Good afternoon, and thank you for joining us for the CP Investor Day. Welcome. Sorry for the delay. We had some flight issues coming out of Montreal and Toronto, so we thought it'd be appropriate just to delay to get some additional people that were expected to come in. So, apologize for that, 15 minutes. And for t hose listening on the web and watching the videocast, a warm welcome to you as well. Trust you've all seen the press release we issued about 40 minutes ago. As an IR guy, I gotta tell you, it's kinda like Christmas. Getting cash flows, $6 billion over the next four years, cumulative, $10 billion of revenue, and more than doubling EPS. Kinda makes my job fairly easy.
But, anyways, excited about the next couple of days. We've got a great event ahead of us, and, so before I get into that, I'll do a little bit of my IR job here. I think it'd be appropriate to remind you that the presentation contains forward-looking information. Actual results may differ materially. The risks, uncertainties, and other factors that could influence actual results are described on the following few slides, 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 four. Prior to starting the formal program, I'd like to call upon our Senior Vice President of System Operations, Scott MacDonald, to provide us a safety briefing. Scott?
Okay, good afternoon. Safety at CP is extremely important. It's my task here this afternoon to walk us through the procedures we'll follow if we happen to have an emergency situation. So if an emergency takes place, the hotel staff are well-trained in emergency response, and they'll provide the appropriate assistance and direction. We also have two CP employees in the room, Breanne and Maeghan. They have their hands up. Breanne is over there. Megan, where... Oh, there's Megan. So they can also provide assistance, and they'll be your first point of contact over the next two days if there's anything else that you require here during the Investor Day. If the need arises, as you walked in, you would have noticed there's hotel courtesy phones throughout the convention center.
If you require emergency assistance, you can pick the phone up and dial 5858, and that will direct you or put you in direct contact with emergency assistance personnel. And if there's a medical emergency, any of the security staff at the hotel can provide assistance and will direct the appropriate medical or fire staff as appropriate. Now, if by some chance we have to evacuate, we'll take direction from the hotel staff. It'll be announced over the public address system. So unless we hear otherwise, we'll stay in the room, but if they tell us to evacuate, we'll, in a calm and orderly manner, we'll go out through the rear doors, follow the well-marked exit signs, and we'll take any further direction from the hotel staff.
With that, thank you for your attention, and Nadeem, back to you.
Thanks, Scott. What I find works pretty well is just following Hunter. You get to where you need to be pretty quick, so. So the team is very excited. I think and I'm excited for you to spend some time with the team over the next couple of days. So please take the time, those here, to engage and get to know them and get to get a feel for why we think they're the best railroading team in the world. To set the scene for the evening, we'd like to play a short video that will highlight some part of CP's journey to date.
And then following that, our CEO, Hunter, will share with you his opening address, which, let's face it, we're all here to see. So with that, enjoy. Thank you.
Every day at CP, we are driven by the power of asking why. A word that has not only transformed a company, but a culture. Three letters that compel our people to ask day in and day out: How can we deliver better customer service? Can we be more mindful of how we spend money? Are we getting the most out of our assets? Can we be safer, and can we do more for our people? Our people are the most important. They're the engines that turn these questions into answers, to improve service for our customers and create ongoing value for our shareholders. It starts with everyone sharing the same attitude, an attitude that's passionate about railroading. No matter what our title, we look out our office, and we know what business we're in.
We understand we're an operating company whose success depends on keeping things moving to help our customers' business grow, on being known for providing the most efficient and reliable rail service in North America. That's why we question everything. We sweat the small stuff because railroading excellence demands it. We believe a little detail can translate into a big difference. Our leadership, who came aboard in 2012, put in place a simple roadmap: Do better, do more, and we've done what we said we would do. The power of asking why has driven continuous rapid improvement across all platforms. We're operating more efficiently with less. We're more agile, we're faster. We're creating more service offerings in areas we're now competitive in, and we're giving back more to communities. But more importantly, we've restored a key ingredient in our company and people: pride.
More than a century ago, the visionary railroaders at CP helped build a country, and over the years, we've served as a backbone of North America's growing economy. Today, we're not only a stronger company that is building on our historic legacy, we're creating a future that is just now unfolding for our shareholders and customers. It's an introduction to a new, iconic CP. We're no longer catching up, but setting the pace. Being in front means having the best vantage point for seizing opportunities first, entering new markets, changing the expectations of what it means to be great railroaders, building a stronger, more successful company for the long term. Our stubborn focus on being better will not just make us the best, we will redefine what that word means each year.
That's because every day at CP, we are driven by the power of asking, "Why?" Welcome to the new CP.
I think it's my cue. They told me there'd be another one, but welcome. Nice to have you here today, and those of you that have concerns about security, just relax, okay? Because we have a noted member here of the formerly with the Secret Service. I know you've read in the press the last two or three days about our Secret Service organization and how solid they are. I'm sure it would give you great comfort in knowing that one of the members is here. Now, he's in disguise, but he's among us if we need him.
You know, I reflected last night a little bit about the last tw0-two and half years, and it's hard for me, it's hard for me to comprehend what's happened and what's taken place in such a relatively short period of time. It's obviously been a nice run, been a successful run. It's far from over, and I guess some of you are wondering, well, you know, was there urgency in having this meeting, the time when you had it? A little bit of urgency, 'cause I'm running out of time, and this is probably gonna be my last plan, my last cut at the apple. So I'm very engaged to be sure that this is another step in the right direction.
