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Canadian Pacific Railway Limited (NYSE:CP)

Q4 2012 Earnings Call

January 29, 2013 11:00 am ET

Executives

Janet Weiss - Assistant Vice President of Investor Relations

E. Hunter Harrison - Chief Executive Officer, President, Director and Member of Safety, Operations & Environment Committee

Jane A. O’Hagan - Chief Marketing Officer and Executive Vice President

Brian W. Grassby - Chief Financial Officer and Senior Vice President

Analysts

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Fadi Chamoun - BMO Capital Markets Canada

William J. Greene - Morgan Stanley, Research Division

Ken Hoexter - BofA Merrill Lynch, Research Division

Cherilyn Radbourne - TD Securities Equity Research

Benoit Poirier - Desjardins Securities Inc., Research Division

David F. Newman - Cormark Securities Inc., Research Division

Christian Wetherbee - Citigroup Inc, Research Division

Brandon R. Oglenski - Barclays Capital, Research Division

Walter Spracklin - RBC Capital Markets, LLC, Research Division

Jacob Bout - CIBC World Markets Inc., Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Scott H. Group - Wolfe Trahan & Co.

Keith Schoonmaker - Morningstar Inc., Research Division

Steven Hansen - Raymond James Ltd., Research Division

Thomas Kim - Goldman Sachs Group Inc., Research Division

Steven I. Paget - FirstEnergy Capital Corp., Research Division

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Operator

Good morning. My name is Simon and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific's Fourth Quarter 2012 conference call. [Operator Instructions] Ms. Weiss, you may begin your conference.

Janet Weiss

Thank you, Simon, and good morning. Thanks for joining us. Today's presenters will be Hunter Harrison, our President and CEO; Jane O'Hagan, EVP and Chief Marketing Officer; and Brian Grassby, our Senior Vice President and Chief Financial Officer. The slides accompanying today's call are available on our website. As always, let me 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 and 3 in the press release and in the MD&A filed with Canadian and U.S. securities regulators. Please read carefully as these assumptions could change throughout the year. All dollars quoted in the presentation are Canadian unless otherwise stated. This presentation also contains non-GAAP measures outlined on Slide 4. [Operator Instructions] .

So here, then, is our President and CEO, Mr. Hunter Harrison.

E. Hunter Harrison

Thanks, Janet, and good morning to everyone. I trust you have seen our press release. We've got a busy agenda this morning. Brian's got a lot of numbers to talk to you about. I'm going to make some, kind of abbreviated remarks to kind of fill you in on my observations of the quarter, which I think goes without saying that I was extremely pleased with. The plan's working. It's clearly ahead of schedule. Let me fill you in on where we stand in a couple of areas. One, we'll be moving into our new headquarters and I think at the end of fourth quarter, which is a little bit ahead of time. Our labor issues are generally behind us, we've signed recently 4 new collective-bargaining agreements. So that -- those issues are out of the way. From a headcount standpoint, I think we had guided you towards a number of, at the end of first quarter, about 2,300, we will be there or maybe fractionally ahead of there. Our operating metrics, without going through them, you got the deck, were pretty record-setting. We continue to fine-tune the reorganization, I think Jane is finishing up the -- some issues in Marketing; and Scott's working on some issues with the Engineering group. We're adjusting to the rationalization of the terminal network, and that's fitting well with the plan. We are seeing improved service across-the-board, and I couldn't be more pleased.

So without further ado, I'll have some remarks at the end, let me turn it over to Jane to talk about the revenue picture.

Jane A. O’Hagan

Thanks, Hunter. Our market initiatives are delivering growth in value. And we delivered a strong level of sustainable, profitable growth in this quarter. In merchandise, we delivered our sixth consecutive quarter of double-digit revenue growth and we're seeing a very positive response from our customers in terms of our service, our consistency and our reliability. So with that, I'd like to review the results for 2012.

As I summarize the full-year results, we reported a solid revenue gain of 10%. We're up 9% on a currency adjusted basis, and volume and price accounted for 7% of that gain. The fuel surcharge was 2%. We had RTM growth of 5%, which was higher than carload growth of 3%, which reflected the significant increase in volume of long-haul crude oil traffic. Average revenue per car was up 7% and our team delivered on our price renewal targets in each and every quarter. So as I turn to Q4, our reported revenue was up 6% and we were up 8% on a currency adjusted basis, where volume and price accounted for 6% of the gain and fuel surcharge was 2%. Our RTM growth of 4% was higher than carload growth due to an increase in the volume of long-haul traffic and other mix changes. Our average revenue per car was up 6%. We delivered on our price renewal target of 3% to 4% in the quarter, and we expect to deliver inflation plus pricing throughout 2013. Now I'd like to walk you through our lines of business and note that as I go through each of the lines, I will be speaking to currency-adjusted revenues.

So in grain, for the quarter, revenue was up 12% and we had a record revenue for grain in the quarter. Our units were up 1%, reflecting a strong demand domestically and globally. Volumes were well above our 3 and 5-year averages, approaching our record Q4 of last year, and our overall grain strength was driven by solid year-over-year recovery in the U.S. production on our territory with strong commercial and regulatory pricing. Our team did a great job of capturing domestic movements as short-haul DM&E export markets declined. You can see this reflected in our strong average revenue per car in this segment. We've had great feedback from our customers on servicing grain, particularly in the U.S. and we are moving more grain with fewer assets based on new levels of productivity and velocity.

So in terms of our outlook for Q1, with our strong service on our unique network, we are very well-positioned to leverage the movement to our North American grain marketplace post the Canada Wheat Board. With demand and production in our territory, I expect Q1 year-over-year increase in the mid-single digits.

So let's turn to sulfur and fertilizers. Our Q4 results, our revenue up 2%. The carload decrease of 10% was in line with what I told you last quarter due to lower export potash moving in long-haul shipper-supplied hoppers, handled in our efficient unit trains. Domestic potash and nitrogen shipments partially offset exports and raised our cents per RTM. As an outlook for Q1, what I can say, it appears that potash is back. The recent Chinese export announcements are encouraging, but the size and timing of the potash turnaround remains somewhat uncertain due to the timing of when India may reenter the market. On the domestic side, strong farmer income, relatively higher crop prices mean good fundamentals for farmers to apply fertilizer. I expect continued nutrient replenishment in the U.S. and while there is a little bit of uncertainty around the drought on the soil nutrient levels, Q1 is expected to be flat with upside potential.

