]

Alright. Thanks for the lack of color, I guess.

[Nadeem Velani:]

Anytime, David.

[Operator:]

Your next question comes from Justin Long from Stephens. Please go ahead.

[Justin Long:]

Thanks and good afternoon. So, first you are 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% to 5% volume growth in your business, what do you think are the most likely commodity groups that drive that upside?

[Keith Creel:]

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 that’s you have captured the essence in the way we feel about this. I mean, we are assuming pretty substantial growth on the bulks. We are assuming growth on merchandise. We are assuming growth in a lot of areas. That crude piece is just a big headwind that we have to workup against. So with that turned around for us, is there some upside? Sure, there is. But unless it does, frac sand does to a higher degree than it has, it’s – I think we are taking a prudent approach, conservative approach and the responsible approach with our guidance.

[Nadeem Velani:]

And 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, etcetera, I would expect that, that could be potential upside areas in line with the merchandise side of the house plastics and so forth.

[Justin Long:]

Okay, that’s helpful. And maybe as a follow-up to that as we hopefully transition out of this freight recession that we have been in, in 2017. Maybe I will 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 is 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?

[Keith Creel:]

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 significant amount of manufacturing comes to the states that they might outpace Canadian GDP, but that’s just my gut feel. I don’t know, Nadeem, if you have got a…

[Nadeem Velani:]

Yes, there is a lot of variables. I mean, 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 have seen some of the benefits of trade as a result of a weaker Canadian dollar. It does take time for that to be to add to the amount of output on the Canadian side. I mean, we have 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 is a lot of moving parts. What this met coal do on 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 and that’s kind of where our focus.

[Justin Long:]

Okay, great. I know it’s a tough question, but appreciate that color.

[Nadeem Velani:]

Okay. Thanks, Justin.

[Operator:]

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

[Bascome Majors:]

Thanks for taking my questions. Keith, the plan has really been in place for some time as you said earlier and maybe you are still mostly the deck is set for management as you kind of commented earlier, but how much presence clearly cast a long shadow. I am curious if there is an opportunity here with him being gone 6 months earlier for you to pull forward anything or any initiatives or something else that we could see happen a little earlier than expected?

[Keith Creel:]

Well, Hunter has never stood in my way. So his shadow, he has always supported me and he has trusted me for a long time. And I’ve done this transition with months before my career. So I guess, the short answer would be no or I’d be doing it. We are going to do the right things. He has 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 this thing. My style is a bit different than Hunter’s obviously. Maybe my shadow is not as great as he is, but certainly if he has done his job and he has done it well. I have learned a lot from that gentleman over the years and we know how to railroad this company and we are going to make money for our shareholders.

[Bascome Majors:]

Thank you. Appreciate that.

[Keith Creel:]

Thank you.

[Operator:]

Your next question comes from Konark Gupta from Macquarie. Please go ahead.

[Konark Gupta:]

Good, thanks and congratulations Keith.

[Keith Creel:]

Thank you.

[Konark Gupta:]

Just a question on mix first, so did you include mix when you said pricing would be 2% to 3% roughly in 2017?

[Keith Creel:]

No, no, that’s just 3% price.

[Konark Gupta:]

To the core pricing, okay. And what do you think about mix in 2017, because the volumes are coming back in most of the segments. So should we expect the mix to sort of improve?

[Keith Creel:]

Slightly down.

[Nadeem Velani:]

It will be a bit of depending on the quarter, Q1 is such a dramatic decline in crude in Q1 with the comps. So that might be a little different, little more impactful, but beyond that, we should net out like Keith said.

[Keith Creel:]

You think about the things that we move a lot of, when we move a lot of it, the cost further goes down a little bit like coal and by potash. So on a cents per RTM basis, the more that we move the more adverse impact it has on mix and price.

[Maeghan Albiston:]

And they also have a lower average cents per RTM versus the rest of the book, which we have seen play out over the last two quarters as well.

[Konark Gupta:]

Right. So when you said positive volume growth, like slight positive, did you allude to RTMs or were you alluding to carloads?

