Canadian Pacific Kansas City Ltd (CP) 2011 Q3 法說會逐字稿

Good morning. My name is Alicia and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific's third-quarter 2011 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Ms. Weiss, you may begin your conference.

Thank you, Alicia and good morning and thanks for joining us. The presenters today will be Fred Green, our President and CEO; Jane O'Hagan, EVP and Chief Marketing Officer; Mike Franczak, EVP of Operations; and Kathryn McQuade, our EVP and Chief Financial Officer. Also joining us on the call today is Brian Grassby, our Senior Vice President, Finance and Controller.

The slides accompanying today's teleconference are available on our website.

Now before we get started, let me remind you that this presentation contains forward-looking information. Actual results may differ materially. The risk, 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 US 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 constrains non-GAAP measures. Please read slide 4.

Finally, when we do go to Q&A, in the interest of time and in fairness to your peers, I would ask you to limit your questions to one primary question. If we have time and you have got additional questions, you can requeue and time permitting, we will circle back. Here then is our President and CEO, Fred Green.

Thank you, Janet. Good morning and thank you for joining us. This morning, CP reported third-quarter diluted EPS of CAD1.10, which includes the CAD0.04 of expense related to the early redemption of our 2013 notes. Sequentially, EPS grew by 47% and our operating ratio improved by 600 basis points as we transitioned from the first-half challenges back to a normal operation.

As you will hear from the team, our third quarter is a two-part story with our results in the first half of the quarter reflecting the end of flood-related challenges, which extended through July and the start of normalized operation. Our results in the second half of the quarter reflect our railroad back in its rhythm and gaining momentum.

I am satisfied with our progress and I am particularly pleased on two fronts -- service where on-time performance of our most time-sensitive traffic improved to well over 90% and yard and train performance, whereas you will hear from Mike, we are driving efficiency improvements on several fronts.

There are many puts and takes in the quarter's results, but the key takeaway is that the railroad is now back and on a path of steady improvement. I will also note that the October metrics are even stronger than September and that Mike and his team are delivering a great product for Jane and her group to sell.

I am going to turn it over to Jane, Mike and Kathryn to provide more color on our results and outlook and then come back and wrap up with some concluding thoughts. Over to you, Jane.

Thank you, Fred. Good morning. Starting on slide 7 with an overview of the revenue performance in the quarter, overall, freight revenues improved 5% for the quarter with revenue ton miles up nearly 4% as positive mix continues to drive growth.

On the quarter, the FX impact was minus 3%, so on a currency-adjusted basis, revenues grew 8.2%. Fuel surcharge revenues generated nearly 5% of that gain and the combination of price and mix was nearly 6% offset by the reduced carloads of 2.5%. Renewals and same-store price are tracking in line with our previously stated targets of 3% to 4% and 2% to 3% respectively and we expect the trend to continue for the remainder of the year.

I will now move to a summary of the market performance and provide some perspective on future quarters. For clarity, I will speak to currency-adjusted revenues. Grain revenue was up 1% on 3% fewer carloads with strength in Canadian grain offsetting reduced demand on our US franchise. Our Q3 Canadian grain carloads were driven by increased marketshare and strong global demand for canola and high-quality wheat and durum.

In fact, since the start of the new crop year on August 1, we have originated on average 13% more carloads per month than the same period last year. This speaks to the strength of our customer relationships, our elevator network and the scheduled grain operations model.

The Western Canadian grain harvest is essentially complete and estimated production for the six majors is about 45 million metric tons, up 6% from last year. Markets for Canadian grains are strong, so looking through this fall and into 2012, the combination of production, carryover stock and our improved operations should enable year-over-year growth.

As we move to mid-2012, compares will get tougher as we start to lap our improvements and shippable grain supplies dwindle. We will feel the effects of the nearly 6 million unseeded acres biased to CP's Southern Prairie rail network.

I will also remind you that effective August 1, the grain revenue entitlement for the crop year 2011/2012 was increased by 3.5%. The revenue entitlement is volume variable and the 3.5% increase is the average for the crop year, but our pricing can and does vary over the course of the year.

Moving to our US grain franchise, flooding and late-season weather have reduced the quantity and the quality of the US Midwest harvest. Overall, crop production in the areas we serve is estimated to be down roughly 1% versus last year with wheat production in North Dakota down substantially.

With global supplies of feed grains competing with US corn and soybeans, the US experienced a soft export market in the quarter, which resulted in an 11% reduction in the carloadings compared to Q3 2010. Looking forward, lower US wheat production, combined with volatile corn and bean export markets, make forecasting through the first half of 2012 difficult.

On coal, revenues were up 26% on a 2% carload increase. Canadian export coal volumes, coupled with the new PRB export thermal coal movements we referenced in Q2, have offset the reduced short-haul US carloads. As noted last quarter, we are on track to move more volumes in the second half than the first half of 2011 with average revenue per car continuing at about the current run rate.

Looking to 2012, the long-term demand fundamentals remain in place and Teck has indicated they will continue to ramp up production capabilities. We are watching the near-term economic conditions, but to date rail demand has remained positive.

Sulfur and fertilizer show continued strength with revenue up 28% and volume up 16%. Overall, 2011 demand for potash and fertilizer has returned to historic levels driven by global agronomic requirements and high grain prices. Q4 domestic fertilizer demand is coming in flat versus 2010 with fundamentals signaling flat to marginal growth for 2012.

Q4 export volumes remained strong. The year-over-year unit comparisons will toughen as we begin to lap the export demand improvement that was ramping up in Q4 of last year. The fundamentals of strong grain pricing and agronomic needs are in place. We believe this will continue to support export demand into 2012 at the levels we are currently experiencing.

In our merchandise portfolio, carload growth was 4% with revenues growing 16%. Industrial products led the way with revenues up 18%. Forest product revenue grew 13% and autos were up 12%. Industrial products continues to be primarily an energy story. The Bakken and Marcellus Shale are providing year-over-year revenue uplift and we continue to capitalize on the inbound materials growth associated with the development.

On forest products, growth was driven by increased pulp demand while lumber was relatively flat. In autos, with the return of normal auto production, we have seen more typical movements as compared to last quarter. Looking forward, we expect sales and production levels will drive solid improvement in autos for Q4, but the rate of growth will slow given the most recent forecast of auto sales for 2012 being in the low 13 million range.