So now let's turn to coal. Our Q4 results showed revenue down 1%, units were up 1%, but I will remind you that CP's coal franchise is very different from that of other railroads. The great majority of our traffic is export met coal destined to seaborne markets. The lower average revenue per car you saw in the quarter was due to mix change. This resulted from long-haul Canadian volume that was reduced to Eastern markets and an increase in short-haul PRB traffic. I will remind you in the quarter, that over 80% of our West Coast volume was moved in trains operated at 152 car lengths, but for -- on a go-forward basis, essentially we will operate 100% of these trains at that 152 car length.

In terms of the Q1 outlook for coal, we model to tax forecast and we will be unaffected by the West Coast incident at Westshore that impacted ship loading capacity. If you're looking at the first several weeks of January, you will see some volatility in car loadings, but this has been due to some near-term choppiness that we've seen in all West Coast ports. The lower international thermal prices are creating uncertainty, but we expect PRB volumes will continue and again, this is opportunistic for CP. We offer an efficient route but it will be dependent on the economics. So overall, in Q1, I expect volumes to be flat year-over-year.

In Intermodal, 2012 was a year of renewal and rebalancing. We made some very purposeful decisions to exit selected terminals and short-haul lanes. We at CP offer a premium service in Intermodal that is second to none. Our service improvements and disciplined pricing for value create the base for sustainable, profitable growth.

So if we step back to 2012, our revenue was up 5% and our units were up 3%. The business profile shift that we saw was due to the changes we made in the second half. This is where we had that discretionary exit of lower profit short-haul markets. We had economic-driven strengths at the Port of Vancouver, and weakness at the Port of Montréal, and our domestic Intermodal markets were dynamic. This had the effect of increasing average length of haul for the business that moderated our cents per RTM growth.

In terms of Q4, revenues were up 3% and units were up 1%, consistent with the guidance I gave you in Q3. Our strong haul, long-haul Vancouver traffic offset weakness in select markets. Montréal was decreased due to European weakness and the U.S. uncertainty, and in domestic, Canadian retail store closures dampened our domestic traffic but we are well-positioned to participate in new retailer growth. What you saw in this quarter was a result as marginal cents per RTM declined versus an increase in average revenue per car.

So for an outlook for Q1 for Intermodal, our carloads will be lower, but this reflects changes in our service offering, changes with our select terminals exits, recent impact of international contract renewals and as well as I've told you before, the continuous reviews that we're doing of the book.

So let's turn to merchandise where I'm going to talk about the book from an overall perspective. Overall, Q4 double-digit revenue growth, again, as I said in my initial remarks, for the sixth quarter in a row. Revenue was up 14%, RTMs were up 23% versus a carload gain of 2%. We saw strong gains per long-haul crude oil and declines in shorter haul industrial product lines of business. These mix changes had the effect of increasing average revenue per car and decreasing cents per RTM, and I will tell you we expect this trend to continue as crude oil formed a larger part of my book.

So let's dive into industrial consumer products. Revenue was up 19%, producing double-digit growth for the seventh quarter in a row. RTMs were up 29% on gains in long-haul crude oil volumes, and the comparatively lower 4% carload gain was due to declines in lines of business that are directly tied to North American industrial demand. The difference in average revenue per car and cents per RTM is due to mix change in the quarter.

So let's talk about crude. We continue to work on our strategy that sees us working with customers, investing in crude-by-rail and improving and creating diversity in our origin and destinations. We remain on-course to achieve our targets. And I'm really pleased to tell you today that our 70,000 annual carload run rate was reached in January, and this includes the recent Philips 66 and global contract. We have line of sight to 2x to 3x present volume, and this remains our longer-term goal as I outlined to you at Investor Day. When I turn to frac sand and the pipe outlook, we have strong frac customers on CP who are proceeding with their mine developments. Our frac sand shipments from new mines are expected to commence in Q1, and 2 of CP's new mines are now in production. The rate of growth in this sector will be dependent on continued growth in shale oil drilling, and the turnaround in natural gas drilling. So overall for Q1, industrial products, we expect another quarter of double-digit revenue growth.

I'm going to quickly touch on automotive and forest products. In automotive Q4, revenue was up 8% and carloads were flat. The average revenue per car gain of 5% reflected an increase in long-haul import shipments. Forest products in Q4 saw revenues as flat and carloads were down 6% as pulp declined stronger than lumber and panel gains. Average revenue per car was greater than cents per RTM improvements, due to an increase in long-haul lumber and panel.

So when I look at these 2 lines of business, automotive growth will be in line with car sales. We say a mid-single digit core growth in Q1 and forest products again, because it's linked to the housing market improvements, we'll be likely see forest products flat, given the pulp closures that will moderate that line of business.

So as I conclude, one of the messages that I would certainly like to leave with you is that our continued improvement in service is effectively giving my team the foundation and opportunity to convert opportunities into sustainable, profitable growth. We have multiple opportunities for growth across our book. Again, our strongest opportunity remains in crude oil, where I will reiterate our strategy and the potential for 2x to 3x our current initiatives based on our 70,000 carload run rate. I've seen a strong start to the year, and I'm very optimistic on growth for the year. When I put all the pieces together for the first quarter, we should see low to mid-single digit volume growth and revenue growth come in above that, in the mid-to high single-digit range. And for the 2013 revenue guidance, I expect that CP revenue growth will be expected to be in the high single-digit for 2013.

And with that, I'm going to turn it over to Brian to give you a summary of the financials.

Brian W. Grassby

Thanks, Jane, and good morning, everyone. The fourth quarter was a strong quarter from an operational point of view. Scott, Guido, Doug and their teams did a great job on driving efficiencies while improving service. We also had to make some tough decisions that had financial impacts on the quarter. But all in, we have great momentum going into 2013. Now let me get to the numbers.

As Jane spoke to, revenues were up 8% on an FX-adjusted basis. Expenses before significant items were up 3% on increased RTMs of 4%. Significant items we booked in the quarter totaled $318 million, and I'll speak to these shortly. All in, we reported an EPS of $0.08. However, if you exclude the significant items, EPS was $1.28. And the operating ratio was 74.8%, or an improvement of 370 basis points, solid evidence that our improvements are being driven to the bottom line.

