Canadian Pacific Railway Limited
Q4 2014 Earnings Call Transcript

Published: 24 Jan 2015

[Operator:]

Good morning. My name is Kirk, and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific's Fourth Quarter 2014 Conference Call. The slides accompanying today's call are available at www.cpr.ca. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. [Operator Instructions] I would now like to introduce Nadeem Velani, AVP, Investor Relations to begin the conference.

[Nadeem Velani:]

Thank you, Kirk. Good morning, and thanks for joining us. I am proud to have with me here today Hunter Harrison, our Chief Executive Officer; Keith Creel, President and COO; and Bart Demosky, our EVP and CFO. Before we begin, I want to remind you that this presentation contains forward-looking information. Actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described on Slide 2, in the press release and in the MD&A filed with Canadian and U.S. regulators. This presentation also contains non-GAAP measures outlined on Slide 3. The formal remarks will be followed by Q&A. In the interest of time we would appreciate if you limit your questions to two. It is now my pleasure to introduce our CEO, Mr. Hunter Harrison.

[Hunter Harrison:]

Thanks Nadeem and good morning to everyone. It’s certainly nice to be visiting with you given the quarter that this team has put together, they’ve been doing this for long time and all things in, this is the best quarter I’ve ever been associated with, which I think sets the foundation for us going forward in our full year plan and some of our guidance for next year, which I know we’re going to have a lot of discussion about in I’d imagine in Q&A so, let me just highlight a few points that I don’t want overlook. The OR was 59.8, which is 600 basis points improvement and clearly the best quarter performance that we’ve had in its history, our earnings were up 40% over ’14, if you look at our 2014 I think we clearly came in if you summarize it two years ahead of the plan with they represent revenue growth and an OR of 64 and a fraction and earnings growth of 850 for the year. So, I was obviously delighted with that performance. We’re going to touch on the guidance as I mentioned but we just can’t highlight it now that the guidance for next year is 7% to 8% revenue growth, operating ratio of better than 62 and we go to a great deal of grinding about how to characterize the OR but that’s our final analysis and then earnings of greater than 25% and I’d highlight that does not include any share buyback in ’15 and I know the board will be addressing this in February and I’d hope and expect that we’d continue there but we certainly did not want to get ahead of the board in that regard but overall it’s a great quarter but it’s been a good week for us and if you think that you might have been aware of that I wanted to take a moment to mention we’ve had some property in Vancouver that’s been part of disputed for some period of time with city of Vancouver and we got a favorable court ruling this week from the Superior Court , which opens up the value of that real estate which I’d characterize it my appraisal, it is in the neighborhood of potentially 100 million. We’ve had for some period of time we’ve had an issue that we talked to you about with the EnCana building here in downtown Calgary. We with the guidance of Mark Wallace and his team, we finally got that settled to the tune of 60 million this week, we’ve also been talking to you for some time about our real estate potential to possess and I think we announced this week a new JV with the dream team that we think is going to unlatch a whole lot of the real estate potential of the organization and then last but certainly not least we keep and keeping talk more about this, I’m sure but we brought on a new Senior Vice President of Marketing and Sales which has got the quite a background to head of the marketing and sales effort. So that a good quarter, good week, we look forward to another outstanding year and with that I’ll turn it over to Keith.

[Keith Creel:]