I looked out here in the audience and some, there's a couple of two or three people I should recognize that are normally not present. Paul Hilal from Pershing Square, who led this fight in the proxy fight and did a hell of a job, and I spent a great deal of time with him on the road, trying to convince investors that this was the thing to do. I saw his associate, Brian Welch, somewhere. Paul, stand up and just wave at the group here. I know you love recognition, so, Brian, where are you? Here, here's Brian. He's in ... And Mr. Ackman was supposed to be here. He's not here, is he? He's never here when the recognition is being thrown out, okay? So he's a very low-key, kinda under the radar guy.
But let me, let me reflect on, on why we're here. You know, I—some of you that I have worked with for some period of years have always asked the question, we've been—we as a team and the teams I've participated in, in this business, have always been asked, from an operating ratio, that we were obsessed with operating ratio, "How low can you go?" And I've always answered, sincerely, I'm not sure that people bought this totally, that this is, this is not always about an obsession with operating ratio and how low can you go from that standpoint. It's much more about the bottom line, particularly when you're dealing with a high fixed cost, capital intensive business.
and very frankly, I've had a little bit of success in this industry, but I've never been put in the position of saying, "We're just about there." And that magic point where you got to think about looking at costs differently relative to growth. We can clearly, I hope you can also, we can clearly see low 60s. You know, and some of you are gonna put some bait out there in a minute and say: Could you go lower than that? And so before we get into that, I mean, we're where we need to be from a cost structure standpoint, but that, that story is not over. So I think it brought us to start thinking about what were the next steps here?
I think you have to think about it in the context of, of where we have as a group come from. A lot of us have come from different backgrounds, different organizations, some internal, with the glue that's held the organization together. Been a lot of turnover, a lot of change, a lot of players from other railroads. But we have, we have been pretty successful in molding a team of, of railroaders that get it, that understand what needs to be done and are ready to deal with it. And as I was thinking about this, with due respect, all the wisdom we have in this room, I thought we would maybe reflect back to what, others thought about this transaction as we move forward. Gosh!
You know, we have a magic marker here that I could take and run over this white strip, and your name would appear. I'm not gonna expose you to that again, okay? But I think it gives you a clear indication of where a group of railroaders understood it and the market didn't. And that's the two forces that we have to bring together. CP needs 50% more locomotives than CN to move the same amount of tonnage. We heard all about the structural issues. Hadn't heard the term since, about structural issues. "As a hedge fund, do I want to be longing this stock for the next three-six months? No, I want out." And probably got out. "Mr. Harrison has no detailed plan to improve CP's operating performance.
The share price move out of the gate yesterday was, in our view, without merit." Now you got to think about it, and I'm going back in time a little bit. At about that time, the market cap was about CAD 7-8 billion. Yesterday, I think we closed at right at CAD 40. Now, there's been a lot of noise today, but I think it goes to show you, to some degree, that we've been able to really do what we said we were gonna do. If you go back to December, if you look at the CAGR on revenue growth, 4%-7%, mid-60s operating ratio. About 2016, this is 2014, cash flow, CAD 900 million. But really, what has been done? 8% revenue CAGR, mid-60s OR, cash flow before dividends of CAD 1 billion.
And I would, I would hasten to add, and I'm not generally, hopefully, an excuse maker, but when I was doing my calculations, that I was accused of not having any plan. I'll tell you a little bit about the market to some degree, a little bit about analysts, some analysts, okay? They said, "What's your plan?" I said, "Well, it's, you know, it's pretty complex. How long you got? And I'll sit down and explain it to you." "You got about 10 minutes." "Can't understand the plan in 10 minutes." "Give me something." "Well, you like headcount?" "Oh, I love headcount." "How about 5,000?" "Oh, bye!" Next day, okay? It's pretty simple. No complex plan. Give me forty... I think it was 4,500, actually, okay? And there's where we got.
Now, to think about where we were, not only numerically, okay, but qualitatively, as a group, attitudinally, morale-wise, a lack of esprit de corps, but a group of underlying individuals who were tired of being called the worst, who thought they had more to offer and more to give, given some leadership and a chance. Now, we got a pretty good, and we've had a pretty good track record with the operating plan, with an architect of this Precision Scheduled Railroading. And it sounds good, and we sold a couple of books, and I was at a charity event Saturday night....
and a lady came up to me and said, "Well, I'll tell you the whole truth." She said, "You ever got anybody maybe thinking about writing a book about you?" I said, "No, I wouldn't allow that." She said, "Why?" And I said, "Because they said they had to tell the truth, and I can't bear it," okay? There are years. But she said, "Where can I get a copy of the books?" And I said, "Well, I understand they're on eBay. I don't necessarily recommend them." "Why wouldn't you recommend it?" "Because it's $1,000 a copy, you know?" She said, "Really, $1,000? I'll take it under advisement." But the point is this: we got a plan. We do pretty good with X's and O's, okay? We're pretty good architects. Okay, but this business, it's all about execution, okay?
We think we're the best. We think we're gonna get even better. People say, "Well, why? What's so different? What's so different about the, quote, new CP?" We just simply, this team of leaders we have, execute day in and day out, better than the competition and others, and that's just too simple for some to follow. Now, let's look at a little bit and reflect on a few issues of where we're going. I wanna highlight a few points here that hadn't been brought out, that will play a key role in my bottom line in a few minutes. But some of these have not made, I think until this slide goes up, it hadn't been made public. D&H, I'm happy to tell you we have a agreement of understanding on a sale with the D&H.