Overall, CP's AAR carload growth in merchandise has been in line or better than the other Class 1 railroads. I am very pleased with my team's ongoing success in making new markets. This is underpinning an overall GDP plus growth capability for our merchandise portfolio.

Moving to intermodal, revenues were down 5% and units were down 10%. The intermodal story continues to be about regaining customer confidence. Like in our grain portfolio, our intermodal franchise is characterized by a strong network of facilities combined with deep, long-term customer relationships.

Given this foundation, I am confident that our improvements in service quality will allow us to repatriate volumes. In fact, we have started to see share return in both our domestic and international business. We will earn back the business by demonstrating service consistency on a sustained basis and through winter conditions. My team and I have been actively communicating to our customers about the improvements in our service and we have been walking our customers through our winter preparedness plan to further rebuild their confidence.

Looking forward, the demand uncertainty I spoke about last quarter continues. In the import/export segment, we are seeing some caution on inventory replenishment and weak consumer sentiment that tempers volumes. For domestic, we continue to model GDP-like growth. Our portfolio consists of both food and merchandise. So in combination, we expect stability in the food segment to mitigate weaker consumer demand.

In closing, we are pleased with the recovery of our operational performance, our growth in coal, fertilizers and throughout the merchandise portfolio. Our focus in intermodal is to continue demonstrating service reliability.

In merchandise, we are making our markets in the Bakken and Marcellus Shale. Our low-cost ethanol customer base is well-positioned to compete in markets across the United States. These energy sources are delivering secure sources of supply to the North American market and will continue to develop. Combining these stronger demand segments with resumed automotive production from the Asian manufacturers has us modeling GDP plus growth in merchandise.

Bulk is based on strong fundamentals. There is strong pricing in the global grain markets. The Chinese economy continues to grow in the high single digits and the existing producers of potash are investing in line expansions. We haven't seen weakness in the Asian commodity demand and we are watching, but our customers are indicating they see sustained demand through the fourth quarter and into 2012. Now I will turn it over to Mike to speak to you about our operational recovery, ongoing service performance and the winter plans.

Thanks, Jane and good morning, everyone. Let me start by saying that Q3 was a quarter of recovery. We entered July still battling floodwaters and exited September with the network in balance and an operation back in rhythm and gaining momentum. You are going to see this in the metrics today.

Despite the challenges, I am very pleased with the progress we have made delivering improved service and productivity while executing a large capital program focused on network renewal and efficiency. Let's get started on slide 15.

This quarter, train operation safety matched last year's strong performance. However, we saw a deterioration in personal safety. Although most of the increase was related to minor strain-type injuries, these results are not where I want them to be. I am personally involved with the team in reviewing our safety plans and opportunities and I am confident our improvement trend will return as we have both the processes in place and a culture built around personal commitment to safety.

Let's turn to slide 16. On the efficiency front, we gained momentum as we moved through the quarter. As Fred mentioned, during July, we were still managing through some flooding and our emphasis was on operational recovery. As you can see on slide 16, while our overall performance was flat to slightly down during the quarter, during the quarter, train speed and car velocity showed steady improvement with train speed up in the second half and car velocity now back at historic norms.

Turning to slide 17, we also saw an improvement in terminal dwell of 6%, a result that builds on last year's 5% improvement. Performance continues to improve through October as we realize the benefits of our local service reliability program.

Our fuel consumption rate increased slightly. I expect to see improvement in this metric over the coming quarters considering a more normalized operation, the introduction of 91 new, more fuel-efficient locomotives through Q1 2012, and the addition of Fuel Trip Optimizer to 100 of our existing locomotives scheduled for completion by the end of 2012.

I remain confident in our ability to achieve a 1% to 2% annual improvement in fuel efficiency over the next several years with some catch-up in 2012 as we lap easy compares, especially in the first quarter.

Turning to slide 18 and productivity. You can clearly see the success we have had in ramping up both train weights and lengths through the quarter. The combination of increased bulk traffic and our long train strategy has boosted train weights by 2%. We are now operating four coal sets at 152 car lengths and during the quarter, we ran 66 potash trains at 170 cars versus none in 2010. You are seeing some of the early benefits of the network improvements we are making to enable productivity and low-cost growth.

Please turn to slide 19. Locomotive productivity decreased by 3% in the quarter reflecting the challenges of the early part of the quarter and our decision to sustain a slightly larger fleet to drive improvements in service levels. Employee productivity continues to improve with GTMs per expense employee up by 2%.

And turning to slide 20, service on our most time-sensitive shipments has improved dramatically and is now back on target. For example, as you can see from the chart, our intermodal train performance has improved and shipment performance is now exceeding standard. In addition, our ability to meet customer railcar orders in merchandise and grain significantly improved from earlier this year and we are now back on target. And as noted in Jane's commentary, our scheduled grain program is working extremely well. Our service is back on track and we are driving for even better performance.

Now let's turn to slide 21 and our winter plan. I know many of you are interested in our winter operating plan and what we have learned from last year's experience. Let me assure you we have taken steps to protect our service. CP has what I believe to be the most robust winter operating plan in the industry. However, last year's extraordinarily harsh conditions gave us added opportunity for learning. We have spent several months enhancing our plan and have elected to increase our contingent resources to further protect and enhance service levels and fluidity.

For example, going through the winter, we will have approximately 500 incremental running [trades] employees on the property. We will have 61 new AC locomotives with another 30 coming on in Q1. Any locomotives deemed surplus to the fleet will be placed into warm storage making them easily accessible and immediately available to the operation if weather conditions trigger an increase in power requirements.

Furthermore, we have increased our fleet of snowplows, added additional switch heaters that can be monitored remotely and we have added more snow fencing in high snowdrift areas of the Dakotas. There are many, many other changes we have made to protect our service and production plans and I am very confident that we are ready.

Moving over to slide 22 to sum up, as we told you on our Q2 call, key efficiency, productivity and service reliability metrics have shown steady improvement and I expect that trend to continue. We remain focused on the key initiatives we spoke to you about in June and our game plan remains unchanged to improve safety, service reliability, productivity and efficiency. I will now turn you over to Kathryn to cover the financials.

Thank you and good morning, everyone. As you heard from Mike, Q3 was a quarter of recovery with normal operations returning by the second half. We saw the same pattern in our financials as our operating metrics improved. Flooding cost us about CAD7 million this quarter in terms of direct expenses. Additional fuel consumption from added miles and detour costs make up the majority of this amount. However, it is fair to say that disruptions to a network business create collateral impacts that are not readily identified or quantified.