Thanks Hunter. Well, suffice it to say I’m extremely proud of this operating and marketing teams combined efforts since we continue is turning to making CP a best-in-class transportation company. Obviously very rewarding, when you take a look at these efforts, improving our training service, our service offering our customers while we convert the bottom line it’s pretty phenomenal. So let me start some comments on the operating side of that and cover the progress on most product and actually the operating ratio is more or so the improvements we’re making on the safety culture because I know the safety metrics was reflect improvements on the safety culture the foundation of our sustaining our success on a long-term basis with CP. I’m a firm believer that our goal is to eliminate all of train accident and injuries but to see us produce a 19% reduction in train accidents versus the fourth quarter of last year were at 30% for the year which has been an industry best-in-class performance for I believe the eight years it’s a strong testament that we’re making progress in this area but this is an area that I’ve always said it’s not a destination its journey and it’s one that we’re continue to pursue excellence here. We all just pursue the excellence to our communities we operate improve to employees as well as our shareholders and our customers. So let’s talk more specific on the metric side. As I said previously velocity is the key ingredient improving our service offering now we have capacity for our growth and eliminate our capital spend so as you see in the progress make the fourth quarter 10% improvement versus last year’s pretty significant and substantial, you combine that with running longer, heavier more fuel-efficient trains, they are all powerful levers that drove our overall performance at bottom line. As we reported 2015 and our continued pursuit in both safety and operational excellence you’re going to see as progress as we evolve our culture as we convert the investments made in our franchise in 2014 which will help us to drive additional improvements in velocity, train length and fuel-efficiency. In addition to the investments we’re going to make in 2015 to continue to improve this network and our core infrastructure. Let’s spend a few moments to talk on revenue side. We ended the year with the strong revenue performance in the fourth quarter up 10% over 2013. RTMs came in line with what we guided to 6%, cents per RTM up 4% which is driven by strong pricing favorable currency offset somewhat by negative mix I’m not going to cover all the individual lines of business but let me go review the highlights from the quarter. On the grain side, we’re happy that we successfully submitted our new dedicated train program in Canada and in the U.S. for the crop year. This is a significant change at our car distributions driven greater asset utilization and created capacity with our fleet which are both positives for customers as well as for the company and in fourth quarter we saw strong soybean demand to and from our franchise to the Pacific Northwest and also on a positive note our unfulfilled car orders were minimal of course compared to 2013. On the potash side strong volumes in the fourth quarter, the function of a strong export demand is needed to refill customer distribution networks. On the coal side, overall flat revenues but on the U.S. side as I mentioned in our last call in the fourth quarter we were successful in rebalancing our operations with our customers and connecting carriers for the Powder River Basin coal to Midwest, shifting that tonnage from the St. Paul gateway to an Iowa gateway. We expect this to continue to improve our philosophy in and coal supply for our customers while at the same time it’s improving the quality of the revenue in this book of business on the U.S. side. On the crude side, we finish the year with 30,000 carloads in fourth quarter. For the year I mentioned it was about 55% light and 45% heavy, this growth is mainly driven by new movements in Canada from Bruderheim and the [indiscernible] facilities which will drive as we go into 2015 that mix change going to the heavy side versus the light side. On the automotive side we reflect what you see is a full year reflection of the loss across the business starting in Q3 2014. Intermodal again this is a tale of two stories with continued success on the domestic side growing at its faster pace in Europe 19% in the fourth quarter versus last year. International was down in the quarter but if you exclude the year-over-year impact the loss of the OOCL business which was essential -- I mean which was material of course. If you exclude that we’re up 15% year-over-year which is a reflection of the superior service we are offering to our steamship customers that we’re doing business with so, all-in-all very positive in the intermodal side. As we look forward to 2015 following two years 8% revenue growth as Hunter said regarding 7% to 8% growth in ‘15 which is a combination of a lot of moving parts obviously. Based on the assumptions we provided we expect 3% to 4% RTM growth that 4% since per RTM growth on the fuel surcharge we’re going to have reduced fuel surcharge obviously that’s offset by FX benefits, order magnitude on the reduced fuel surcharge specific to revenue it’s about 5% -- this also seem the sale of our southern portion of the D&H and DM&E full-year affect reduced revenues is about 1%. Crude outlook I’m sure that will be topic of much interest. I’ll point out that we’ve taken our expectations down for 2015 to 140,000 carloads for the year. We’ve actually seen significant price declines for the commodity that is not expected is our original targets for, were closer to $9. Even in December I pointed out that this commodity was trading below 60s even today we’re in different scenario and we’re down to the mid-40s. Bottom line we feel this improving approach is necessary to take down assumptions to a growth rate of 25% to 30% versus 2014 volumes. This growth is mainly expected to come from increases in heavy production with our new facilities are going to come online in the second half of ’15 as well as the two facilities to come up later in the year. Got Exxon Mobil coming on second quarter late, we have got the larger planes coming on in July. Other merchandise outlook we expect double-digit revenue growth for our forest products are chemicals and are plastics and minerals groups. And as we complete on these service offering is positioning us well to grow in these markets, providing superior service for our customers, reduce cycle times and improve transits. We also see potential strength for our lower Canadian dollar which is going to improve our Canadian company and partner’s ability to compete internationally and the impact of lower energy cost should improve economic prospects in the U.S. and Eastern Canada as we move into the year. Both side we are assuming low single-digit revenue growth, the shipping levels are going to moderate versus ’14 level. Intermodal side we set mid to high level single-digit growth given we are going to lap our contract losses on the international side and continued strength in the domestic intermodal. And final comment just to understand on the extreme left side of [indiscernible] to enhance strength of our bench on the marketing and sales side Tim Marsh is joining us from COSCO he will be with us February 01, bringing 25 years of experience sales and marketing certainly with a vast knowledge of the international shipping industry with those same strengths and tell us that we can develop leading world-class organization their sales team will help us leverage growth across our Board as we move to our 2018 goal of taking our revenue to $10 billion. So with that said, I will pass it over to Bart to provide some more color on the numbers.

[Bart Demosky:]