I cannot reveal who the other side is. That's something that was in the original plan that some of our team has worked very hard at, that's coming together. Don't forget this increased velocity. That's what this is gonna be all be about. But this, today, we initialed, subject to ratification, an agreement with our employees in the U.S., the operating crafts, for an hourly rated agreement. Which could be big! That's not in the bucket. Now, the reason why it couldn't be big is because it's only a step to another step. You know, I think our labor, Peter Edwards, and has led our labor group, and they've been doing a hell of a job. We have signed five agreements in the last six-eight months. Every one of them is five years plus, five-six years, unprecedented in the rail industry.
The last one, and think about this, reflect on this a minute, with the Teamsters, okay, was ratified 94%. Ninety-four percent of the people ratified that vote. That is the same organization led by the Teamsters, that we can't even get to the table in Canada. But this will be a step. We've got Unifor next, which is, which is effectively what you would have talked about a year or two ago as the CAW, which is basically our shop crafts. We have, I think it's safe to say we've had a very, very good dialogue with them. I think we'll get them signed up early. And so we'll have everything put aside, with the exception of the T&E operating people in Canada. And this issue with the, with the, U.S. crafts will be big in taking a step in the right direction there.
Now, I trust that you have seen the press release on what we expect to accomplish through 2018. Now, I have to be careful what I say, when chances are I'm not gonna be here in 2018, in fairness to the rest of the team. But they're gonna have to do a good job to do this. This is not a stretch, okay? This is not something that cannot be achieved and accomplished, of effectively $10 million CAGR. Operating ratio, call it what you want, low 60s. Could it ever go below? Yes. Will it be seasonality some higher? Yes, but in the 60 range. And cumulatively over that four-year plan, free cash flow of $6 billion. Now, I knew today the challenge was gonna be, and by the way, the real-...
The real guts of this presentation is going to be tomorrow when you hear all these railroaders that are going to have to produce this, Keith and his team, and others share with you how this is going to be done. How? We know why, how it's going to be done. I thought I'd take you and give you a little insight in my view, and hopefully, the influence that I'm going to have on this organization going forward. And it's all about one thing. It's all built around effectively one thing, and that's velocity. Now, I'm looking out beyond four years into the future of movement of freight in North America. But let's think about, and some of you that have been along for this ride with me, okay? These are not just new thoughts and ideas.
When we first started and wrote what was going to be the first little pamphlet on how we work and why, and you heard about how important we talk about why is. Then we evolved, that involved into a book, and then it evolved into another book of change, leadership, mud, and why, and the hourly agreements and the velocity. All this ties together, okay? There's a method to this so-called madness. Let me just give you a little insight as to potentially what I think this might do. I think I would describe this probably as the new CP or railroading of the future, the ones that get it. So let's think about a minute in this context, velocity, and what it does for us. Well, it improves productivity clearly, in ways that you don't imagine.
What is the difference, those of you that have not grown up in this business, in an hourly agreement and a mileage agreement? You know, in a mileage agreement, we spend CAD millions improving infrastructure to raise the speed to 60 or 70 miles an hour for a crew to run over the territory in six instead of nine, and guess where they go? Home. And guess what we get out of it? Nothing. But if we're willing to pay more and be on an hourly basis, what the hourly agreement says today, is if they get there in six hours, they work four more for that 10-hour day, because it's a 10-hour day. There's no overtime after eight. There's no overtime after 40 hours.
You know, it was the answer to a question that a group asked me one day, and they said, "Isn't there something else but this, arguing all the time and this adversarial, confrontational relationship with labor?" I said, "Yeah, there is. Great question." And the answer is this: I'll make you the highest-paid railroad in the world. And I did. We did. You got to be the most productive. So an engineer today in my former employer, Baton Rouge, Mississippi, I mean Louisiana. God, I'm sorry. I could be struck dead for that in the South, okay. They work a 60-hour week, straight time, one day off. They chose that in a menu arrangement. They're paid by the hour, and they're paid generously, but they work very hard.
Our rationale was, it's much better to pay two to do what three can do, given the cost of fringe benefits. Their compensation, and some of you are sitting there saying, "God, six days a week, 10 hours a day, that sounds like a sweatshop." Look, folks, any of you have been to the South, those folks love money, okay? They're into security, and it worked for them. That's one of the things it'll do for us. It'll improve productivity. It'll lower cost. Now, what does it do then with asset turns? It improves asset turns. It lowers capital exposure. You turn locomotives quicker, you turn rail cars quicker, and if you turn those assets quicker, what happens to service? It improves.
If your service and velocity improve, you can expect, I'll show you an example in a minute, that you can improve your quality of revenue and probably gain market share. It has to improve capacity. We all know in the business, the faster you run the trains, the more capacity you got. You got a 40-mile-an-hour railroad, you can put so many on there a day. You got a 60-mile-an-hour railroad, just that speed, just that quality of that infrastructure raises the capacity that much. So it helps your capacity, things that Keith is going to spend a lot of time with you in much more detail tomorrow. So you've got better service. You can grow the business with less capital exposure, improve productivity. What's wrong with the model?