Now let's turn to the financials and I will walk you through the lines. Let's begin with earnings on slide 24 looking at the FX-adjusted column on the right. Total revenues were up 8% with price, mix and fuel surcharge offsetting lower volumes. Jane has already provided to you the details. Operating expenses were up 11% and operating income was flat to last year and I will get into the details in a moment. Other charges were higher by CAD13 million and I will speak to this on the next slide as there is a little more movement than normal in this line.

Interest expense was higher by CAD4 million reflecting changes in long-term debt. Income tax expense was lower with an effective tax rate of 24% versus 29% last year. For the year, we expect the effective tax rate to be around 25%. Diluted earnings per share were CAD1.10 and the operating ratio was 75.8%, up 210 basis points.

Turning to slide 25, other income and charges were CAD13 million higher. The charges of CAD9 million associated with the early redemption of our 2013 notes we press released earlier in the quarter reduced diluted earnings per share by CAD0.04. Additionally, there was volatility in the Canadian dollar, which weakened dramatically at the end of the quarter. This led to an increase in foreign exchange loss on US-denominated working capital of $6 million, or $0.03 of EPS.

So let's now move to the expense line items beginning with compensation and benefits on slide 26. Including an FX tailwind of CAD7 million, this line item was lower by CAD29 million or 8%. The decrease was primarily driven by lower incentive and stock-based compensation of CAD49 million, which more than offset the other increases. Roughly half of the reduction is due to the share price, which increased in Q3 2010 and decreased this year. Wage and benefit inflation was CAD9 million.

Training expenses were also higher by CAD9 million as we continue to bring on new employees to meet attrition and demand needs. The training costs are primarily tied to our crew hiring and at the onset of the year, I indicated 2011 training would be higher by CAD25 million. That is still a good estimate year-over-year.

Our average active expense employees came in at 14,262, an increase of 2.2% and we ended the quarter at 14,295. I estimate our year-end expense employee count will be about 14,700, about 4.5% higher than we began the year. Pension expense is higher by CAD3 million and other nets to CAD1 million.

Turning to slide 27, fuel expense was up CAD72 million or 43% after an FX tailwind of CAD11 million. Price increased this line item CAD69 million with the all-in costs of $3.44 per gallon, up sharply from last year's price of $2.34. This increase, while substantially recovered in our fuel surcharge program, does put pressure on the OR. Total consumption was up CAD8 million with higher workload and the impacts of additional miles from reroutes. Efficiency, as measured by gallons per thousand gross ton mile, was 1.13, not where we have targeted, but showing sequential improvement. Other items netted to CAD6 million.

Purchased services and other was up CAD14 million or 7%, including the FX tailwind. IT expenses were CAD5 million higher. We are seeing this variance narrow as more work moves from expense to capital and a similar run rate will continue in the fourth quarter. Property taxes were higher by CAD4 million. Locomotive overhaul costs are higher by CAD3 million with the total number of overhauls up this year 40%. Dismantling costs were also higher by CAD2 million, a function of our higher capital program. Detour and weather-related costs were CAD2 million. Other is a net of CAD4 million.

Turning to the remaining operating expenses on slide 29, you will note all had FX tailwinds. Materials was higher by CAD13 million with CAD4 million of it due to increased maintenance of locomotives and freight cars, CAD4 million from lower scrap credits and CAD3 million from higher fuel prices related to non-freight use. In equipment rents, higher leasing costs were essentially offset by FX gains and depreciation was essentially flat.

Let me take a moment and review a few other items on slide 30. On the financing side, this quarter, we redeemed our 2013 notes with the CAD0.04 earnings impact reflected below the line. In early October, the 2011 debt of $246 million matured and was repaid as planned. And in the fourth quarter, we have arranged secured locomotive financing for the units delivered this year of about $140 million at 3.88% for 15 years. The remaining 30 will be financed as they are delivered in the early part of next year.

Looking at capital, I estimate our spending to be about CAD1.1 billion, but this will be highly dependent on how late in the year the gangs can continue to work.

I know many of you are interested in our pension guidance. We have seen a lot of volatility and much more uncertainty entered the market since we have last met. Pension expense is sensitive to both equity returns and discount rates. And let me remind you nothing walks in until December 31. I will provide you guidance for 2012 in our January call, but for those of you interested in modeling, sensitivities are outlined in our MD&A and we have added some additional details regarding pension expense.

With respect to cash contributions, the CAD1.1 billion in prepayments continue to provide us certainty in the near term. This year's contributions will be CAD100 million, at the low end of our guidance and CAD125 million to CAD150 million per year for the next three to four years.

In summary, Q3 was a quarter of recovery with normal operations returning in the second half. Mike and the team continue to move forward with their productivity and efficiency projects supported by our multiyear capital programs. While economic volatility appears to be the new normal, the investments we are making will be supported by productivity lifts, as well as modest growth. We are making progress to our longer-term goals, which have been masked by the unusual events this year and remain committed to our low 70%s operating ratio. With that, I will hand it back to Fred.

Thanks, Kathryn and just to sum up, from a market perspective, visibility to the near term remains limited, but we remain positive about our prospects in both the bulk commodities and energy sides and we continue to position the organization for longer-term growth. Operationally, our service is great and we are looking to build on our recent results. We have more crews and locomotives in place as we enter winter and we expect this will give us added resiliency and enhanced flexibility should Mother Nature throw us a curve ball.

We are resourcing with a bias to service and we stand ready to react to swings in both operating conditions and customer demand. We have targeted improvements in Q4 in service, in productivity and of course, in financial performance.

On a final note, the Government of Canada has put forward legislation that will eliminate the Canadian Wheat Board as the single desk marketing agent for wheat and durum. The supply chain implications we believe should be minimal. Ownership of elevator and port infrastructure is unaffected and there will be no impact on regulated grain rates. As Jane described, we are having great success today and with 60% of the high throughput elevators located on CP, we expect to continue to build on our industry-leading position. With that, I will turn it over to Alicia for Q&A.

(Operator Instructions). Turan Quettawala, Scotia Capital.

Yes, good morning. I guess my question was on the intermodal business. I am just wondering when you are having conversations with customers -- I know you talked a lot about your operating plan, as well as how you are trying to source (inaudible) winter and your service metrics are getting better. But I am just wondering how much are sort of customers willing to have that discussion right now considering that winter is around the corner again? So anymore update there will be great. Thank you.