Thank you, Keith, and good morning everyone, very proud to be on the call with you and proud to be reporting this quarter’s results which certainly are record on all count. So, quarterly revenues growing by almost 10% to nearly 1.8 billion, Keith and Hunter have outlined a record operating ratio of 59.8 that’s the lowest in the company’s history. And record operating income and adjusted net income of 708 million and 460 million respectively. And all that adds up to adjusted EPS of $2.68 a 40% increase versus last year and results combined to produce reported EPS of 263. I am sure our shareholders have an appreciation for our strategy to buy back shares to enhance shareholder value and we were very aggressive with our purchases in the fourth quarter when prices were depressed. To enable that buying we will be issuing debt and as far as tend to manage our cost to debt very tightly by issuing lowest cost way in either Canadian or U.S. dollar. We kicked up this strategy in the quarter with the issuance of U.S. commercial paper and we currently have about 675 million outstanding at an average interest rate of 0.45% or 45 basis points. So that’s the very attractive pricing. This debt does attract accounting currency translation so every penny changed in the value of the Canadian dollar means about $0.03 of after tax non-cash accounting translation below the line. And if we take on additional U.S. dollar denominated debt reached 100 million sensitivity will be about $0.025 after tax. I do want to express those fluctuations are fairly below the line accounting adjustments and non-cash in nature, so you can expect that these adjustments our earnings going forward. As we said in the past we tend to be very strategic with our share repurchases and I trust our shareholders appreciate our decision by aggressively in the fourth quarter when prices were low. To give you an example of the benefit of the approach, in Q4 we bought a total of 5.2 million shares of which almost half were purchased directly from Canadian financial institution at an average price of just over $192 that’s in comparison with today’s share price of about 230. Operating expenses on the quarter were 1.05 billion down 441 million versus last year. If we exclude the impact of the DM&E West sales of 433 million significant items expenses were still down but 45 million on a foreign exchange adjusted basis, and that’s in spite of a 6% increase in RTMs. I don’t want to go into the each of the expense category but there are few items we are highlighting. First, we continued improvement in comp and benefits this quarter driven largely efficiency benefits and lower stock and incentive comp versus last year. There are few headwinds on the comp and benefits line in 2015, I just want to highlight for you. First with falling interest rates the discount rate we used to calculate the pension liability came in lower than the previous year which pushes up pension expense on an accounting basis. And for 2015 this results in a defined benefit pension expense of 45 million that’s about a $90 million headwind versus last year. Other business performance continues to be very, very strong and it has put us well ahead of plan. We are anticipating an increase in incentive comp as we true up some of our performance share unit assumptions later in the year and that’s about a $28 million impact. And we are also modeling higher stock-based comp sensitivity now with the $1 change and share price having a $1 million impact on the comp and benefits line. Now that is a three year rolling program we are now fully into the third year of the program, so that sensitivity should remain very stable going forward. Lower fuel prices and a 3% improvement in fuel efficiency drove fuel expenses lower year-over-year and purchased services were up 19 million versus last year but that’s largely reflects in a foreign exchange and lower than usual casualty cost in 2013. Looking towards this year, we currently expect to see about 25 million to 30 million of land sales and that’s roughly in line with what we’ve seen in last couple of years. For the full year we generated free cash before dividends of just under a 1 billion and free cash flow of 725 million and that’s an increase of 37%. Our CapEx was 1.45 billion and as we lookout towards this year, we’re expecting CapEx to be relatively unchanged at approximately 1.5 billion. Now consistent with the rapid improvements we made on the cash flow front, and our credit metrics have also continue to improve, resulting in another set of ratings upgrades in the fourth quarter and that’s a 2 notch improvement over the course of 2014 and seems our target ratings up to where we want them, which is BBB+, Baa1 and BBB high respectively for S&P Moody’s and DBRS. And the higher rates of course allow us to the as I stated much lower spreads than where they were just 12 months ago and that is important as we manage our leverage going forward to least cash on the balance sheet for shareholders. And just to finish my thoughts on share repurchases from earlier we bought back about 10.5 million shares over the course of 2014 at an average price of about $199 versus an average traded price of over 206, a savings the $7 and obviously well below today’s share price. To date we’ve bought, completed about 85% of our current program and we’re on track to finish that program by its exploration in March and I’d be remiss if I didn’t reinforce the message that we continue to see repurchasing our shares at the strong value proposition for shareholders going forward. Thank you very much and I’ll turn it back over to Nadeem or to Hunter.

[Hunter Harrison:]

Well Kirk, with that we’d be glad to take questions the group might have.

[Operator:]

[Operator Instructions] And your first question comes from the line of Fadi Chamoun from BMO Capital, your line is open.

[Fadi Chamoun:]

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

[Keith Creel:]

Fadi, I think it helps I think you got to understand the two different books of business. On the domestic side what we’re converting in value is based on service, based on transit times. So while we may not have a 40% or 45% benefit on fuel cost versus the truck we certainly still have a service that’s been adjusted, they can replicate on the truck side if you have a shortage of truck drivers and 40% to 45% maybe that’s reduced to 20% to 25% it’s still very compelling to continue to grow on the domestic side as we improve that book of business. So on the international side, fuel cost come down I think that’s a good thing for steamship partners. If you align with steamship partners that’s start actually - and actually give you some consistency in your arrival at your port that’s going to allow us to improve our service and reduce our cost that’s handling that distinct business. So on both fronts I think it is positive.

[Fadi Chamoun:]

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

[Hunter Harrison:]

There he is, I think we’re still comfortable there. The components might change a little bit but I think the bottom line earnings we’re very comfortable with, we don’t expect for crude to stay depressed like this for that period of time but your question if they do, we think there will be some improvement across the board and the rest of the economy which will pick up things there, we think the aggressive continuing cost control effort and efficiency that we talked about really in the plan that were count at the corner turning the corner here can certainly replace any deficiency that crude might bring to us but at the same time I’d point out to you and I continue to point this out and - this, it is just a fact of life - is our crude business is not the highest margin this as we got, -- to see contract there the initial contract. So I don’t know there is I think we still feel very comfortable with the data that we provided in the full year plan going forward.

[Operator:]

Your next question comes from the line of Chris Wetherbee from Citi, your line is open.