Now let me give you some color on the significant items. At Investor Day, we outlined our plans to both significantly reduce our costs and improve service. We talked about reducing our workforce by 4,500 positions, improving our asset utilization and relooking at all parts of our network. As a result of decisions made in the quarter, we have recorded a charge of $318 million. In driving our workforce reduction, we expect attrition to play a major role. However, in certain areas, we need to go quicker, so we're booking a charge of $53 million or $0.22 EPS. This charge covers over 600 positions that have been or will be eliminated. These are not easy decisions, but they are the right thing to do. As a result of our improvements on locomotive utilization, we have decided to sell a series of locomotives that are only 14 years old, but have been very problematic from both a reliability and maintenance point of view. This has resulted in a charge of $80 million or $0.34 EPS. Finally, as announced in December, we are taking a charge on the option to build into the Powder River Basin.

Now let me get into the different expense lines, which I will speak to before the impact of a stronger Canadian dollar. Let me start with comp and benefits. At the end of Q4, our total headcount, including contractors, was down 1,800 positions from July 1, 2012, in line with what we outlined in December. By the end of Q1, we expect to be down greater than the 2,300 positions we talked to previously, and that is over halfway to our 4,500 target. Comp and benefits were down $8 million or 2%, driven by efficiency savings of $20 million as we had fewer employees and less overtime while handling greater volumes. Training was down $8 million as we had a significant new hire training program in Q4 2011. Stock and incentive costs were up $22 million quarter-over-quarter. The majority of this increase was driven by higher incentive comp, as we paid no annual bonus for 2011. While our stock price was up significantly on the quarter, we saw a similar increase last year, so not a large year-over-year variance. As I look to 2013, I expect wage inflation to be in the 3% range; pension expense will go up, and I'll speak to that shortly; and finally, stock comp sensitivity will be roughly $700,000 for every $1 change in our share price.

Now let me turn to fuel. Fuel expense was down $4 million or 2% on the quarter. We saw an $8 million savings due to a 3% improvement in fuel recovery, a fourth quarter record. Increased workload added $3 million and higher fuel price cost us $1 million. For 2013, we are targeting a further 1% to 2% improvement in fuel efficiency. Equipment rents were down $2 million or 4%. Q4 saw a 10% improvement in both active cars online and car miles per car day, driving a savings of $7 million. These savings were partially offset by higher lease rates and lower car hire receipts.

And let me update you on lease turnbacks. Year-to-date, we have provided notification to return 7,000 cars and 5,400 cars have been removed from the property. Looking to 2013, we're anticipating a full year run rate savings of $15 million to $20 million. The benefits of improved asset velocity are now starting to bear fruit, and we will continue to look for opportunities to right size the fleet.

Purchase services before land sales were up $8 million or 4%. We saw some efficiencies from fewer crew starts with lower debt handling and crew accommodation costs. However, these were offset by higher IT costs. CP is in the process of updating its IT infrastructure. As we move forward, we are looking to in-source some of this IT work, but this will take some time as we wait for certain contracts to expire. Land sales were down $19 million as we had a large land sale in Q4 2011. And as you model 2013, we're expecting land sales to be in the range of $10 million to $15 million.

And finally, materials were up slightly and depreciation was up $17 million. This increase was driven by capital additions, as well as a depreciation study, which includes decommissioning certain IT assets, as we retire legacy systems and renew our IT infrastructure.

Before I wrap up, I would like to update you on pension expense. At Investor Day, I provided the 2013 pension expense outlook about $140 million to $150 million. However, based on strong 2012 returns, and the completion of labor negotiations with our major unions in Canada, we are revising our guidance to $50 million to $60 million for 2013 and 2014, with Q1 2013 being the implementation period. A large component of this reduction is tied to the introduction of a pension cap. From an accounting point of view, the associated reduction in the liability is amortized over the life of the contract. That is why we see the significant drop in 2013 and 2014. In 2015 and '16, we expect to see pension expense increase, but to a lesser extent than previously anticipated. I also caution you that when you project pension expense out a number of years, there are a lot of assumptions you need to make, so please refer to our MD&A.

So let me wrap up. Q4 2012 was a strong quarter for operations, with $37 million in savings and momentum going into 2013. In 2013, we will continue to drive further efficiencies while improving service. Jane took you through the revenues, and for 2013 we are modeling high, single-digit revenue growth. With this growth and focus on controlling costs, we are targeting an operating ratio in the low 70s, which will be a record for CP. We also expect EPS growth to be in excess of 40% over a normalized 2012.

With that, I'd like to turn it back to Hunter.

E. Hunter Harrison

Thanks, Brian and Jane. Let me conclude by making a couple of observations. I think what you've seen here is that the results of third and fourth quarter of 2012 have established a platform or foundation that has positioned us well to be able to have a record-setting 2013. I think probably even beyond my expectations. And I often get this question of why that's happening, and why could we even go further than we thought, faster. And I would say it's -- I kind of characterize it by one thing, and that's the -- this organization, the employees and the leadership in this organization have embraced change better than any organization I've been associated with in my close to 50 years now, and I think that's extremely important because the change is not over. This plan is obviously producing significant results and I can -- I think those results will continue. And I'd only give you 1 analogy to show you what -- that there's many other initiatives in the bucket here that we haven't even really scratched the surface on, and that's our maintenance policy this year as far as our capital work. Our Engineering group, along with the Transportation group has been working very hard on -- we had typically, in the past, given 5-hour work blocks to go out and lay rail and ties and we work very hard into the leverage of scheduling, it put us up in a position now where we think that rather than giving 5-hour work blocks to Engineering, we can get -- give 8-hour work blocks without having a adverse impact on service. The worst case would be the eastbound schedules might get 2 or 3 hours, but we think through the other efficiencies that maybe we can pick most of that time up.

So that will allow us then to do our capital work with, potentially, in the neighborhood of 400 people less, and with the same dollars outlaid, put more ties in the ground and build our infrastructure, particularly in the places where it needs it.

So this is a continuing process. This is a leg in the journey, very pleased. And with that, I'll be, along with the group, happy to answer questions you might have.

Question-and-Answer Session

Operator

Your first question comes from the line of Tom Wadewitz with JPMorgan.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

I wanted to ask a little on the revenue side. I mean, it seems like your position, you'll be heading in on all cylinders in 2013. Jane, your comments on potash seem a little bit conservative, maybe relative to the -- what we've seen the first couple of weeks where we've seen potash, I think, up maybe 35% the first 4 weeks of the year on the volume side -- I guess, fertilizer volumes, to correct that. What do you -- is that a conservative view you have on potash, and maybe there is some upside? And maybe also on the crude-by-rail, are you running actually at 70,000 or maybe you're -- are you even ahead of that target today?