Okay, thank you for your question. Well, this discussion is all about service and earning back the confidence of our customers and really customers are really willing to have these discussions because it is about defining those expectations and mutually agreeing that the sustainability of our quality of our product offering is consistent with the original intent and that we have earned back the right to move the volumes. And it is about collaboration, it is about rebuilding and strengthening that relationship and we are doing that very well right now.

Our train performance is also excellent. So we are having discussions. And we are seeing customers returning volume to us now. Our domestic loadings are up in the mid-single digits in the first three weeks of October and the international business is starting to return as well. And so we feel that we are in a really -- we feel very confident that we are going to see these volumes return to us.

So I guess should we expect -- I mean I guess the comp gets easier in Q1 more so than Q4, but should we expect to see some growth here in the next couple of quarters or in Q4?

So Turan, it's Fred. I think one of the things I really am reluctant to do is -- the customer is king, the customer will make those decisions, the customer will select the time that is right for them. Mike is delivering a great product. Jane is communicating and illustrating that success with the customer base. But really it is the customer who will make those choices. So I am not going to put faults or any kind of indication on the timelines other than to say that obviously sooner would be better than later, but it is incumbent on us to earn their respect and to get it back and we will have to leave that in the hands of the customer base to time that as it best suits their interests. And I can tell you, as Jane said, the receptivity and the evidence that is mounting of our performance is obviously very helpful, but it really is their call. So we won't predict the timing.

That's great. Thank you very much.

Jacob Bout, CIBC.

Good morning. I wanted to expand on the opportunity to rail crude and maybe you can talk a little bit about the number of unit trains you had in the third quarter, what your expectations are for the fourth quarter and 2012. And then if I might, what is the incremental volume per unit train that you expect from that? And then maybe talk a little bit about the backhaul associated with that and does that grow proportionately?

Okay, well, let me start off by saying with respect to the Bakken, we are already at this point in time moving about 50% more than we were moving when we talked to you at June at the Investor Day. So when we look at the size of this market, clearly, we see growth there and it is just the start to what the volume we talked about over time being around that 35,000 carloads that we mentioned back in June.

If we talked about this market from a revenue perspective, we could be talking around CAD70 million to CAD75 million and what we are seeing in this market is, from a unit train perspective, is that where we are getting our gains, and Mike talked to you about this at your Investor Day, is some of the investments that we are making on the Newtown that will see us taking our unit trains and growing them about 10% to 15% in terms of size.

The key in this game is really to work on what those originations are in and around the Newtown area and again, to work on your destination markets in the Gulf and in the US Northeast to be able to terminate the volumes.

With respect to backhaul, I am not sure that I am getting right to your question, but much of this product is moved in shipper leased equipment and again, there isn't a ready backhaul for it. So it is primarily driven as a unit train model.

Okay, thank you.

Ken Hoexter, Bank of America-Merrill Lynch.

Great, good morning. If I could -- I think the first question started off on the intermodal side and kind of going into the potential impact there. But if we could take a look on what you are doing as opposed to the customer, what are you prepping differently now than maybe say a year ago to kind of head into -- knowing that we are going to get some inclement weather, how are you preparing maybe perhaps differently going into this season than you have in the past?

So Ken, it's Fred. I will kick off and then Mike will jump in a second here. I think for context, it is really important to go back and review the story that we told during the more difficult times. Last year, 2010, Canadian Pacific grew as fast or faster than any railroad with regard to RTMs. I think our number was 17% and we were right at the top of the pack, if not the top.

In the process of growing that quickly when we had planned for growth of clearly less than a third of that, we consumed what one would call the contingent resources or the capacity that one naturally has to deal with extraordinary events or to deal with upside opportunity. So having consumed that and then moving into the new year and watching the extreme weather events contract our normal capability, never mind the fact that we didn't have any contingent resources, we experienced what we experienced.

So the context is entirely different. What we have done over the course of the year is to rebuild our normalized contingent capability in every aspect of our business. And in addition to that, we have taken other steps, which Mike can elaborate on. So I want to kind of set the stage to say that we have gone back to a normal approach as we would expect to. The success of our growth caught up with us because our resourcing was not such that we could eat that much capacity and still have contingent capability. We have corrected that and now Mike can give you a few more specifics.

Yes, Ken, I have already spoken to the additional locomotives, crews and so forth that will have the engineering resources we will be directing towards the network this winter. But a reminder also that our long train strategy is allowing us also to buffer volumes at either end of the chain. We have now commissioned infrastructure in the West that gives us more meet/pass capability to handle those long trains.

I spoke probably in June to things like our cold slow protocols that we will be implementing again this year, which will allow us to mitigate the impact of weather on trains that have -- whose equipment is in good shape and we spend a lot of time making sure that our local service operating plan in Vancouver, for example, is running like a fine-tuned watch and it is. We also have joint scorecards in place with a number of the port terminals to make sure that we are monitoring and managing those flows very, very carefully so that we are ahead of the curve with respect to volume.

So I would say there are a number of things along this vein, Ken, that give me great confidence that we are going to continue to improve upon and maintain a very high level of service for this product right through the winter.

Fred, Mike, thank you. That was a great response. If I can just get a follow-up on pricing. Fred, do you think that -- I guess Jane mentioned 2% to 3% in terms of same-store sales pricing. Is there a limit on that because of the service levels that you have had over the past year or in other words, as Mike starts to improve those service levels, can we see that pricing accelerate or do you think this is what the market bears now?

Well, it's a pretty tricky question, Ken. I think we can honestly say that Jane and her team have been very disciplined despite the disruption because we deemed it to be a very temporary disruption as it is proving to be in service. We did not compromise on our pricing expectations during that period nor are we today.

So when one looks at a 10 or 15-year history of performing very well with two bad quarters, there is no cause for us to compromise on our pricing expectations and that is the guidance Jane had and her team behaved that way.

I would suggest to you that, over the course of time, if we can take our service to yet another level over and above the standards that we had previously offered that that might provide some upside. But I think it'd be premature to declare victory in that regard. And always remember that whatever we do has to be compared to the competition. So if their game is elevating and ours is elevating, that's good for the customer, good for the fluidity of the railway and the industry, but it may not provide a competitive advantage. So I am not going to declare anything with regard to elevated pricing expectations at this time.

Thanks. Thanks for the time.