Now, some of you are probably sitting there saying, "Yeah, but those folks in Washington now are talking about restricting speed, and the folks in Ottawa are doing the same thing." They're nuts. They really are, and I've told them that. I mean, how do you think, folks, in the U.S. particularly, we're going to get back to 2006 volumes? The infrastructure won't handle it, trust me. Chicago, Illinois, will not handle it. Bad weather or not, just a normal winter. Now, this company, mark it down, has made an offer to buy the Belt Railroad. We've made an offer to buy the IHB Railroad. We've made an offer to lease the railroads. I mean, we've made an offer to do a management agreement to improve velocity through Chicago.
Because to say we're going to slow the trains down because of crude, but we're going to move more crude and more grain, it doesn't work. It doesn't work. That's Washington talk. And we've got to sit down and understand what we want to do, both in Canada and the U.S. here. I'm convinced that this industry will be able to convince the regulators and legislators that we can do this safely. We're not, we have never quibbled. We were the first company that came out and said, "Get rid of the tank cars." 25 years ago, people said they were unsafe, and 25 years later, we're still having hearings in Washington about it. That's somebody we will be able to convince, I'm convinced, the regulators, legislators, that there's a better way to do this.
And so if we do this, velocity, not at the expense of safety, to increase safe operation, will be the key to this industry going forward. It'll have huge impacts on this economy and jobs and all the stuff that's good. Now, let me give you the last... I'm going to let you cheat on the test a little bit, okay? Here's what velocity is going to say to you: It's going to cause us, it is causing us to revisit the way we think and to look at train revenue as opposed to car revenue. Why would I say that? Because what we've learned, what we are learning, is a slot on that train is very important and expensive. And we have advantages over the airline. They can't take seats out. They got a fixed consist in that plane, hopefully.
We can impact that. Let me tell you some numbers I ran, just back of the envelope. I'm not a very complex guy. You read that, okay? We do a pretty good job, and are going to do a better job, in what I call capacity management. We're going to do a better job than we do today in this company, and Keith has really led some efforts here of coordinating our efforts between market sales, operating, and the marketplace. Now, that's why getting to this number, that, by the way, is not etched in stone. Can that number change? Sure, it can change. But we're going to get to a point... I looked at some numbers and I said, "Here, we got a train out there running. It's got 150 cars, slots, potential slots.
But we're only running 100 cars on it, because that's all there is in the market." And you say, "Well, why is there 150 slots?" Well, the people are the same, whether you run 100 cars or whether you run 150 cars. And the locomotives are almost the same, and you know why? Because every railroad in the country besides us, it says, bigger is better. Well, when you get bigger is better, when you got a little too much of that 16,000 locomotive, and all you got left is another 6,000, you overpower trains because you cannot incrementally slice up that horsepower to match the needs... So just follow me. You got 150 cars, potential capacity on the train, and you run 100. Let's say the rate's $1,000 a car.
You got a $100,000 revenue train. And you say: "You know what? I gotta get this train full." But the market won't allow it. Maybe the prices won't allow it, but what do they allow? God forbid, if I ever use this term, okay, some of you are gonna shoot me and roll over in your grave, if I ever said discount. But I'm a bottom-line guy, and if you said, "You know, if they'd let me, if I'm the marketing chief, I can discount this train by day of the week or for the week, 3%, and I can move the capacity up to 135 cars instead of 100." With 3% less revenue on every car. Let's say they're all widgets. Guess what that does to the net-net bottom line of the train? It raises it 8%.
So you say, "Well, that seems awfully easy. Why aren't people doing that?" Because they think it's too hard to get there from here. But we can get a running start, the new CP, okay, on getting that done. And you know what? I get to talking about this, and I'll be damn, at 10, starts to get to be 11, and 11 starts to... It's untold. It's untapped, the potential of what can be done. So what's gonna happen? Sure, we're gonna gain market share. We'll gain it organically, we'll gain it in new markets, we'll take it from the highway, we'll take it from the competition, okay? And it's huge opportunity at the best margins they can. So my-- the reason for this passion plea is to tell you, there's just a lot more to get out there, okay? Maybe it's the second season of low-hanging fruit.
Call it what you'd like, okay? I know you go through learning curves with organizations, and in there a year or two, and you think you've seen it all, okay? Year four, you see things you didn't see year two, and opportunities open up themselves. So let me, at this point, given that we got a little late start, and by the way, I think the agenda for tomorrow is 8:00 A.M. here, right? Keith's gonna lead off and lead the day with his team, and Bart's gonna finish up with the bottom line. But he's gonna do the first finish. I'm gonna do the second finish at the farm with you, okay? And the only other participation I will have is they might let me sit on the panel asking questions, if there is one. So we got a few minutes here.
So before cocktail hour, if there's questions of me, of the plan or my heritage or whatever, I'm happy to answer them. Yes, Tom?
Should I wait for a mic? I just wonder if you could give us some thoughts on how you would frame the market opportunity from a faster train speed. You know, if you ran average train speed at 30 miles an hour, you know, how large is presumably the truck market or the broader market you could access, if there's any way to frame that? And then I'll throw in a second one. It seems like there is more noise around regulation. You give us a view that you'll be successful or the industry will be successful in pushing back. But do you think as profitability rises, if you did go into the fifties with OR, is there some risk that there's a further stepping up of, you know, regulators getting into your business, you know, aside from just grain? So thank you.