Jane A. O’Hagan

Well, let me start with your first question. I mean, obviously, you know me, I'm optimistic on potash. I believe the fundamentals are strong, and that this is a product that certainly, from a demand perspective is going to play out for us. I think there is good potential for growth this year. I think, though, as I said, the size and timing, this is really a Canpotex decision, is going to relate to the extent to which India and some of the other contracts get ramped up throughout the year. But I will say that I think that the signing of the Sinofert contract should pave the way for some of the others in 2013. When I get to crude oil, the answer to your question is, yes, we are at the 70,000 run rate. I do believe that we're tracking a little bit ahead of that, given sort of what the January volumes look like. Tom, this is a highly competitive business. We have a very specific strategy that involves us working with customers that are investing for the long-term in the crude-by-rail model. So yes, I do believe, just to reiterate, that our strategy remains intact and that I will see growth throughout 2013 in this sector.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Would you think that, then, your targets you're talking about, maybe do leave some room for upside on those 2 segments?

Jane A. O’Hagan

I would say that, yes, as I say that -- I said that in potash, in my remarks, that there is upside potential. And clearly, when we look at our 70,000 carload run rate, that we're ahead of that. And that we're looking at the initiatives that we'd look at 2x or 3x where we have line of sight. The answer to that question is, yes, as well.

Operator

Your next question comes from the line of Fadi Chamoun with BMO.

Fadi Chamoun - BMO Capital Markets Canada

So on the crude-on-rail, so as you look into this 2x to 3x higher going forward, can you give us some ideas of where do see that primarily coming from, whether it's heavy from Canada or Bakken, a little bit more color on that.

Jane A. O’Hagan

Well, Fadi, what I would say is that, as we look at the volume and as we look at our strategy, which is to create origin-destination diversity, the volume's going to grow as the market and refinery demand for different crudes evolve and as the spreads move. The majority of our business right now moves into the Gulf, but these markets are continuing to develop very quickly, and the beauty of this product is, is that we work with producers, marketers and transloaders to basically make these markets. It's likely over this period of time that the Eastern and Western markets will attract some of the light sweet crude, and that the Gulf will attract the heavy, but it's really hard for me to predict how this market is going to evolve, but the one thing that I do know is that the model that we've developed creates a consistency, the transit reliability, the types of supply chains that our customers are looking for, that they're investing in this model and that as we continue to -- and as you know, we've made our announcements on the various markets such as Hardisty, Philips 66, et cetera. Obviously we're moving crude reliably into the Gulf, the Midwest, the U.S. Northeast, and Eastern Canada as well as the West Coast. So I think that, that's kind of where that market's going to move for us, and that's how that growth's going to break down.

Fadi Chamoun - BMO Capital Markets Canada

Okay, and maybe 1 follow-up on this as well. So as you look into 2013, it sounds like more of this crude is moving east, and I'm wondering whether the affect of the mix that we saw in 2012 could be even greater in 2013 as we move east?

Jane A. O’Hagan

Yes, I think that, Fadi, I think that, as I've said, what we try to do at CP is we're trying to create origin and destination diversity. Clearly, as we look at the Bakken and as I just discussed about where those markets are likely to go, we're seeing that dynamic emerge. But I can assure you that my team is very focused on taking that diversity, making those markets come to life and to work with those customers who are making those investments. So I don't want to put myself in a place where I'm going to predict one market over the another. I'm just going to tell you that I'm active in all the markets.

Fadi Chamoun - BMO Capital Markets Canada

And maybe Hunter can give us some update on your efforts to get THEO in place.

E. Hunter Harrison

THEO, I mean, they're going well, and I would expect, hopefully in the next 2 to 3 weeks, we would have an announcement there.

Operator

Your next question comes from the line of William Greene with Morgan Stanley.

William J. Greene - Morgan Stanley, Research Division

Hunter, one of the things you've talked about in the past is that as the service levels get better, you would ultimately have some conversations with some of the customers on the pricing side. Now I know you're sort of sticking still with this inflation plus, but we did see some change in the Intermodal business. So maybe, can you talk about the competitive landscape a little bit? Is everyone kind of playing ball here? If service levels get better for you, is that -- obviously it's good, but if you lose business because you're trying to raise price, that's not good. So maybe a little bit on puts and takes there?

E. Hunter Harrison

Well the service, Bill, does a couple of things for you. Number one, it helps you lower your cost with the asset turns. And I think as we're delivering a more consistent product in the market, we're seeing a different mix. Are we going to take increases there at the appropriate times where the market will allow? Certainly. I can tell you this, we are not going to chase volume. I'm not -- I hadn't fallen in that trap in my career, and now that we got a service we're proud of, we're going to put it on the shelf and we hope people buy it, but we're not going to chase business.

William J. Greene - Morgan Stanley, Research Division

All right. Fair enough. Just one little point of clarification. Brian, you mentioned land sales, $10 million? But we're freeing up a lot of assets related to the yards. I would think land sale opportunity would be much bigger than $10 million.

Brian W. Grassby

Yes, absolutely. Done -- when I talked about Investor Day as some of those larger developments will take a little while longer to develop. So when I sort of said $10 million to $15 million, those are the smaller land sales, but anything that would be large would be over and beyond that, and we'll update you as the year goes on, on some of those opportunities.

Operator

Your next question comes from the line of Ken Hoexter with Bank of America Merrill Lynch.

Ken Hoexter - BofA Merrill Lynch, Research Division

Great. When you think about the yards, Hunter, where you've made changes and maybe even a few months now after Investor Day, are there, as you've shut some down and moved resources, are there still larger steps to be taken, or is it now kind of incremental? And then if I can, just a follow-up, I guess, a clarification on the pension. Can you split out the difference between pension caps and the returns, what the difference between your math was there, Brian?

E. Hunter Harrison

Well, first, Ken, to the terminals. I think the large blocks of cost are mostly taken out. Is there still more to do? Certainly. I think the thing that we're at now is the fine-tuning and continuing to lower the dwell time and provide the service and don't let the rationalization of the yards have an impact on the terminals. And I think to add to that, the biggest block that we've seen right now, which has been resolved, but the good terminals work is that we are significantly improving train size and improving train size, both weight and length to the degree that we can lower train starts, and that's one of the big issues you're seeing. So yes, there's not going to be -- I think we've probably gotten 60%, 70% of the savings out of the terminals, but there's still more to do.