Thank you.

Matt Troy, Susquehanna.

Yes, thank you. Fred, you have always been candid in your assessment of the overall economy and more astute than most actually in your read. I was just curious, we are approaching the part post-Thanksgiving where rail volumes start to thin out for the year. The economic statistics are kind of going both ways at this point. I was wondering what are your customers telling you either for the next several months or into next year in terms of their outlook.

Matt, I would probably divide the marketplaces because there are segments of the market. On the bulk side, as Jane indicated in her comments, despite all the rumblings and rumors that we hear from the media in Asia about Asian slowdown, the demand for all of our bulk materials -- grain, potash and coal, metallurgical coal -- remains surprisingly strong -- good, strong, robust numbers consistent with our original expectations.

I would like to think we are astute enough to keep our finger on the pulse, so we are not declaring that that is in perpetuity. We are simply saying what we are experiencing today and the indications we are picking up in dialogue with our clients on the bulk side would be more favorable than what you would read in the media as it applies to kind of westbound Asian-driven commodities.

With regard to the general merchandise side, which is I will call it industrial-based, etc., the same old story. You have got housing in the doldrums and no evidence it is going to get better. We would certainly be consistent in that regard. We like the auto franchise because of -- the difficulty of the tsunami and the difficulty of a handful of the foreign builders who have transplants over here getting restarted, if I can use that phrase, gives us belief that we will see stronger and pretty consistent demand marching from 12 million back up to 15 million and that we will see some pretty good volume activity over and above just GDP in that regard. So we like that marketplace and we see some -- no signals to believe it is going to soften.

With regard to the retail sector, Jane described it appropriately that, as long as you've got the unemployment levels you have in the United States and the apprehension about the European, I will just call it, economic or monetary issues, I think there is going to be a reticence on behalf of the general population to get too far beyond its means. So we are feeling today, and in dialogue with our clients, believing that replenishment of retail trade will be modest, it will not rapidly take off at all and we will be fortunate if we see kind of GDP, GDP plus a little bit in the way of growth in that regard.

And then finally on the international side, which, of course, is affected by the same issues, again, we are not seeing a nice consistent role. We are kind of seeing spotty movements in that regard, which, again, leads me to believe a little bit of discomfort and apprehension with retailers and others.

So I hope that covers the waterfront. It is generally a good news story for this franchise, which has such an Asian orientation to it. But clearly, we are very, very aware of the retail side of the business.

Thank you, Fred. My second question would be just relating to export coal. A lot of the focus has been in the East. You mentioned -- or it was mentioned earlier that the new thermal exports from the PRB are moving now. I think there are six export facilities proposed to open up in the next couple years. I know it will take time, but are you in discussions with any of those projects or about any of those projects and what might they mean for CP over the next three to five years? Thanks for the time.

Well, obviously, we have said before that we look at the PRB coal situation in terms of export as being an opportunistic market and we are currently participating via Prince Rupert in around 650,000 tons a year. Clearly, as this market develops and there is not complete clarity just how long term it is, we are obviously looking for any opportunities that we can use to diversify our footprint to access those ports.

So my message to you would be is that we are continuing to look at the opportunities. We are participating in volumes today and we are going to be making the most of that as part of our plan.

Matt, it's Fred. I might just add a touch on Jane's comments. We are in active dialogue with multiparty considerations of some of these opportunities. So we just don't want to be too far ahead of ourselves.

Remember that the paradigm has changed. So if somebody had said to you three years ago we are going to be moving thermal coal to Asia in big volumes, it is a bit of a paradigm change. People are now stepping up with some investments, but the nature of these things are a little riskier than the traditional. And as such, we want to make sure that people are looking at commitments to investments, commitments to move and those dialogues are not just spot moves overnight. We would do that, but rather can we collectively engage to make this part of a longer-term volume that we can all enjoy from a sustained basis as opposed to just when it happens to be opportune.

Make sense. Thank you.

Scott Group, Wolfe Trahan.

Hey, thanks. Good morning. So Fred, you mentioned that it was really kind of a quarter of two halves and I know you don't usually do it, but is there any way to think about the margin or OR progression throughout the quarter and kind of where we finished the quarter? Or maybe if you don't feel comfortable with that, do you have any kind of visibility to -- are we at the point where we should start to see margin improvement year-over-year in the first quarter or because of the robust winter plan and extra resources maybe we don't start to see that margin improvement until the first quarter? Any color you can give there would be great.

Okay. Well, Scott, you are obviously going into a space we wouldn't normally go into, so I won't talk too much other than, on Q3, other than to say obviously the second -- it is a fair assumption that the second half of the quarter delivered better financials than the first half given what we experienced and the momentum and fluidity that arose.

I think you should feel comfortable with the knowledge that our own expectations with regard to Q4 would be that we will outperform last year's Q4. That is our aspiration. It is a function of the marketplace, but based on the early October -- well, actually almost all of October operating results where Mike has got double-digit improvements in car miles a day and terminal dwell, there are some very good things happening out there with a good consistent reliable product. So I aspire to and we don't do guidance, but obviously our aspiration is to outperform last year's Q4 and we are certainly planning to try and deliver that.

That's very helpful. Just with that, is there any way to think about how the incentive comp should look like or at least on a year-over-year basis should look like in fourth quarter?

Let me -- Scott, this is Kathryn. Of course, what I said was half of it was stock-based and half of it was incentive comp. I give a lot of information year-over-year. So I gave what the delta was last year as well, but it is fair to say, in the incentive comp world, not the stock-based comp world, that you should still see a tailwind going into the fourth quarter, about comparable with the third quarter.

Okay, great. Thanks for the time. I appreciate it.

Cherilyn Radbourne, TD Securities.

Thank you very much and good morning. I wanted to come back to the intermodal business for a moment and just ask how you would rate your progress on repatriating intermodal customers both in domestic where you didn't see a lot of losses and in international where you did experience some consequences because of the service [queues]. And can you give us any sense as to the impact on international of customer losses versus the late start to the peak season and the muted growth in the peak season that we have seen from your peers?

So Cherilyn, where I would start is I would talk to you about the fact that obviously we are in discussions with our customers. We are collaborating, we are having that dialogue about the excellence of our train service, around the sustainability of that and in terms of our winter planning. As I indicated as well, when you look at our domestic business, clearly, we, as I indicated, we are seeing that business return at both the mid-single digits.