Yeah. Tom, the first question is almost, it's almost untapped. You know, if you look at the percent of freight bill in North America that the railroads collect out of all the opportunities, it's—and I'm talking from memory here, but it's in the 8%-10% range or less, at that total tab. So there's a whole lot for us to do before we start looking and saying, "We're gonna be tapped out here.
There's nothing else to haul." On the point of regulation, well, I'd say this: if they start to do that, and I'm on the bench, retired, you got a free consultant that will come and give an emotional presentation to Congress saying, "I know you're not very bright now, but if you do this, you're really not bright." Look, I went through the sixties and seventies of regulation, which is effectively the end of the first 100 years, 110 years of railroads. We didn't know how to act then. But I'm telling you, if people think something is not going right today and they match it up with the sixties or seventies, they would never go back to that. Now, think about something....
Most of the rhetoric that I hear now about, quote, "railroads," whether it's not hauling enough grain or what, is when's the last time you heard about enough grain being hauled? I can't remember. 15, 20 years ago, when people were saying, "We've got grain that you can't haul." Now, why would you think that an aberration like that pops up in 2013-14 season? Now, is it, is it ironic that Canada had the worst winter in 75 years, that, that had anything to do with it? Or that the Midwest was like this? You know, and we got farmers, with due respect, I love them most of the time, they're saying, "I'm not going out there 30 below and load grain." What do you think our people are doing? You know, our people work 365, 24/7. I'm not worried about regulation.
I just don't think that. Let me qualify. What I hear is what you don't want to hear, which says things like, "I got to get my name on this bill, but I'm really not for it, but politically, I got to be a co..." And, you know, I really don't appreciate that kind of dialogue. But the bottom line of it is, I think we're gonna do better and better as an industry. There's a couple of us not gonna do well and might fail and, you know. But look, I used to say this all the time growing up, I hate to get spanked for something my sister did. Okay, so if I do wrong, fine me, put me in jail or whatever, but because railroad XYZ doesn't do right, don't start, you know, changing the rules and regs on me, hopefully.
Yeah, Bill. Mark, you be the timekeeper, okay?
Thanks, Hunter. So, first question is on what you outlined from a revenue standpoint. The great thing about the CP story for so many years was we knew you were going to cut costs. There was no doubt about that. And now we've got a story that's a lot more focused on revenue. So can you—you talked about the market size, but can you talk about your confidence in your ability to hit that, whether it's economic assumptions or, you know, maybe some of this discounting that you referred to, so to speak, maybe that gives you a much greater confidence that you'll hit these numbers no matter what. But sort of talk about the confidence there. And then the second question is just on labor. What does it take for Canadian labor to change its view?
Because you weren't successful at the former employer in getting that through. Will you be successful here? Will they come around, and what would it take? Thanks.
Yeah, I think, second question first, I think they will. I mean, I think it's just, it's so compelling that you can't keep turning it down. You know, it's kind of like cutting your nose to spite your face. It's just nobody really argues on the merits of it. It's the right thing from quality of life. It's the right, it's more comp, it's more this. You know, it's just an issue that people think that labor is not supposed to agree with management. You know, and I went and sat with one of the organizations in Canada, and we had this wonderful meeting, and we shook hands, and we were on the same page, and everything was lovely, and so...
And the next day, he gets a question from a reporter, just calls him out of the blue and says, "What do you think about rail safety?" You know what he does? He reaches in his file and says, "Rail safety, railroads." And it's all the stuff that headquarters has furnished him to say about how bad rails are. So I called him up, and I said, "Sam, was that you I met with yesterday?" "Yeah, but, you know, that's the party line." "Well, I'm not doing that deal, okay? You're gonna, you know, I'm gonna fire back at you like you've never been fired at, and I'm gonna make you look awful stupid." And he said, "Well, you don't have to do that." "Well, you just made me look stupid.
You just called me a liar three times." "Well, I know, but that's what they said to say." We got to get beyond that. We got to get beyond the party lines and what? Bill, I think that as you bring out and as I kind of said, is this: railroads haven't had a lot of experience with growing business. I mean, boom, crude hits, and we're gonna grow, or we have a record grain crop. But I think, though, I've had some recent conversations that people that really get it, that say, "Look, if you can bring us better service on a consistent basis, you're gonna pick up business." Now, we're not gonna see it in grain, like what we've talked about here. What are we gonna see in grain?
I think what I read and what the experts tell me is they're getting more yield. They're getting more yield, they're probably gonna plant more. And in normal weather years, there's gonna be more grain for us to handle. It's not gonna be big just planting coal. It's not gonna be big in potash or the commodities that we've got ten-year contracts on, but intermodal, domestically, all the, what I call, merchandise business, the stuff that railroads were built on, that we've lost to the highway, it can be gangbusters. And I'd make a prediction to you... You know, we're doing this in the face of cleaning the book up, so to speak, of some real bad marginal traffic.
You know, it's hard in the face of thinking you're gonna try to grow the business, to say, "I'm gonna let that business walk." But you gotta develop some discipline. There's got to be a place. You know, one of the things I said at my former employer, they said: "What was the best thing you accomplished? If you had to judge yourself, what's the best thing?" I taught people to say no, and live up with it and stand for it. So I am convinced if we and other railroads do our job, if we do the velocity, if we do the consistency, if we do those things, we will be rewarded. One final thing. How many of you heard early on at the other spot about schedule railroading and so forth?