Brian W. Grassby

So Ken, let me just jump in on your pension question. I have separated 2013 and '14 versus 2015 and '16. Coming out of the arbitration award, there was a cap put on pensions. It was very important for us, and from a -- it just makes our pension plan more competitive than it was in the past, and it's a key plan going forward. But with that cap on -- the maximum of pension that can be achieved, there will be a reduction of the liability of just over $100 million, and the accounting of that is you would, in effect, take that and divide it by 2, 2 years, which is the 2 years remaining in the contract. So that's why 2013 and 2014 are going to be lower. Some of those provisions will only be implemented at Q1. So you're going to see us have a slightly higher pension expense in Q1, and then it'll drop for the balance of the year. When I look out beyond, in terms of further down the road, we do see a continuing benefit from the cap on the pensions, as well as with, we're going harder on the headcount reductions so that provides a benefit, as well as better returns. This was a very strong year. A lot of it came in the fourth quarter for our pension plan. We had a return over 10% and that helps the future pension expense. So those are some of the drivers behind what changed the guidance around pension.

Ken Hoexter - BofA Merrill Lynch, Research Division

Great. I appreciate the run-through. But Hunter, just a clarification, has there been any step back in the progress at the yards, or have you only seen -- I guess, progress, is there anything that surprised you, I guess, on the -- through the process?

E. Hunter Harrison

No, there's no surprises, except they -- the only surprise is, is they've gotten ahead of my schedule and ahead of me a little bit.

Operator

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

Cherilyn Radbourne - TD Securities Equity Research

I just wanted to ask whether the pension curtailments that you were successful with have any impact on your cash funding as it relates to the pension, and whether that does anything to bring us forward to a time where you could think about share buybacks?

Brian W. Grassby

Cherilyn, no. I think for the foreseeable future, I've guided to a $100 to $125 for the next number of years, and that's really a function of the pension prepayments that we've done. I think we all hope for interest rates to go up over time, but as I mentioned at Investor Day, my -- our intent is to build cash, strengthen the balance sheet, invest in the company and then anything, whether it's share buybacks or other things, we can talk about in the future, but it's not something we're going to talk about now.

Cherilyn Radbourne - TD Securities Equity Research

Okay. And is there any update on your processes seeking expressions of interest on the DM&E West? And can you just clarify if that's more likely to be sort of a lease arrangement or a cash in sale of that property?

Brian W. Grassby

We've had a lot of interest in -- from an expression point of view, and we haven't landed in terms of whether it's going to be a sale or if it's going to be a partnership or it's going to be a lease. So we're in active dialogue and it will be something we'll update you when we make a decision.

Operator

Your next question comes from the line of Benoit Poirier with Desjardin Capital Markets.

Benoit Poirier - Desjardins Securities Inc., Research Division

Just want to know if you, Jane, if you could provide more details about the -- your coal business and the new capacity expansion announced in Vancouver, and what we should expect on your coal franchise in the upcoming years?

Jane A. O’Hagan

Well, I think that as I said earlier, is that we really have 3 distinct franchises, and again, the U.S. side is certainly more volatile and it's generated by power demand. We have some U.S. on the export side that I talked about that was PRB-related, and then the Canadian metallurgical side is, again, the majority of the business that we have at CP. I would say that as we look forward, certainly, we feel that Teck has made the required investments in their facilities. I think that we are well-positioned and have the capacity that we need to move the volume that Teck will produce, and that we're also seeing at the terminals on the West Coast that they've made the necessary investments so that we can truly run an efficient, world-class supply chain. Again, our Canadian volumes are driven by Teck's forecast and I'm really not in a position where I can talk about 2013. You're best to refer to that demand. And as I said, our PRB market is expected to be -- again, it's opportunistic, but at this point in time we certainly expect that, that volume will be there. So I think that when you look overall, I feel optimistic, certainly, about coal and our ability to meet the demand. And again, while Q1 is flat, I hope that there's some potential upside for us in 2013.

Benoit Poirier - Desjardins Securities Inc., Research Division

Okay. And just a quick one. Any timeframe on your crude by rail goal to double or triple the number of carloads?

Jane A. O’Hagan

As I said, this is a dynamic and it's a competitive market. I think that my best thing that I can tell you is that we will keep you informed as each and every deal comes to fruition. But I think you should watch the carloads. And as I said in my guidance for the quarter, that I expect double-digit revenue growth in Q1. So that's about as close as I'm going to get to -- giving you more than that would be soft.

Operator

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

David F. Newman - Cormark Securities Inc., Research Division

Just, Hunter, maybe looking at the initiatives that you have underway, nevermind what you have in the bucket, but if you had to take a look at all the initiatives that -- and assume that they're all done at the beginning of January, what do you think the OR could've been for 2013 if they're all done just on January 1, and we could get a sense of even what 2014 might look like?

E. Hunter Harrison

So let me be sure I understand here. I think it's a leading question.

David F. Newman - Cormark Securities Inc., Research Division

A little bit, but just trying to get a sense of all the initiatives that you got, you've already have underway currently. And if they're all done immediately, what that OR impact might be.

E. Hunter Harrison

Oh, if they were done all immediately...

David F. Newman - Cormark Securities Inc., Research Division

Yes.

E. Hunter Harrison

Ahead of the ones that are continuing now, it's probably a couple of points in the OR. So what that says, I mean, you can do the math, that just gets us to our targets quicker than we had first assumed. Now given that you've speeded it up a little bit here, but no, we're still -- look, I still feel extremely comfortable, even more so. Every time I see results, I feel more comfortable with the targets that we've set for 2016. And is there a possibility of exceeding those? Sure.

David F. Newman - Cormark Securities Inc., Research Division

And the ones that you have in your bucket, any timing on those and what the impact might be for sort of early 2014 views?

E. Hunter Harrison

Well, I think some of this is kind of a learning curve that we're going through. I mean, I'm learning the organization, they're learning me. There's a lot of change going on. But as I've said, there has been no hurdles that we couldn't get over and I feel very positive about all the guidance that we've given you.

David F. Newman - Cormark Securities Inc., Research Division

That's great. And just maybe one for Jane. Jane, obviously, the crude markets are working well, housing's coming back, automotive looking much better. Outside of that, though, the freight markets have been relatively tepid. Is there any sort of timing that you guys have? Do you think it's going to be, just on the general freight market, will it be more of a have-to recovery, or what's your sense on the timing this year?