Clearly, on the international side, as I indicated, we are certainly seeing key customers returning volume to us. I don't want to get into talking about a number, talking about the share because, as you look at the AAR carloadings, you can sometimes get a little bit distorted because of vessel arrivals, other things that can impact those numbers. But what I would like you to take away is that we are seeing the domestic business return. That is up mid-single digit and the key customers are returning volume to us on the international side.

And I would just add a little more color to tell you that I spent -- the week before last, I spent time in the East visiting with the C-level decision-makers in our critical domestic customers and nothing but positive feedback with regard to the job that our team is doing. So I am very comfortable, as Jane says, that as they have success, whatever form that takes, we will be the beneficiaries of that as well.

So are we sort of in the early days of this or did you make meaningful progress in repatriating during Q3?

Well, I think obviously you just have to look at the carloadings to see that the international side or the intermodal side remains below the run rates that we would traditionally have and that we expect in the future. So we are migrating back. So obviously we are not sprinting back. But I would put in context for you that when we had this conversation the last quarter, we anticipated that the shipper community would want to see performance not just in our peak period, which is obviously October and we have proven that and delivered some great results, but also at least in the early indications of the different weather.

And so everything that we are experiencing is very consistent with our own expectations about the migration timing of business back to us and they will want to see us go through some difficult weather and deliver some great results, which we expect to and we would hope that that would cement the deal and start the more rapid repatriation.

Okay, that's helpful. Thank you. That is my one.

Walter Spracklin, RBC Capital Markets.

Thanks very much. Good morning, everyone. So Fred, just on your comment there when you are in the discussions over in Asia with your customers, I mean if I were to put myself in the shoes of your customer and see that you have -- they have kind of migrated service over, you are asking them now to -- we have a better plan, come back to us and test it out. Is that an opportunity? For me, I would think that that might be an opportunity for them to push you on price. Do you get that sense that they are saying, okay, we will come back over, but we want an incentive to come back?

Well, let me deal with it this way, Walter. I have yet to meet a customer who doesn't always bring price to the table when you have a discussion. So I would be surprised if somebody didn't ask the question. But I think as I indicated in an earlier comment about the guidance that we gave to Jane and her team and that Jane has taken to the marketplace, when you deliver the caliber of service and deep relationships and the infrastructure that we have consistently for 15 years and then you have a bad quarter, there is no reason that we should have to compromise because of the blip in the radar screen with regard to the fundamental values that we have.

So it is not part of the game plan. We hope that the customers would respect 15 years of great performance and would allow us to earn back the volumes without anything in that regard, and certainly it is not in the game plan.

So you are not intending to move on price to incent it back, is what you are saying.

Don't need to would be my view.

Okay. Just on the potash side just to change gears a little bit here, Jane. There is a lot of focus in on whether you are going to keep whatever portion of the Campotex business. I know you really can't talk to that. Perhaps what you can do instead is clarify and give us a little bit of a historical context of how big that market is, now that it has returned to the historical norms. And is there any indication from Campotex that they are going to dust off that capacity expansion plan that they had talked extensively about back in I believe it was '07, '08, and to what extent that could be additive to the current production levels?

Well, Walter, I think where I would start is to say that when I referred to the Campotex volumes and talked about the export volume back at the 9 million metric ton level, at the historic levels, clearly we are seeing that. If you look at our Q3, Q4 run rates, we would see some modest growth on a go-forward basis into 2012, if you use that as the basis for your modeling.

If you look as well at certainly the plans that the companies -- Mosaic, Agrium and PCS -- have about expanding their capacity, clearly we have been very focused on understanding what the benefit of that growth will be. Because you could see this between 15 to 18 million metric tons by say 2015, 2016. Clearly our focus is to participate in that share.

In addition, when you look at this market, we also talk about the greenfield development sites. And I will remind you that we signed an MOU with BHP to move their volumes from the Jansen mine to Vancouver, Washington. So we are looking at all the opportunities we can in this market. We feel the demand fundamentals are there. We have got a great product. We have a great logistics system. We have the know-how to move it. So we are going to capture the most of those opportunities.

That's great color. Thanks very much.

Bill Greene, Morgan Stanley.

Yes, hi there. Good morning. You know, if we look at kind of what you are seeing in terms of the carloading trends and what you said in terms of winning back some of the business, it seems like carloads in the fourth quarter this year should kind of end where we were in fourth- quarter 2010. But given the winter plan, I have got to believe there is a fair amount of costs that are going to be associated with.

So not really much change in carloads, but higher costs, no elevated pricing. So the way I sort of think about that is that is going to create some margin pressure. Fred, that sort of runs counter to what you were answering in a question earlier in the call. And my thought is is winter weather kind of continues quite some time in Canada as well, so this even has implications for 2012. So am I missing a piece here?

Well, Bill, you have just created a model that you think we will be a higher-cost operation. What I would ask you to introduce into your model is that the fluidity or the lack of fluidity of a railway has a lot of direct and a lot of collateral consequences, which Kathryn referred to earlier. So if everything is running perfectly, you have a certain unit cost. If everything is not running perfectly and arguably well down the spectrum of less than perfectly, you have an awful lot of stop/start, you have an awful lot of fuel consumption waste, you have an awful lot of crew to train ratio, you have car hire because the cars are not moving, just as a starting point of examples.

So I think the missing component that I would encourage you to think a little bit about would be, if you take the efforts that we are taking with the contingent capability to keep the fluidity as high as it is today, which is substantially better than last year in October, then I would anticipate that there is a benefit to that fluidity in the elimination of all those collateral expenses that I described that would probably change your conclusion.

Okay, so in other words, the productivity gains from running with initially more resources should eliminate the risk of having recovery costs assuming winter weather is what it is?

Well, again, I want to be careful I don't just say yes or no. I mean it is a pretty complex web. The principal is run the railway on time, keep the assets moving, avoid the congestion in the yards, avoid the re-crews, avoid the stop/start and the fuel consumption and you will deliver a lower unit cost than you would otherwise do. Remember that as we moved into the winter months last year for the reasons I described earlier about the 17% growth, we started to experience some of those things and as a consequence, those are opportunities for us not to experience this year.

Bill, this is Kathryn. Let me add a little bit of color. So if you look at the contingent resources that we have on hand, it is mainly additional crews. Mike has hired up more crews, so back to Fred's comment on crew/train ratio, if we have to use them because we start having service problems then you have that cost. But for the most part, you have the contingent crews that aren't necessarily paid a full amount if they are not being used in operations.