They despised me, and they didn't like me because I made them run the trains on schedule, and I wouldn't wait for them. How in the-- Now I'm getting rewarded for that. Run a disciplined operation over there. How in the hell are you gonna run a disciplined railroad and say, this guy says, "I want to go at four." "Nope, nope, nope." "I want to go at midnight." Well, when are you gonna go? That's our job responsibility. So I think what's happened a little bit in Canada, both sides of the coin, is people are not looking at railroads, not as many people are looking at railroads as, quote, utilities. So but I, I think that once we break through and make a big step forward, it'll almost be hard to shut the doors. Yes, Scott?
Thanks. So Hunter, in the past, we've talked about you get the service and then eventually you, you get the pricing, later. Is that story changing? Do you still get price or is now you're gonna discount and it's really just about incremental margin to, to volume?
No, I think-
Or do you think you can get both?
Well, I think you get both. You know, I think it's just like the airlines. You know, if they're gonna run a damn plane, and there's 150 seats, and they only got 50 of them sold, maybe they ought to get something for the gas money. You know, I mean, there's times when organizations go through in times of recession and whatever, and if you look at your numbers internally and say: Does that qualify marginal? But no. But if you don't, you know, somebody's got to pay the light, gas, and water. So I think that's... you know. You know, I was talking about widgets. We're talking to some degree about what the market will allow and demand. I'm a believer in this, okay? We don't create the price, the marketplace does. We decide whether we want to play.
And so I don't want anybody to get the impression and walk out of here and say, "Well, they're through with increases." I mean, I'm a hog, okay? I will not allow my service to be commoditized, okay? But at the same time, hopefully, I'm smart enough, in spite of my operating tendencies, to say: Look, if we're operating in that corridor, and we got to go once a day, and, you know, we effectively, to my example, got this capacity, but we're only running 100, and you look at the net, net bottom line, are you gonna do this or are you gonna do that? I'm gonna do the bottom line thing. So I think it's hard to generalize that, but, I mean, in this plan, it ain't all about 3% discounts. I...
God, I'll be sorry I ever said that, but it, it's not what it's about.
The example you gave of going from 100 cars to 130 cars, is that theoretical, or have you spoken with the customer yet? Or do you feel like you're starting to get that market share? When do you think you start to get that, and what are the customers-
Well, I think it's all the above. Yes, my exercise to some degree is theoretical, okay? But if you start to say... And once again, we have to be careful with this in this quote, kind of environment of a utility. You know, look, we're gonna run the train now like a streetcar. You can't call a streetcar like you do a taxi and say: Pick me up at 2:00 A.M. You know, look, we've canvassed the market, we've done all the market intelligence, and this is the time we're gonna run the streetcar, the train or whatever. And, you know, look, there's—we have to really be careful of understanding if we really understand our business.
You know, the first thing we got into was, why are we running intermodal trains 60 miles an hour across the country to be there 4th morning, and they pick up every 5th day on average? They sit there five days. So you got to think about that. So should we run... And you got to balance this with assets and turns and all that. Should we go six days a week and make that balance with assets and deadheads and, and all that?... But that's part of our job. The bottom line of this is this: this will be a much more dynamic exercise. This will not-- this will be moving away from annual plan or what? This will be more of a marketing, operating, "What are we gonna do this week? We got snow this deep. We got grain here. We got..." My favorite story.
We got the University of North Dakota just did a study that said we cost the farmer $67 million. And then the head of the department said, "I don't know anything about the study. Should have taken two years, and it took two weeks." It was just a political ploy, but I just wanted to get that needle in a little bit.
Hi, Hunter. Hi, Hunter, Tom Kim over at Goldman. I wanted to ask you-
Where are you?
Hi.
Here, I got you.
I just wanted to ask a follow-on question to the earlier comment or question on revenue growth. Can you contextualize for us how you're envisioning the volume growth versus pricing? You know, two years ago, you gave us a pretty good explicit breakdown in terms of your rough approximation of what kind of mix you were looking at. It'd be helpful for us to try to understand that in the context of, you know, how velocity is gonna improve your overall revenue stream going forward.
Yeah, I think every market's gonna be a little bit different. I think intermodal is gonna be one animal. You know, I think grain's gonna be totally something else. So I think it kind of, quote, "depends." Now, look, think about something. Grain hadn't had any problems, as I understand it. I'm new at the new CP. Hadn't had any problems for 20 years moving grain out of North Dakota. This year, we allegedly shut the state down. Now, what happened? What happened different? Well, the only thing I know different is the facts that I read said that it was a normal crop. Our normal market share of that crop, 21% or 22%, and there's only one other player, so he's pretty dominant, and you couldn't guess who that might be, okay?
But the only things I know that happened is their velocity went down pretty significantly, 20-30%. I'm not being critical, just being factual. Weather, a lot of things had in to do with it, and grain was being trucked from Canada to North Dakota to go west because people thought that that was the best way to go. Now, I think people have learned today that, look, if they can get on somebody and ride and get a good trip and be consistent, that's the place to be. And just to be beating carriers over the head about low price doesn't always work. I still think in the stage we're in, that... And year one is gonna be different from year four.
I mean, I would describe this, and I don't want to get ahead of James tomorrow, but number one, we're gonna have to go through a little transitionary period. But to my points earlier, 8% CAGR, I remember when that was a grand slam, and now people don't register unless it's double digit. So if we could stay at that level, we're pretty good. I still think that during this cut-over phase, it'll be more price driven. As this model shapes up, we polish it off and towards the back end. And the back end is normally what we don't want to talk about because we can't see it, but I can feel it, that if you do these things, it's gonna be there. Towards the back end of the plan, I think it'll be more volume-oriented, non-price.