Jane A. O’Hagan

Well, I guess, from my perspective, I'm expecting that there's going to be some ramp-up in the volume as the year progresses. I talked about the crude. Obviously, that's an area where we're working that strategy, and I think in other commodities such as potash and frac sand, we're also going to see that ramp up. We're going into the year, as I discussed, with strength in our grain. That will carry us at least through this crop year. I'm not certainly going to be predictive or clairvoyant on what the crop might do for the coming up crop year, but I also think that as we experience a gradual improvement in the U.S. economy, it will also show up in some of our industrial numbers. So I think that I feel, as I said before, optimistic about where we're going and optimistic about our high single digit revenue guidance.

Operator

Your next question comes from the line of Chris Wetherbee with Citi.

Christian Wetherbee - Citigroup Inc, Research Division

Maybe just a question on kind of [indiscernible] 2013, you've given us some guidance for the first quarter, and I think previously, you had mentioned a good chunk of those 4,500 heads [indiscernible] the second half of '13. Just wanted to get a sense if you have a little more granularity for 2013 as far as headcount reduction is concerned.

E. Hunter Harrison

Oh, I would think that by the end of '13, we will be -- we will exceed 3,000 at that point for sure or I'll be extremely disappointed.

Christian Wetherbee - Citigroup Inc, Research Division

Okay, so about 70% is probably the right thing -- right number to think about. And [indiscernible] follow-up on the CapEx side, now that you've had another couple of months post Investor Day to take a look at kind of the network and see how operations have progressed through at least part of the winter, are there any -- is there anywhere on the network that maybe feels like it needs a little bit more investment just from a capacity standpoint or a recoverability standpoint? Or is there everything kind of in line with what you're expecting?

E. Hunter Harrison

Well, I think that there's a lot of rationalization going with the surplus miles of track with the terminal rationalizations and a lot of things that we've done there. But having said that, there are some areas of our, what I would call our branch lines, our secondary lines, that our 85-pound rail, that we need to catch up on. But that's just kind of a redeployment of the guidance we've given you for overall capital spend.

Christian Wetherbee - Citigroup Inc, Research Division

Okay. So nothing really incremental to what you've already said?

E. Hunter Harrison

No.

Operator

Your next question comes from the line of Brandon Oglenski with Barclays Capital.

Brandon R. Oglenski - Barclays Capital, Research Division

Jane, I was hoping we could follow up on the crude oil discussion here. What are some of the constraints over the next, I don't know, year or 2 in the marketplace? Is it really production or do we have limitations on the tank car fleet? We're hearing that rental rates there are increasing pretty significantly. Can you talk to some of those aspects and where you can overcome some of those hurdles?

Jane A. O’Hagan

Well, I think that in the -- certainly in the crude by rail market, I think that the tank car producers -- and I talked about this in a previous quarter, as you see in emerging market like this, industry has a very unique way of addressing each and every one of the bottlenecks as they emerge. The one that we talked about probably 6 months ago was cars. And certainly, the tank car producers have stepped up and those that are interested in the crude by rail markets are certainly getting that demand in place. I think that the real areas that we can help in is that, basically, the concept and the model that we have built shows the consistency and reliability in terms of origin destinations that customers can use to make decisions in their investments. I think that, by and large, one of the key areas, obviously, that needs to be addressed, is, certainly, West Coast capacity, industry is working that. But I think that we are well positioned and I think it's really the proof of concept that positions us well for growth in this particular market.

Operator

Your next question comes from the line of Walter Spracklin with RBC Capital Markets.

Walter Spracklin - RBC Capital Markets, LLC, Research Division

Just a quick question on the Intermodal business, if you could give us an update on the competitive environment there. I know CN has been talking about winning market share in that category. Pointing to the APL, MOL, it looks like they got the target business as well. I know you've been providing improved service offering in that area. Just curious, is this a pricing win that CN is getting or is there something else going on? Perhaps, Jane, if you'd give us an update there.

Jane A. O’Hagan

So, Walter, what I would tell you, that as you look at each of them, and I'll just build on Hunter's comments that, obviously, we're not chasing market share. A big part of our Intermodal story is about rebalancing, renewal and taking out costs. In the case of APL and MOL, individual contract renewal, decisions really turn on a number of factors and it's never usually just one single factor. And I can tell you that service was not a significant factor in any part because our Intermodal service is second to none and there isn't really an Intermodal market that we can't reach. Again, we've got to make tough decisions based on the sustainable growth opportunity in price. We're disciplined in our pricing, and as Hunter said, we simply will not price to keep the market. So our product has value. The value that we put in our product, we need to get it encased in our pricing. And I would add that while there is some mention on target, target is not a single carrier play. We will be a significant participant in the target business as well.

Walter Spracklin - RBC Capital Markets, LLC, Research Division

Great, okay. And just a follow-up to, Brian, on the pension expense. I know you managed to bring that down $90 million for next year versus where you were expecting, so that's quite an achievement there. I'm just curious if I were to break it up, I think I heard you say $50 million of that $90 million is due to the cap. If you were to break out the other $40 million, just curious, was there any changes to your actuarial accounting assumptions and was there any changes to your -- I know you had already had an idea of your labor force reductions, but was there additional labor force reductions above what you were communicating on your Investor Day? Or were you just truing up for those workforce adjustments that were already detailed?

Brian W. Grassby

I think, Walter, in terms of the reduction and the liability, as I mentioned, it's just over $100 million and you amortize that over 2 years remaining in the contract, and again, not in Q1 but that will be in the balance of the year in 2014. But yes, you nailed it in terms of our assumptions haven't changed. We ended up at a discount rate of about 4 30, which was close to where we thought we were going to be. But, no, what's driving the lower is our returns were better, very strong fourth quarter, but as well as the headcount as we're looking out down the year, we're modeling that. As well as there will be an ongoing savings from the fact that we have a cap on the pension, so that's part of, going forward, the reduction. So those would be the main components of why, in the out years, I'm coming off of pension expense.

Operator

Your next question comes from the line of Jacob Bout with CIBC.

Jacob Bout - CIBC World Markets Inc., Research Division

I had a question on the -- on your operating ratio guidance. So you're guiding to a low 70% operating ratio in 2013. And can you just put into buckets for the year-on-year improvement, looking at it from a comp or fuel efficiency or run some materials, how you expect that to play out, and then how that mix changes as you move through 2016? And then maybe just a follow-up here. So we're targeting a 65% OR in 2016. If you move from a mileage to an hourly-based comp, how does that change your outlook for the OR for 2016?