[Chris Wetherbee:]

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

[Keith Creel:]

I don’t know I can expand that at broad but this generally close to that I know that there was about 40% different than the rate per container versus the rate per truck and certain key lines when I started this journey with over a year ago. So that came down that going to complete so I’m sure it is going to 20% to 25% that’s just to me an educated guess but at the same time maybe it’s a little bit more maybe it’s little bit less that either understand this so we still going to have truck drivers they’re not going to be very compete head-to-head transit time, single truck driver coming into these key lanes which is the most profitable for CP and also the most important to those partners they care about service that they serve so we’ve got a reliable product in the market place that have competitors from the transit time it’s not better than the truck and there is cost advantage. So all those point are straight.

[Chris Wetherbee:]

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

[Keith Creel:]

Let me quantify that comment we’re excited to have that in January but this winter is not over we still have February and March. So knock on wood I love to say and assume that we have the same kind of time and the nature in those two months, but I just don’t know that. So I’d say that yes, you’re going to see some benefits January is very encouraging. Speed is up, our train length is up, our train weight is up, our services up, our business is up and our cost is down so those are all good things but again we still have February and March to go through.

[Operator:]

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

[Benoit Poirier:]

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

[Keith Creel:]

When you see easy compare on international side OOCL loss we’re going to last that, we actually still have some OOCL business in January of last year. So the easy compare fees is not full affected until we get to the second quarter.

[Benoit Poirier:]

Okay.

[Keith Creel:]

There is going to be a little bit headwind there. When you thing about our -- it explains little bit more --

[Benoit Poirier:]

Just in terms of -- I mean you are looking for an RTM close to 3% or 4% for that year, but specifically in Q1 would it be fair to expect a higher number, lower number given the conversion versus last year and the grain situation?

[Keith Creel:]

I’d say little bit higher I’d say mid-single-digit is supposed to lower single-digit.

[Benoit Poirier:]

Okay, perfect. And second question if you could provide also an update on the early agreement, whether there is any change on that side.

[Keith Creel:]

Well it was put out for vote it was turned down on the U.S. side this is specific to the U.S. operation so at this point I still think it’s relative and I still think it’s possible I’d say yes and makes too much sense not to be -- not in the nearest future. So it’s nothing that we’re sees with right now, we’re looking at optimizing the way we operate our crudes, optimizing there is still some gains to be made relative to maybe some consolidations on the multiple agreements that we got in our U.S. properties that we’re looking at but we’ll continue to improve labor productivity in the -- that agreement. But as time evolve and as people retire and attrition takes hold and you have a workforce more concentrated with the different set of value that early deals going to play very well to those values as we go forward so more to come on that.

[Operator:]

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

[Bill Greene:]

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

[Hunter Harrison:]

I mean Bill if you play it out it’s a timing issue respectively the fuel surcharge is going to be worst, it’s going to be obviously be a negative hit to the top line but at the same time it’s kind of none of that when you look at the overall OR over 80% period of time. So let me -- those that make the industry the sector more competitive with pipeline at least psychologically there is the benefit there but it doesn’t play strongly in the four year planning either way. We are going to have some adjustments with the DM&E top-line we are going to have some adjustments if we are successful with the sale of D&H. But all things in there is a lot of moving part, and as I tried to point out earlier the components might change I think the thing we still feel the strongest about is the bottom-line doesn’t change. That might be made up a little differently but we are entering the stage and people tend to forget this, that in the four year plan where we are starting to turn corner. And this is really this leverage is based on the low cost carrier team. So we could be much less aggressive and I hesitate to say it we can be much less aggressive price given the strength of the OR and not be in a position where we are trying to drive the 57 but we are trying to drive more growth, and that’s the key shift that people tend to miss in the overall strategy of the four-year plan. I mean I feel very confident that if we look at some of the business, if you go back initially and look at some of the legacy contracts when people were very concerned about, business that was at the bottom of the book from a margin standpoint now at the top. So, now you got much more market that open up to you that you can really generate growth in spite of what potentially happens with crude over the next two years or three years and I certainly personally don’t think that crude going to stay in the 40, mid-40 range, I think you are going to see a shift there, but and I emphasize this -- none of this plan is dependent upon crude moving to other levels of 75 or 100 it’s almost it’s not a huge factor in the plan.

[Bill Greene:]

Okay, that makes sense. Can I just have one follow-up here just on the currency. And that is, how long do you think it takes for, whether it’s Canadian manufactures or producers of any sort, to start to benefit from the lower currency? Is that something we should be thinking about? Does that benefit, for example, Ontario manufacturers or whatnot such that it could help CP? Or is that a very long lead that this would come out over years, it is not something to think about for 2015?

[Bart Demosky:]

I don’t think it’s I feel certainly that’s pretty area talking about. Some of it exports will take advantage immediately where there is profitable product North and South as a border and with the lower dollar and clearly some of those things will change quickly. Now there is other that you got contracts with legacy contracts that we will see certainly will see a lag but I think that will be the digital boost to the overall North American economy that to some degree really hasn’t been taken into account north of the border because we didn’t get our tears out of our eyes here.

[Operator:]

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

[Scott Group:]

Wanted to first ask about the buyback. I know it is not in the guidance and I know you can't get too ahead of the Board. But if I just let -- you bought back 7% of stock or so in three quarters, so call it on a run rate of buying back 10% of the stock a year. Do you feel strongly about the stock at these levels that that’s the kind of buyback you would like the Board to approve? Or should we be thinking something less aggressively?