Hunter, okay. Benoit Poirier from Desjardins.
Yes.
Yes. Okay. You mentioned, Hunter, that-
You're from Memphis, aren't you?
Sorry?
Good. Joke.
No, no. You mentioned that M&A is something that will happen, obviously, because of capacity issues. Obviously, CAD 6 billion of free cash by the end of 2018 is something quite sizable. You also give a pretty good tip a few hours ago with the increase of the share buyback. So just wondering, where do you see CP's future on the M&A side? And also, what are the catalysts that will stimulate the M&A activity? Will it be another tough winter or a downturn or, or maybe something else?
Next question. I think... Look, Benoit, you know, I certainly can't comment on specific impacts to CP at this point. I'll say this: I still think all the forces are there that say M&A makes sense in the U.S.. You know, we know, I know, it might be debated that if you put two carriers together, east-west, there's gonna be better, there's gonna be capacity created, it's gonna be smoother, it won't, it'll take pressure off Chicago, and so it's, you know, it's the old story, it makes too much sense. Would we ever consider anything, as I've said publicly before? Sure, but you got to have somebody to dance with, and I don't know anybody who wants to dance now... And there's a lot of reasons for that.
Because when you get into those kind of issues, my experience in the past, and I've had too much of it, it's more about social and egos than it is true bottom-line value to the shareholder or creating. So I think it's gonna happen, two years, five years. I'm an outlier. Nobody else believes it, so I'll just, we'll see. But, I mean, we're in a, it's always nice to have a problem of sitting on cash, what to do with it. Okay, so let me just take a couple from the back, because I think the front got dominated this. And you can do this: You can answer a question from the back, or we can drink. I don't care. Doctor's got me off alcohol, so go.
Hey, Bascome Majors over at Susquehanna. You talked a lot about taking share from the highway in both the intermodal and merchandise business as part of your growth strategy. How does rail-to-rail competition factor in, and perhaps, you know, what opportunities could you see there?
Rail to rail?
Yes.
You know, I think that we've got some competition out there. I really don't think about it as competition as such, because on a relative basis, it's just not. If you go back to the proxy contest and some of my statements, and to tell you how bad people can be off, one of us, Fred, said something to the effect that 75 or 80% of the business that we both shared was competitive, and, and I said 25. So you think somebody's missing it somewhere. But I really think if you look at our markets, for an example, in Canada, you know, we got the south route, CN's got north route. We have advantages to Chicago. They have advantages to Edmonton. Calgary is a CP town, Edmonton.
So unless you screw it up, there's only about 15%-20% of what I would call jump ball business, rail-wise. Now, look, that's not to sneeze at, and that's something that we will, you know, we'll certainly go after and see what we can do. But that's not the real focus of what the big opportunities are. So 2 more in the back, and we'll be done. And Ken, somebody up here had their hand up, so...
Sorry.
When I went over liquor, I'm impressed, I'll say.
Question on velocity. It makes intuitively more sense because as velocity improves, your cost goes down and your service goes up. It's a slam dunk proposition. But how much of it is within your control? How much can you improve velocity with the rest of the industry and the value chain itself supporting it? For example, you're connecting at Chicago, where you're dependent on other carriers. Ports, you know, the delays in the ports are inevitable and how you form the unit trains. So how much is more externally driven versus how much is internal in your control?
Well, you know, if you look at the percent of business of ours that is, quote, "local," meaning it originates and terminates on CN, as opposed to interline forwarded or received traffic that comes from the connections, obviously, the local traffic we can have much bigger impact on. We're limited to what we can do going to Dallas, Texas, depending on who our partner is, whether it's Chicago or Kansas City. We're no better, I've always said, than they are, or vice versa. So that's a weakness. But local traffic, velocity can be big, both from a service, and asset turns and in that occasion. And, you know, it's got a big impact that some of you are kind of maybe overlooking, for an example, on locomotives. We've got 75 locomotives leased out right now, big ones, 4,400 horsepower.
And we're gonna grow the business. But there's a compelling case, at the same time, that we can almost do this, almost, without acquiring locomotives, without acquiring, certainly, any one for one of what you would have thought of. So you make a good point. If it's related to the port, other people that control part of the pipeline or offline, there's limitations there, which speaks to the M&A issue again, or, you know, this company would be open. You know, we'd buy grain elevators, origin, termination, any infrastructure that's there that would make financial sense, that would help us control more of the pipeline, we would certainly have an interest in. Now, that gets other people's attention, but that's the way it is. It should be that way. So, Ken, and-
Thank you. Ken Hoexter from B of A Merrill. On your slide, you mentioned a range of 58-63 on the operating ratio. So take the big picture, but kind of drill it down to some numbers. You noted in the press release, kind of mid-60s. I don't know if that was your-- the two-year target was the mid-60s.
Two year.
Okay.
Yes.
So just want to think about upside. You know, what gets you to your upside? Is it, the agreements, the hourly agreements, maybe even something in the future in Canada? Does that take you, beyond that, to buybacks, or are they in the, the doubling of the, the EPS that you put out there? So just want to understand where your upside is, and then what makes you nervous still? Is it, is it getting wrapped up in a price war with the concept of the discounts, and, and does that start there? Is it Chicago congestion, I guess? So where's your upside, maybe downside, within that, that big picture?