So it is about having smart contingencies on hand. The same with his locomotives. He has locomotives stored, that the less efficient locomotives is when you have to pull them out, that they end up with a higher burn rate, etc. So you just can't look at -- you have to look at what a service meltdown or service issues create in terms of cost and what the contingency cost just to have them on hand.

Yes, that is fair. Is there a way to say what the investment is in the winter plan? I don't know if that is the right way to describe it, but --.

I go back to my original comments, Bill, that we are replenishing the contingent capability that we would normally have had had we not experienced 17% growth. So it is a bit of catch-up obviously trying to -- on the basis and you are seeing that with Kathryn's comments about $25 million on training. That, like many other railroads, we are experiencing a heavy front-end load to training and will for some period of time due to demographics and in our case because of the catch-up on the very rapid growth, but I don't really know how you quantify this. It is kind of business as usual through cycles is the best way I would describe it.

Okay. That's very helpful. Thanks for the time.

Tom Wadewitz, JPMorgan.

Yes, good morning. I wanted to ask you about the view on export coal. I think you had some comments, but if you could give a little more perspective on where you would see 2012 export coal shaping up and how much of a risk to volume do you think Australian production coming back, how much of a risk that would be?

This is Jane. Obviously, we model to Teck's forecast and Teck has not provided guidance for 2012. So we are not in a position to give you full visibility for 2012. But as I have said before, the long-term industry fundamentals for met coal are strong and Teck is investing to increase their production capability. So 2012 is really going to be dependent on sales and the market is dynamic. We do see that 9% growth in the Chinese economy, but there is uncertainty in that marketplace as well and so I really wouldn't want to speculate on what those volumes might be. This is really a story for Teck.

So I think when we look at Canadian coal, we feel that Canadian coal is very well-placed in the Asian market. Teck has very long and strong and established relationships with customers in the seaborne market and they really don't represent swing tonnage to Australian volumes. So I would say that when you look at Q4, we see that looking a lot like Q3. But at this time, my visibility into 2012 is limited and again, that is due to the fact that Teck hasn't provided public guidance for 2012.

Okay, that is fair enough. And then one question on resources for 2012, if you are kind of overresourcing the railroad this year perhaps, if you want to look at it that way, after maybe underresourcing last year, what would 2012 look like in terms of what you can do on headcount if volume ends up being flat?

So just for clarity, I wouldn't characterize it as underresourcing. I would characterize it as outgrowing. We grew by 17% and planned for 4%. So as a consequence, we ended up short of resourcing. We didn't plan to be short; we grew faster than we anticipated growing.

Fair enough.

With regard to going forward, I don't think we are in a position today to start putting FTE counts on. Kathryn has, I think, been very diligent almost quarterly if not every quarter on giving you our best estimates of FTE counts. But we have not done -- we haven't been to the Board, we haven't done our 2012 formal plans, so we are not really in the position to quantify that other than to say that it will be reflective of having caught up, if I can use that phrase with regard to the contingent capability this year and that we do want to ensure that we are never the bottleneck with the opportunity volumes on potash, coal, etc. So we will continue to hire. The pacing of that will quantify better when Kathryn maybe comes on in January.

Tom, let me also remind you of a couple things that we have put in the public domain as well. Number one, we do have some very high attrition every year. And it is about 1100 people a year attrite out that we expect over the next five years. So we can rightsize very quickly with normal attrition.

Secondly, as Fred said, when you have to hire crews, you have got eight to nine months leadtime there, so we are assuming our business remains strong, but certainly with our demographics, if there seems to be some other economic environment that materializes in 2012, it doesn't take a long time to start having the adjustments that are needed to be made.

Right. Okay, great. Thank you.

Jeff Kauffman, Sterne Agee.

Hi, it's Kanchana Pinnapureddy in for Jeff Kauffman. Most of my questions have been answered, but I wanted to know if you could maybe talk a bit about some of the longer-term levers that you have to improve margins?

Well, I think we'd probably just take everybody back to the June Investor Day and we did talk, as you will recall, about the whole longer term or longer train strategy and how that would roll out over a number of years. We spoke about the mechanical shop rationalization and facilities and how we had the opportunity over the course of time to lay those out. We talked about the opportunity to redefine the green gathering system and take costs out, which has already been done and we are seeing great evidence of that. We talked about fuel consumption rates being improved on a continuous basis. We talked about the adoption of lean throughout increasing numbers of facilities and areas and the early results being favorable.

I am sure I am missing some, but those are all kind of structural cost reductions with multiyear time horizons. And if I could throw one more on, I would just say the whole adoption of the digital railway and the technologies that we think will displace items. Now with that, I think we characterized much of our capital spend as opposed to being kind of primarily for capacity, we characterized as primarily for efficiency, which has the benefit of increasing capacity.

So those are a list of six or seven things that are structural in nature and we would know reasonably that each and every one of those isn't being progressed consistent with the commitments made at the Investor Day.

Great. Thanks so much.

Christian Wetherbee, Citi.

Great, thanks. Good morning. A question on the intermodal side, you showed how you had some nice improvement on train velocity on the intermodal side sequentially. Can you give us a sense of where you stand relative to 2010 right now? And then on the international side with your customers, is there opportunity to win back share prior to kind of the new intermodal year, the new shipping year, which starts in the spring or Fred, to your point, you get through the winter, you see how things go and then you have that opportunity for contract, potential contract wins before you see meaningful share come back to the business on that side?

Chris, I would characterize, just answering it in reverse order, I would characterize it as it is going to be some combination of both. I mean as renewal opportunities arise, there is always the opportunity to pursue share. But with regard to I will call it former share that we would like to repatriate, I think we have discussed that as being a program of deliver what you say you are going to deliver illustrate it, validate it, do it through peak season, which we have done, do it through some of the early evidence of winter weather environments and earn back the confidence.

So as I said earlier, I don't think we have the ability to predict with certainty when the shippers, because they are not homogeneous, the shippers' confidence will return to them at different times and we will be the beneficiaries hopefully of earning that back when they reach those conclusions.

With regard to service, I think what Mike's team has delivered from a train performance perspective and more importantly a shipment performance perspective, because you have the ability to go from the railhead to the ultimate shipper and improve even the train performance, has been a substantial improvement. And in fact, I would argue we are already doing better than we were doing I call it a year or two years ago before the more difficult times.