[Hunter Harrison:]

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

[Scott Group:]

Okay, so kind of the run rate you are on you have been doing you think you can sustain?

[Hunter Harrison:]

Yes.

[Scott Group:]

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

[Bart Demosky:]

Okay, pricing on the crude I can tell you this. We are going to haul it for free we are not going to do it for practice. So we still have a legacy contract in there that is not the most favorable but as we sign these deals and we lock and load on this crude growth we are certainly bringing it on at a fair rate that reflects the service that we are providing. So as far as the run rate, 140 we were at 30, fourth quarter of this year that run rate probably is going to ramp in second half to get us to 140 versus the first half, if you’ddo the math that puts into 2015 not again assuming that oil stays pretty close to where it is at now. The key to that of course is those two facilities we’ve got coming on [indiscernible] as well as the ExxonMobil, Kinder Morgan facility in Edmonton which will be serving. As far as share, I think it’s a wash I don’t see anything material on the share side. I believe strongly, we can provide a peer service I believe that we’ve got an advantage when it comes to transit reduce mileage going into key market and I think we’re strategically positioned extremely well with partners south of the border for heavy crude growth that going to handle this franchise. So I feel fine on the share side.

[Operator:]

Your next question comes from the line of Walter Spracklin from RBC, your line is open.

[Walter Spracklin:]

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

[Bart Demosky:]

Walter, its Bart. We’ve got some buyback built in as you know we’ve got a program underway right now that ends in March and I think what Hunter was referring was to was zero beyond the current program. So, we haven’t built anything and beyond this but there is little over 2 million shares to be purchased yet under the current program and we will complete that way by mid-March.

[Walter Spracklin:]

Even with 2 million shares of buyback built in it is still not working out to 25%. Perhaps I have to come back to you afterwards. But there is nothing I am missing here. If I am assuming 8% and even below 61% I should get to north of 25% earnings growth with a 3 million share buyback.

[Bart Demosky:]

Yes Walter, we can come back to you after the call but there is pick up there in the interest expense line and other charges as well and we can walk you through that.

[Walter Spracklin:]

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

[Keith Creel:]

What I can led, Hunter provide a little bit more color but let me set this up saying for this year, you got to make sure you understand 5% debt on the lost revenue from fuel surcharge and then also 1% overall from the network with a full year effect of the DM&E and D&H. You have got DM&E on the front half and you got D&H on the back half, so those are huge offsets and I mean you can also take a look at just to extend rate if we take today’s exchange rate about 8% to 10% so it’s just there is so many moving parts in this thing trying to know exactly where the pin is, it is not exactly easy to do, we just have to reiterate the fact that we’re very confident in the long term, bottom line EPS, which is what the real value is.

[Walter Spracklin:]

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

[Keith Creel:]

That’s exactly correct, it was 4% core in the fourth quarter and you can assume the same thing for the guidance of 2015, 3 to 4.

[Operator:]

Your next question comes from the line of Tom Wadewitz from UBS, your line is open.

[Tom Wadewitz:]

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

[Hunter Harrison:]

Tom, let me make this comment. I try to and I’ve been really unsuccessful, in decoupling us so much from crude. Now we talked about that all in its particularly 10% of the business if you look at frac and sand and pipe and the crude and all that, the first factor is we don’t know where crude is going and I’d like to know the person it does and I could be more defensive in my answer but I know we have a plan A and a plan B and plan C, if crude would stay here, we’ve got a lot of capacity, we’ve got a lot of improvements in service we continuing and the big leverage is we’ve got a lot of leverage on the cost side which can be converted to the top-line volume side which equal as our stronger bottom line that we’ve indicated going back to full year plan. So this is -- a lot of driven part here and it gets in the high level which we like to go through at some pointing time with all of you or any of you but the bottom line of it is that we’re highly confident that in four years the EPS will be where we said indeed.

[Tom Wadewitz:]

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

[Hunter Harrison:]

The headcount, the latest numbers are bigger will be down around 500, to 600 this year and then in the out years there are similar type numbers given that the sensitivity and the shift in the book of business doesn’t change. And one of the things that some may -- as we bring all additional tonnage doesn’t necessarily bring on additional heads or costs. The big leverage that Keith has been able to create is with frame side and it were operate in some train for an example at 12,000 ton and average is six or seven we got a lot of leverage there that we can bring on incremental business without bringing on additional heads and T&E and the -- cost that demonstrate land which is the wrong subject to make.

[Keith Creel:]

Let me add to that Tom if I can order magnitude if you think about this fiscal plan we’ve said this, we’ve inherited the physical plant that was under invested and it’s not optimize still it stay with our existing business to run long train this past year and we’re seeing the benefits at about 16 siding extensions that we invested in in 2014. Now we’ve got 30 in the books for 2015 and some of that we can pull back if we want to in the absence of crude growth but still the other magnitude is going to be 20-21 siding. So if you take that continue to investing and expand upon this franchise even with today book of business that gives us incremental gains somewhat -- weeks in train side and train speed to bring it all the bottom line based on today’s revenue. So that’s just order magnitude that we’re talking about the level of detail that we have and to play this plan A, B or C.