E. Hunter Harrison

Wow, it's a big question. The biggest bucket, by far, in the -- as we're experiencing today, is the -- our train and engine men transportation expense related to the terminal reductions and productivity increases. And the one that's overlooked and missed is the reduction in train starts, which is savings Day 1, every day. So our train starts are down pretty significantly. And going forward, I mean, is there a -- you can only go so far there, yes, but we probably got 30% more to go in that regard. So right now in the bucket, that's what's there. Now the question on the hourly, it's, number one, I would have to characterize that the potential for doing an hourly agreement appears, at this point in time, and things change, but the more likelihood is right now in the U.S. where we have a smaller level of expense. But if you carved out the train and engine men expense in the U.S. and convert it to an hourly agreement, that we were the architect of, that agreement, it would take, approximately, 30% to 35% of the expense out of that component, that part of that U.S. expense, and it would be a number that might be marginally higher in Canada but not over 2 or 3 points. But keep in mind, also, the dynamics are different because it gets involved with fringe benefits. Our fringe benefits are significantly, obviously, higher in the U.S. they are in Canada, so the dynamics of what you can pay on the hourly agreement as opposed the old mileages are different once you cross the border. But that gives you some -- a little bit of feel for it, hopefully.

Operator

Your next question comes from the line of Chris Ceraso with Credit Suisse.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

A question on the guidance and a follow-up on the pension. I was wondering if, Jane, if you could give us a little bit of color by category what the outlook is for Q1 in terms of RTM. There's been such a big difference between carloads and RTMs, and you gave us some good color on what you expect carload growth to be in Q1. Can you give us similar numbers on an RTM basis, particularly in categories like grain and potash and coal?

Jane A. O’Hagan

I think that as I indicated to you, we talked briefly about where we saw it in terms of the coal. I talked Q1 would be flat. So I think that as I look at it overall, certainly, our export coal should drive good RTM growth in the quarter. I think that as we look at potash, again, this is one of those inverse relationships where RTMs are related to, certainly, our other lines of business versus where we would be with export potash. But I think, overall, I feel very optimistic that we will see some positive upside on that. I think that the grain markets right now, when I look at those particular areas, I would not want to call, specifically, given the fact that we see so much dynamic movement as we think about the grain markets and how they've changed in the post CWB. But I will say that from, certainly, an RTM perspective on the long-haul, our team is really set up well to move as much grain as we possibly can to those export corridors. So I think that the guidance I gave around mid single-digit, certainly on the RTM side, I would say that for Q1, would be in line on that side.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. And then the follow-up on the pension. Now that you have more clarity on the caps and the contract, have you thought about steps you might take from here to derisk the pension, whether it's offering buyouts or changing the asset allocation to try to minimize the volatility relative to either discount rates or asset returns?

Brian W. Grassby

Chris, suffice to say, we're looking at all things and it's a file that we've managed very closely and so we're looking at all aspects. I do want to say the prepayments give us some stability out into the future. But there will not be any buyouts that you're referring to, but it's a file that we actively manage.

Janet Weiss

It's Janet, and I'm just going to jump in here, and recognize we're about an hour into the call now [Operator Instructions].

Operator

Your next question comes from the line of Scott Group with Wolfe Trahan.

Scott H. Group - Wolfe Trahan & Co.

So, Hunter, historically, we've seen a bigger sequential drop off in the margin at CP relative to CN. I'm wondering kind of with the things you're implementing, how you think that might change. And then I guess with that, within the guidance for 40% plus earnings growth this year, given kind of tougher weather comps and slower volume growth beginning the year, do you think it's fair to think about being below that trend in the first quarter and then ramping above 40% earnings growth in the back half of the year?

E. Hunter Harrison

Well, I hadn't looked at it as it relates directly to earnings, but I can tell you that we do have a seasonality factor in Canada and first quarter is probably your toughest from an operational standpoint. Second and third are you really mop up and break records. And then depending on what happens in the fourth quarter, there's sometimes some noise there. But I think one of the things that I've tried through my career and will try through there is kind of as much as we can of a leveling of the volatility between quarters, which, once again, goes back to our -- on the maintenance away side, the stabilizing and level workforce. So I think from any sequential -- I mean, I think this is not -- this is certainly not linear. There's a lot of moving parts, but we've jumped ahead. Will we hit a point where we're not at this pace for a moment or 2? We could. It's been a clear track and a high grain so far, and I just look forward to more of that.

Operator

Your next question comes from the line of Keith Schoonmaker with MorningStar.

Keith Schoonmaker - Morningstar Inc., Research Division

I think at the Investor Day, you mentioned you've removed 195 locomotives since July 1. This move into lower-cost headquarters and reducing the locomotive fleet seemed like sort of classic Harrison playbook moves, that is a spotlight on asset utilization. Could you elaborate a bit on how you can remove a tranche of even problematic locomotives even without compromising service?

E. Hunter Harrison

Well, those locomotives have not been in service for some years. I think -- I don't really know the history of the -- but they're SD90s. I think the only locomotives just about that were bought by anyone was by CP. They didn't work. They've been in storage. They've been -- and if you've got a locomotive that doesn't have reliability, it's worse than -- you'd rather have nothing because to get out there with a train and have a failure, it's problematic. We've got, effectively, if you look at the stored locomotives and the ones that we have turned back or scrapped or whatever, we're working with about 400 less locomotives today than we have been. Will that number, with business levels -- at these type business levels get better? Yes. But there's a point where if things start to pick up in the world economy in the U.S. and Canada and we see growth, we'll be in a position to be able to handle that business and will not get caught short.

Keith Schoonmaker - Morningstar Inc., Research Division

So it sounds like discontinuing the non-use of locomotives won't comprise service. But would you share thinking on the financial benefit of removing a typical locomotive?

E. Hunter Harrison

Well, there's a lot of benefits. I mean, you're talking about from an operating expense standpoint?

Keith Schoonmaker - Morningstar Inc., Research Division

Yes, I think so.

E. Hunter Harrison

Well, if you don't have a locomotive in service, you don't have to have anybody to maintain it. And there's some kind of ratio that people will argue about, but there's 1.3 or 1.4 people per locomotive, for example. You don't have to have parts and material for the locomotive if and when it fails. You don't have to have fuel in a locomotive just sitting in the tanks when it's not being utilized so -- and the biggest factor is you need to get to a point, and I've learned this early in my carrier, of what you can -- how much tonnage can you move with x number of locomotives because the bad thing is when you get too many locomotives, they're there, you use them and then when you start to replace them, you replace the numbers in kind and that's why there has been such huge movements at some carriers that I've been associated with, the reduction of locomotives.