[Keith Creel:]

We are talking RTMs, RTMs, RTMs, RTMs.

[Konark Gupta:]

Perfect, okay. Thank you. And then just a quick follow-up on I think you have previously mentioned about repatriating about $200 million to $300 million business from trucks mostly, where do you stand on that and like do you anticipate some of that materializing in 2017?

[Keith Creel:]

Yes. Well, it’s actually $200 million to $300 million repatriating from the strength of our networks, some from trucks, some from rail share. I would say we are probably a third into that if you look at it. And there are some gains that we are looking at in 2017. We have assumed, certainly we just signed the contract with one particular customer on the strength of our franchise and our service. We are shifting about 10% of business to our rail that wasn’t there before. So $111 million contract, 10% should do the math. That’s $10 million or $11 million. So again, it’s singles and doubles and triples, it’s not any big $450 million or $200 million accounts. But was again, what we would bring to the table, we put it straight to the bottom line. It’s pretty compelling value proposition.

[Nadeem Velani:]

Sometimes you get our call that when you have these big lumpy contracts they don’t come on as the same level of contribution. So for us, our focus is of gaining those $5 million, $10 million here and there comes out of a much better margin to the net bottom line.

[Konark Gupta:]

Okay. Thanks for the color. I appreciate it.

[Keith Creel:]

Thank you.

[Operator:]

Your next question comes from David Tyerman from Cormark Securities. Please go ahead.

[David Tyerman:]

Yes. Hello. My first question is just on the OR and the productivity, I just wanted to actually clarify, so on the productivity guidance that you gave, 100 basis points to 200 basis points, does that include or not include the impact of the pension – the net of the pension and the change in land sales?

[Nadeem Velani:]

That does not include that.

[David Tyerman:]

Okay. So it’s going to be more than that in theory and then you should be able to get some from pricing too some share core prices larger than inflation, is that the way to think of it?

[Nadeem Velani:]

Yes.

[David Tyerman:]

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?

[Keith Creel:]

It’s across the board on the operating improvement side, it’s absorbing the additional RTMs we are talking about without increasing headcount we are running longer trains, [indiscernible] 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 breakdown less. It’s going into like an operating maintenance, when I am talking about taking out switches. I am not cutting my operating maintenance, I am taking out the work places they have to do work, so I cut my operating expense. So it’s – and issues like that across the entire board, at this operating team every year we challenge them and push them. We haven’t converted this thing overnight. There is a top 10 and we fix those 10 and there is 10 more to go after. So it’s something that we focus on. We challenge expense. We are always looking for better ways to improve this railway, be it process, be it culture, be it safety, be it waste elimination and that’s sort of how you continue the story. It worked in the past, it’s working now and there are still many more chapters left to come.

[David Tyerman:]

Okay, fair enough, that makes sense. And then just on the domestic intermodal, your RTMs are actually down and your revenues are actually down in 2016, but it sounds like it’s a fairly big focus area, so just wondering what the difference between the actual and…?

[Keith Creel:]

Well, the revenues were down overall, but the RTMs 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 board are 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 have got the shortest routes between Toronto, Calgary, the major markets. We are developing the market across the board and working in partnership with trucking companies as partners as opposed to competitors and we are winning market share. So it’s working well for us.

[David Tyerman:]

Okay. So it’s really a second half and moving into this year kind of comment?

[Keith Creel:]

Yes. It’s a much better demand situation in 2017. We had a lot of additional capacity out in the marketplace in ‘16 that was a headwind for us.

[Nadeem Velani:]

And David, I would just point out in terms of the OR, keep in mind as fuel prices go up and you add back revenues that effectively 100% OR, that has a negative impact on just the math of that. So keep that in mind.

[David Tyerman:]

Alright, okay, it’s helpful. Thank you.

[Operator:]

There are no further questions at this time. I will now turn the call over to you, Keith Creel.

[Keith Creel:]

Okay. Well, thank you very much for your time this afternoon, for the meaningful questions that 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.

[Operator:]

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