[Operator:]

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

[Cherilyn Radbourne:]

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

[Hunter Harrison:]

We’re still very confident in the robustness and the fairness of our program Cherilyn just to give you some color on this, 4% of our fuel surcharge is based on WTI the balance is based on highly diesel.

[Cherilyn Radbourne:]

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

[Hunter Harrison:]

Well, I’d say that it’s in all fronts because when you look at our network in all the corridors we’re investing in southern region which is going to benefited some train size on merchandize on bulk as well as on intermodal we’ve got some limitations strengthen our productivity because there the absence of CTC in those corridors the absence of long sidings to reduce train starts which allows you to increase train speed and increase train interact capacity and it’s a similar story in the west. So as we continue to do the investment you will some opportunities on bulk in the southern region. The stuff going westbound, I think we’re pretty right sized when it comes to coal and to potash. However as we continue to invest in the out years you’re going to see a pick up on grain which we don’t benefit from now and then the northern territories and across the Asia we’re going to see again a pick-up in grain and pick up in potash we don’t run in the coal lease so that’s not a benefit but definitely pick up at the merchandize side. So we’re position across the board to take some synergies relative to train length and train time.

[Operator:]

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

[Allison Landry:]

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

[Bart Demosky:]

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

[Allison Landry:]

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

[Bart Demosky:]

Allison as far as velocity?

[Allison Landry:]

Right.

[Bart Demosky:]

No, we will definitely see a benefit across the other books of business. But as that said the sidings I am talking about investing in, if we stay at this level or get to a greater reduced level, so to speak, which I hope doesn’t happen and I don’t anticipate, we have got a plan B and plan C there as well. So we would not spend quite the same amount of money that we planned to spend in 2015 on sidings that we don’t need. As we said back in Investor Day we are trying to bring this capacity on to match the growth in the business. So if a certain piece for that business growth isn't there then we have got an ability to scale back or throttle back on those investments. But regardless what’s left you are going to see a pickup in efficiencies and velocities across balance of the book of business.

[Allison Landry:]

Okay. Fair enough. Thank you.

[Hunter Harrison:]

Let me add this.

[Allison Landry:]

Sure.

[Hunter Harrison:]

In a crude way, no pun intended, so look at crude. If you cut down to it it’s got a relatively higher operating ratio relative to the other book of business. So if we lose crude revenue, we don’t lose as much at the bottom-line. And there are lot of unknown with crude going forward a lot of potential liability issue and our liability coverage and our insurance and what’s going to happen legislatively. And so all things in if we get hit and we have been as a pretty conservative in looking at unit of crude it’s not all going to go away, and it’s not a linear equation there to look at the potential loss.

[Operator:]

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

[Brandon Oglenski:]

Good morning everyone, and congrats on the quarter. Hunter or Keith, I think a lot of the confusion here obviously stems from the fact that the 10% CAGR was built off of a lot of energy growth. But your confidence level seems pretty high that you are going to hit it with some potential offsets even if energy isn't quite the contributing factor you thought it was. And are we thinking about it the wrong way? But you guys structurally have a shorter distance from some of the West Coast ports into inland US and inland Canada. And I think our view is that you historically just haven't leveraged that with the velocity that the system should be moving at. So how much of the plan is really predicated that you are just under serving the markets to begin with, inefficient, and now you are going to bring efficiency up for the customers that you are serving today, be more competitive with highway moves? And it is not really contingent that much on energy or even the economy for that matter?

[Hunter Harrison:]

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

[Brandon Oglenski:]

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

[Keith Creel:]

Well, we are seeing velocity improvements obviously with an improved network and improved Chicago versus last year, but when I was to say it’s improved versus last year you got to be careful what you compare it to. It’s always going to be fragile. We had not add not even close to the whether we had last year. So I am cautiously optimistic right now given the weather conditions about Chicago. We do have again cautiously optimistic this industry expert team that the industry put together this think tank that’s looking at ways to improve fluidity in Chicago. The thing that I do get……** That I do get a little apprehensive about though in a caution now raise this as an issue from our colleague in the industry just because we’re experiencing maybe a breadth of fresh air now compared to last year, we can’t forget how sensitive that city is, we can’t forget the need to do all that we can do collectively as an industry to improve velocity and to create capacity in a place that is constrained so I think that’s going to continue to be a focus for us. For short term things are much better than last year that is for certain.

[Operator:]

Your next question comes from the line of Tom Kim from Goldman Sachs, your line is open.

[Tom Kim:]

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

[Bart Demosky:]

From the back of the assumption there Tom I think it was close to the $90 WTI on the deck, but I’m pretty sure it’s $90.

[Tom Kim:]

Okay.

[Bart Demosky:]

So yes, when you take out revenue at an almost 100% OR the 5% revenue that we are going to take out from fuel surcharge, it naturally -- the math just helps your OR. So that's certainly helping us -- .

[Tom Kim:]

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

[Bart Demosky:]

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

[Operator:]

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

[Steven Paget:]

Good morning and thank you. You answered one of my questions on fuel surcharges, so I will skip that. It seems you have had some success increasing your per carload charges in grain. So can we expect to see per car revenues in the $3,500 range in the coming year?

[Hunter Harrison:]

The success on the grain side has been centered on our growth in Pacific Northwest to taking Canadian product, taking U.S. product those were over the Pacific Northwest export terminal we’ll get a longer haul and a better quality of revenue. So as long as those trends the same - you’ll see continued strength in that regard.