Operator

Your next question comes from the line of Steve Hansen with Raymond James.

Steven Hansen - Raymond James Ltd., Research Division

Jane, the crude opportunity continues to impress here. I'm just wondering if you could give us a sense for what kind of planning horizon most of the prospective customers are thinking in these days, really in the context of some prospective pipe coming down the road over time.

Jane A. O’Hagan

Well, I think that we've been pretty clear, though, on our strategy that we expect that all the pipelines will go ahead as planned. Obviously, we see a place for crude by rail where the primary mechanism that we offer to them is optionality. In terms of planning, this is a rapidly growing, fast-pace market. I will tell you that the customers do act quickly. I mean, a big part of what we do with them is working on creating very highly efficient, consistent supply chains. But I think that when we look at the model that we've built and the strategy that we believe in, the customers are purchasing the assets, which gives them some lead time, certainly. They're also looking at leasing where they can pick up to get into the market quickly, and we can develop our models and move them from, say, a manifest to a unit train service. And I think the other is the customers that are also investing in terminals and in origin capacity, those are also tending to move quite rapidly. So I think that in that marketplace, it's highly competitive business. But the constant and consistent dialogue about learning about the rail model and us syndicating our know-how is a big part of how we participate and actively grow this market fairly quickly.

Operator

Your next question comes from the line of Thomas Kim with Goldman Sachs.

Thomas Kim - Goldman Sachs Group Inc., Research Division

I had a couple of questions. One, can you just tell us what your forecast is for rail inflation in 2013?

Brian W. Grassby

Tom, as I said in my remarks, we're expecting around 3%, 2% to 3% when you put it all in.

Thomas Kim - Goldman Sachs Group Inc., Research Division

Okay. And then a separate question just with regard to safety. We noticed that the fourth quarter showed some slippage in terms of the overall improvements during the course of the year, and I was just wondering if you could provide a little bit of an update in terms of what was going on and what should we be thinking about looking ahead in 2013 in terms of the overall gains that we've been seeing?

E. Hunter Harrison

In the safety-related areas?

Thomas Kim - Goldman Sachs Group Inc., Research Division

Yes.

E. Hunter Harrison

Well, I mean, there's a lot of initiatives going on right now, as we speak. There's a lot of different training and development. And but we continue our emphasis on safety, both personal injury side and derailment side. And I would -- we will, certainly, see those efforts continue and to maintain the wonderful track record that CP has developed over the years.

Thomas Kim - Goldman Sachs Group Inc., Research Division

I was -- if you could maybe just specifically address sort of the injuries per employee per hour -- sorry, employee hour sort of deteriorating about 11% in the fourth quarter year-on-year? And then just, in general, the train accidents per million miles? We saw really good improvements during the full year on 2012, but in the fourth quarter, we just had seen some slippage. And I just was wondering if you might be able to provide a little bit of color surrounding some of those stats?

E. Hunter Harrison

Well, the color I would add is this. One of the things that I've talked about before in my concern with the weakness of some of the measurements is it doesn't measure any severity. So if you have someone exposed to the weather and they get a little frostbite, it's a personal injury, or if you have some -- a fatality, it's the same thing. So we have really emphasized that. The same way with derailments. There's a threshold from the FRA that so much -- if an accident is right below the $10,000 threshold, I believe it is, it's non-reportable; and if it's $11,000, it is. So I don't think that there's anything that we have done or intend to do that will in any way, shape or form, compromise safety or derailment records.

Janet Weiss

So it's Janet, I'm going to jump in. We're going to take 2 more calls and then we're going to wrap it up.

Operator

Your next question comes from the line of Stephen Paget with FirstEnergy Capital.

Steven I. Paget - FirstEnergy Capital Corp., Research Division

Could you please comment on capital expenditures in 2013, PTC expenses, and whether the $80 million in rail infrastructure for crude oil is going to be complete this year?

Brian W. Grassby

So, Stephen, I've guided to about our capital expenditures will be roughly between $1 billion to $1.1 billion. And we also -- part of that is PTC, and I think it will be in the range of $30 million to $40 million. We're also working on some re-man, we're re-manufacturing locomotives, which is actually going to improve reliability and also lower our maintenance costs. And as well, we're building our new headquarters in Ogden. So overall, we're going to be between $1 billion and $1.1 billion. From a crude oil point of view, there aren't specific items. There are certain parts of the network that we're looking at, but it is not going to be a large item.

Operator

Your next question comes from the line of Jeff Kauffman with Sterne Agee.

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

2 points for Brian. This change in pension impact that you mentioned, is it going to have any effect on taxes? And you mentioned build cash. Is there a particular cash target at which you'd say, Okay, now we have enough cash?

Brian W. Grassby

So in terms, Jeff, your first question, pension expense has no impact really on taxation. It's really what you put in the pension plan. So none of that will change from a tax point of view. And the second question, I'm trying to remember, Jeff?

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Well, I just think sitting on cash is bad for return on capital, so I was just wondering if you had a threshold at which you'd say, Okay, this should be enough cash?

Brian W. Grassby

I do have a threshold, but at Investor Day, I didn't want to answer it and all I'd say is, Jeff, towards the end of this year, early next year, when we reach that threshold, we'll be updating you in terms of our thoughts going down the road. But it is critical from this point of view. I mean, pension is still a big issue. You've also got the economy with its ebbs and flows, so I think it's prudent for this company to have a good cash balance. And once we get there, then we'll have the conversation, Jeff.

E. Hunter Harrison

Just one thing I could add to that, as Brian has said before, the first thing we're doing -- and this early on in the plan and there's some confidence being developed, we're going to strengthen the balance sheet first. We're very sensitive to your question of sitting on capital. If there's not places to spend it internally that generate the kind of returns that are justified or that we need, we'll certainly look, and I'm sure the board will be addressing what we do with cash whether it's buyback, increasing dividends or what those other things might be. But I can rest assured that as long as I've got a vote, we're not going to sit on capital.

Operator

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

E. Hunter Harrison

Well, I'm worn out. But thanks so much for joining us and we look forward to seeing you, if not before second quarter, with some more of the same results. Thanks.

Operator

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

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