...Well, you know, one of the things that I would hasten to point out is there's a lot of moving parts in operating ratio. When I did my so-called back of the envelope calculation, I didn't discount it for mark-to-market with options, with management salaries. Now, if you took, for an example, if you took that out, and somebody will correct me here if I'm wrong, but if you took that out of fourth quarter, okay, and a couple of other issues that were clearly one-timers, you get to 61, boom! So it depends on what's in there and how you're gonna look at it. And I am more and more... In fact, I was talking to someone earlier that was bringing to my attention today, the issue at Coke about options.
And I'm becoming less and less and less and less and less and less an advocate of options for management comp. I just, it starts not to make a lot of sense. But those are the kind of things that if you look at what we kinda look at, and I'm, we're not trying to advertise anything to break some record and all, but if you look at what we look at, and we call it our core issue, which is what we can. You know, we discount both plus and minus land sales, and we discount this mark-to-market. And that works both ways. Stock goes up, you know, the cost goes way up. Stock comes down, the cost. But when we discount those, we get to a real number that's bare, low, low sixties. Now, are there some other things that you can do?
If all you wanted to do was get that number to 59, but if you weigh that against the growth over here and net-net it, it says that more times we should be going this way. I sleep pretty good. I don't think there's gonna be re-regulation. I think some of this is gonna turn on the regulators, the legislators, both Washington and Ottawa. Look, I just picked up an article and read the other day, and I understand a little bit about politics. Thank God, I don't understand too much, or I wouldn't be in very good shape. But the, the Prime Minister said that free trade was extremely important to Canada, that Canada was fully capitalistic, okay? Was pro-business and all this stuff. And I said: "Wait a minute.
You're telling me what I can charge for the product, that if I don't deliver it, I get penalized, okay? How many assets I'm supposed to put towards it. That doesn't sound pro-business to me." Now, in my view, that's a totally political decision, which will come back in the long run and backfire. I think to some degree, some of the same stuff's going on. I mean, how long has Rockefeller been on this deal, okay? I mean, come on. And his whole agenda is West Virginia coal. Now, forget that, Senator, that's... The market's passed you up. But he's not on West Virginia coal, so now he wants to do a little grain in North Dakota. I don't think he's ever been there, okay? So, now, having said that, it's not something I just totally disregard.
I just, I just think that those, the likelihood of those type things happening, is not, is not likely. A price war scare me? No. If I'm the low-cost carrier with the best service, you want to get in a price war? Come on, bud. Let's do this, okay? When we get through, I'll tell you who's gonna be standing. And so I don't think anybody wants that, and, and we're not looking for that either. You know, I'm just looking to be compensated for my... Now, I do think there's points that, we can't just totally misbehave in either country. You know, when I look up and see some of our friendly associates saying they're taking a 17% increase, and I'm saying...
Pounding their chest, and I'm saying, "It's not the right time, please." You know, because from a PR standpoint, we could do a little better job than that. So I would hope that we would, you know, think better about that. And I guess the best example that we got going right now is the crew deal. I mean, just think about something horrific accident in Quebec, okay? I mean, 47 people killed and literally a town wiped out. What? Why? Well, I think most people that know will tell you it was behavior. Not on one person, more than one. To park a train on the side of a hill overnight while a crew gets rest, number one, is not very good railroading. Number two, for the one engineer, one person only...
Now, look, if other people want to run with one-person crews, so be it. We're not on that page. But they got an exemption from the CTA to operate the only railroad, that I'm aware of, in Canada, that had an exemption to operate with one person. He didn't set the brakes. He went to bed at a motel... Now, I don't care what you do about all these regs. If they don't set the brakes, it's gonna roll down the hill and kill somebody. It's about human behavior. But we've got all this rules and regs and rhetoric and stuff going on, and people are really overlooking this issue. Final thought: We have a case in Canada as we speak, and I'm rather proud of what our management team did here to some degree.
We had an employee, a locomotive engineer that operates a train, caught by us twice, hot on cocaine, okay? Twice. Plus other ventures with his recreational drugs that he can go to Colorado and do all he wants, okay? And I wish he was in Colorado. And guess what? We dismissed him because of his behavior. And guess what a neutral, in all his wisdom, an arbitrator said in Canada? "Put him back to work. He's only had two strikes." What do you want? Do you want a Lac-Mégantic, another Lac-Mégantic with 47 people? What do you want us to lay out in front of you? So we said, "Nope." And people told me internally, "We can't do that." Watch us. He ain't running a locomotive on my watch.
Now, I might go to jail, and hopefully some of y'all will protest for me to let me out. Okay. He's not running a locomotive on my watch. And guess where we went? We went to the courts in Quebec. Right, Paul? Quebec. And the judge says, "This arbitrator is nuts." And all of a sudden, this whole system in Canada, for years and years, has not been challenged, is being challenged. And people are saying, "Do you mean there's people running trains out there that are hot on cocaine?" So it's a disease. Okay, I'm sorry. So they're addicts. I'm sorry. Put them up and don't let them kill anybody. We can give them all they need, okay? But the message here is this: if we, as railroaders, as citizens, or whatever, don't stand up for people doing the right thing, it ain't gonna change.
We're trying to encourage people to do the right thing. It's been a stimulating afternoon. We'll enjoy a cocktail now and an evening meal, and then we'll see you bright and early in the morning. Thank you.