[Steven Paget:]

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

[Hunter Harrison:]

I’d take this. Number one, we clearly have a much better service offering than we had before. Clearly, we’ve a much better reputation of doing what we said we’re going to do. I think it’s clear we gain some respect of the shippers that maybe the organization didn’t possess or now some of that hard, some of that change, some of that have different way of doing business yes but I think you can bear with that hopefully but as we may interact with customers today as oppose to two and half years ago it’s a much more pleasant experience.

[Bart Demosky:]

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

[Operator:]

Your next question comes from the line of Ken Hoexter from Merrill Lynch, your line is open.

[Ken Hoexter:]

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

[Bart Demosky:]

I’d say the structural opportunities there to take it to a different level and more big levels we don’t chose but the hardest point the game shifting we want to grow the top line. So it gives an ability to decide if we’re going to play in markets. There are certain markets couple of years ago I couldn’t play in because that could make about few in it that game is changed and our tool kit has changed and improve dramatically. So I just say that we’re getting strong day and day out with this franchise as we invest money as we convert this culture to be able play ball with the level playing which is pretty exciting as we go forward trying to grow this top line with the opportunities we see at on the future exclude group I’m not talking group I’m talking about the other parts of our business. There are some exciting opportunities of and the years laying out and is playing for us.

[Hunter Harrison:]

I think I’ll just add to this, the operating ratio is our hold card, okay. It’s going to make this thing tick one way the other. We can go either way we need to go strategically. If there is not and I believe there will be, top-line opportunity and the only thing to focus on is cost -- people are going to shudder when I say this, there is lot of run way left. Look, we just went through a 59.8 fourth quarter. From the seasonality factor, the fourth quarter is not the best quarter with the holidays and some weather factor. With the initiatives that Keith has talked about here with some of the headwinds we’ve got as it go to tailwind and we’ve earned I don’t think it improve situation in my personal view it is going to get much worst I think there is much more upside and downside. So I’m pretty pleased that where we’re positioned and as I’ve said before it’s a simple formula without -- with the best service and rest of doesn’t take care itself.

[Ken Hoexter:]

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

[Hunter Harrison:]

I think we’re always going to be optimistic and if we see -- look we’re not obsessed we’re trying to create some merger but if there is a fit if we’re in position and there is opportunity there given shareholder value from our strategic plan we starting to take look at that. Now it appears today that there is nobody was there so it takes two, but look, we’ve got a great agenda here, we’ve got a great plan and in some day whether it’s six months or six years there is an opportunity that comes up and it meets that criteria and enhance the shareholder value -- going to be nimble and it position to reactive.

[Operator:]

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

[David Newman:]

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

[Bart Demosky:]

David, you’d be in the right area, we came in just under 1 billion this year we are forecasting greater than 25% earnings growth. So you know the correlation between the two in terms of, that’s going to produce some more free cash, so --

[David Newman:]

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

[Hunter Harrison:]

Well, we are over hurdle one, which took a lot of dotting I’s and crossing T’s and lawyers, which I don’t have lot have patent for so we get that I mentioned the other two that are going to be aggrieved I know the dream team has a great reputation. Both of us do not want to sit on opportunities so I would expect that possibly by year end you’ll see the transaction and start to see some things if the income statement below the line or above the line given the rules but certainly from cash flow standpoint I would think you’re going to see those things start to kick in certainly within the next year.

[David Newman:]

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

[Hunter Harrison:]

I think what gives us the best return. In my world cash is king. It's nice to have it, it gives you a lot of flexibility, gives you lot of latitude. And we are certainly going to go take a look at it and say okay, now we are in this cash position, we are in a position to do something that maybe we couldn’t have otherwise. So it just opens up more doors of opportunity.

[David Newman:]

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

[Hunter Harrison:]

I think, I mean Keith can comment further, I still think as we think that across the Board we can get better in all accounts. If you pick one place that we are spending a lot of time and Keith and I have yesterday afternoon and half the night on this, the one that we are focusing on this year a great deal is terminal cost. So I think you will see some improvements there. But I know people think there is a wall that we are hit, there is still lot of opportunity at there to look, to further become more efficient whatever we do with that efficiency as far as leveraging there is still a lot more to be done on the side. We are a long way from being a perfect operation. And so there is a lot of opportunities on the assets side, there is opportunities on the terminal side, in spite of the fact that we make huge improvements there. It just shows you what the opportunities were.

[David Newman:]

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

[Hunter Harrison:]

Yeah, I think that there is one line segment effectively most of it’s in North Dakota that here we saw that crude was going to get worse and not going to bounce back and our volumes are not going to be at where we expected. There is a several siding projects. But it's not a huge number maybe it could be a $10 million some will describe it as a rounding error but, it’s not significant, because we basically think that all the line segment that we have put substantial amount of capital in, are supported by grain, potash and those are commodities and is not just related to crude. And I am convinced one thing worse case is that we put some of the sidings in too early, that over some timeframe crude is not going to face $45. I mean I got here crude was 22, so it go to 140 and we have done pretty well between 22 and 140. So we can deal with $45 oil.

[Operator:]

Your next question comes from the line of Jason Seidl of Cowen and Co. Your line is open.

[Jason Seidl:]

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

[Bart Demosky:]

Yeah we kind of picked up on the international side of course, both at all three terminals really.

[Jason Seidl:]

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

[Bart Demosky:]

No, I won’t say it. It’s not material enough to quantify. But I would say something. Again it’s not something that we expect long-term. So with that increased business also come some increased headaches that have driven some operational cost that I am not very happy about. We were actually reviewing that yesterday and looking at Vancouver's terminal. So, I would much rather have something that’s ratable to sustainable that we can plan for that I can control the cost on. So there is positives there is negatives, I would say it’s net neutral.

[Hunter Harrison:]

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

[Jason Seidl:]

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

[Bart Demosky:]

I don’t see that we need to do any additional investment. I think people probably sitting in room right now trying to figure this whole thing out and if it’s long term what do we do, what is the political response, what the individual corporation’s response, what the risk issue and though until they figure them out they’re not going to give a lot of indication to us but I think all in I think what we miss is this is supposed to help the overall economy. Now those that was related to energy and energy related companies have got some big headache but overall the Canada as a whole this should be a plus, and depending on which side of the ledger you are on but the weaker Canadian dollar certainly from an export standpoint keep strengthens the economy lower. As it is just cleansing if you will that certain sectors or commodities have to go through to found out where it’s going to shake out and end up and I think there is a lot of things that are going to happen yet issues are going to fall that people haven’t even imagined. But I’m not going to give you a follow up on that.

[Operator:]

Your next question comes from the line of Matt Troy from Nomura, your line is open.

[Matt Troy:]

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

[Hunter Harrison:]

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

[Matt Troy:]

Okay, sure. And again, it is open ended as in it is not just 30 properties per say with --?

[Hunter Harrison:]

It’s open ended.

[Matt Troy:]

It’s open ended.

[Hunter Harrison:]

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

[Operator:]

Your next question comes from the line of John Larkin from Stifel, your line is open.

[John Larkin:]

Thank you, gentlemen for taking my question and congratulations to Hunter and Keith for sweeping the Railroader of the Year awards. That was rather impressive I thought. First question is for Keith and it relates to the improvements in velocity and weight per train that you were able to accomplish in 2014, quite impressive, up 10% on velocity, 6% on weight per train. As you go forward into 2015 and 2016 can we think of that same magnitude of improvement or does it get progressively harder as you move forward and the railroad becomes even closer and closer, to use Hunter's words, perfect?

[Keith Creel:]

See, we’re not even close perfect I can tell you that. Train speed you’ll see largely it’s again this year - looking at double digit expectations on train speed improvements for our investments when we get to train length and train weight we’re approaching industry best, we’re not too far from it, we won’t have those same quantum leaps, you are limited by the technology, you’re limited by the locomotives and the [indiscernible] and all those things we have to concern ourselves with to make sure we don’t push the envelope too far and compromise safety because that’s paramount. So, train weight, train length not a mid-single digit improvement year-over-year.

[John Larkin:]

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

[Keith Creel:]

Yes, there is a little bit but not really material order magnitude about 10 million benefit.

[Operator:]

Your next question comes from the line of Jeff Kauffman from Buckingham Research, your line is open.

[Jeff Kauffman:]

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

[Bart Demosky:]

Thanks. Good question. Our view on cash is pretty straight forward in the form liquidity and when you got a well-run organization this performing exceptionally time and time again they need to have excess liquidity on your balance sheet in the form of cash just -- So the argue is simply the cash is something that available to enhance shareholder value and so we’re going to keep minimum cash on the balance sheet going forward. We do a very strong liquidity in the form of back stock credit facilities and we carry about 2 billion there, so from a liquidity point of view we’re in good great shape but we’re not going to sit on the bunch of cash. In terms of cash usage there is two real areas in 2015 where we’re seeing material bumps in the need for cash beyond the normal use of it. We think about pension and pension expense, cash expense. As you know we went through pre-funding exercise some years ago we’re going to continue to see the befits of that over the next few years and the cash contribution there remain very, very stable and we guided in the [NYT] about 50 million to 100 million and we think we’ll be in 80 million to 100 million range this year as we’ve seen higher expense there. But there is no other thing in bucket that I see we’re going draws on cash, if anything are going to work very hard to reduce our working capital by running things much more efficiently and hopefully we’ll be able to have some cash that way as well as through the real estate initiatives. so I think we are in great shape.

[Operator:]

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

[David Tyerman:]

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

[Bart Demosky:]

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

[Operator:]

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

[Keith Schoonmaker:]

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

[Bart Demosky:]

I’m not certain about the gas drilling versus the oil I think we serve in both markets I think are very well positioned with our suppliers we got strong low cost producers on the frac sand side. So while we saw the growth last year which exceeded our expectations I think will probably coming pretty close to the same by level maybe down a little bit 3%, 4%, 5% and those are the assumptions that we’re making but I think we’re well positioned and quite frankly there could be upside back to the low cost producer side as you see consolidation in industry, fewer players in the game so to speak, if you are a partner with strong low cost provider you could see some growth there some upside.

[Operator:]

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

[Hunter Harrison:]

Thanks very much for joining us. We are still celebrating this quarter and will be for the remainder of today and we will move on to other things. And so we look forward to talking to you after the second quarter.

[Operator:]

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