So we have recovered all of that. Now the issue is can we take it to an even more competitive performance and that is where Mike and his team are focused.

Okay. That's very helpful. And I guess just conceptually on pricing, you have talked a little bit about it today. When you think about kind of -- start to think about 2012, you obviously probably have a piece of your book of business built in. But how do you think the risk is to the 2% to 3% same-store sales pricing you have been getting? I mean given service coming back and improvements there, is the risk to the upside or is it that kind of the run rate we should be thinking about as you go into 2012?

Well, I think that, as I told you, my expectations for renewals at 3% to 4% and same-store price 2% to 3% would extend into Q4. I would say for 2012, what my expectations would be is inflation plus pricing on renewals, but I wouldn't want to provide any guidance on this at this point on same-store price for the very reasons and what Fred talked about earlier.

Okay. But inflation plus on the renewals?

Yes.

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

Chris Ceraso, Credit Suisse.

Thanks, good afternoon. I wanted to follow up on the comment I think Kathryn made about the intermodal volumes. Some of the numbers that show up from the AAR look like volumes are down quite a bit. Is it a timing issue you mentioned with some of the deliveries or is it a funny comp? Is that something you expect to level off by the end of the quarter?

Chris, this is Jane. I made the comment, not Kathryn. I think on the AAR data, again, what I want to focus on is that it's really a snapshot in time and that, in fact, this data can get a little bit -- I am not going to say distorted, but it can lag a bit given ship arrival bunching and a number of other components.

So I think the key message that I would want to leave you with is that we are seeing key customers return volume to us. As Fred said, we are seeing our domestic up in the mid-single digits and again, this is really -- the other key point is we are seeing our international customers returning key volumes to us as well.

Okay, so it is a timing issue and it will look better than this as we get deeper into the quarter?

Yes.

And then just one longer-term question about the operating ratio. You mentioned the pension can be volatile with the discount rate. Does your low 70%s OR target require some kind of an increase in discount rates and therefore a decline in pension expense for you to achieve that number?

What we have said about the low 70%s operating ratio still holds. I mean there is a lot of volatility out there, but we have certain assumptions over the longer term and as we close the end of this year, we will have better insight in terms of what our 2012 will be. But at this point, all I can do is put things under historical assumptions and we will have to wait and see where the economy and where the discount rate and our equity returns end up on the year.

Have you spoken specifically to the pension as it relates to the low 70%s? Do we need --?

Yes, I did. When we gave the guidance at the Investor Day, we gave the assumptions and the assumptions in terms of the ramp-up of pension expense over the next three years. So I would encourage you to go out and look at that and then we will reflect on that again when we meet with you in January.

Okay, thanks.

David Newman, Cormark Securities.

Good afternoon. Just a quick question on the pension side once again, and I know you can't really put a pin in it at this point, but assuming the current conditions prevail by the end of the year and your solvency deficit does rise, how do you balance that out against I guess your CapEx plans and overall funding for 2012? And I guess I am just trying to get a sense of obviously your CapEx plans are fairly robust this year and I would assume next year and I know you haven't given guidance for 2012, but just conceptually how do you balance that out?

Okay, the way I would balance it out, number one, is to differentiate between my pension expense and my contribution.

Contribution. I am more referring to the cash.

So the cash contributions, we feel very confident with the guidance that we have given for the next approximately three to four years in keeping our pension contributions between CAD125 million and CAD150 million and that is a function of the prepayments that we made. So again, that is very different from the pension expense, which has a different sensitivity as well. So looking at cash flows, the pension prepayments have continued to provide us certainty around our contribution requirements.

If I recall, Kathryn, I think you mentioned at the Analyst Day that you kept some of the prepayments in a reserve, did you not?

No.

To draw on. You had some to draw on.

No, no, no. What I was saying on that is the way that the funding rules work, we have a certain contribution requirement that would be required for 2011 and one for 2012. The prepayment is used as a drawing account. So we will -- the CAD1.1 billion, we will have consumed some of that this year and we keep -- the CAD100 million that we contributed this year was essentially our normal cost. So it was our normal cost and all of the solvency funding was funded by the prepayment. But it certainly didn't use up the CAD1.1 billion. So it is a drawing account that we use over the next three to four years as the solvency funding requirements come toward us from a regulated basis. Does that make sense?

Yes, that totally makes sense and hopefully one day we will actually see a reverse on these interest rates.

My God, I certainly hope so. I am dreaming of those days.

Someday. It keeps on going down. But just one last quick one. Just on the purchased services, is there anything in 2012 and once again, I know you haven't given guidance, but is there anything you are seeing in the run rate this year that could potentially fall off next year that we would have a more normalized or I guess a lower purchased services?

No, and maybe will be able to give some color in January on that. But one thing I do like to -- we are experiencing higher IT costs. Some of it is a function of our renewal, but I also like to remind people that we have outsourced a lot of our IT as well. So where some of the other rails would experience depreciation in terms of CapEx on IT, it runs through our purchased services and IT costs. So it is not just the normal renewal, but it is also just the normal replacement of IT infrastructure as well, which comes through our line on a purchased service basis.

Okay, makes sense. Very good. Thank you.

Jason Seidl, Dahlman Rose.

Hey, guys. It was asked and answered. Thank you so much.

Gary Chase, Barclays Capital.

Good morning, everybody. I wanted to see if I could follow up please and see if I could get a little bit more clarity on the answer to a question that I think Bill Greene was asking earlier. I am just trying to get a sense of whether or not you feel right now that you are overresourced. I mean if I look at what the headcount guidance is for the fourth quarter compared to where you are now, it looks like a reasonably normal progression. And so I am just wondering if you feel that there is a level of volume the network could achieve now given the resources that you are deploying that is in excess of where you are today or whether we should think this is sort of the right balance here in terms -- that you are sort of appropriately sized for this volume given the service dynamics that you want to achieve.

So Gary, it's Fred. I just keep going back to the point that we consumed our contingent resources with the 17% growth rate of last year. So the run-up in resources, the relative expansion of resources has brought us back into what we would call a normal zone. I don't think that is such a perfect science that we would say it is within 0.00X%. I think it is a range that you like to operate in. We are probably slightly on the higher end of the range because of the reasons I described with our aspiration not to fail. But we are clearly in a zone or a range that would be quote normal, so we are not overresourced, but we may be at the slightly higher end of a range that people would call normal.

Okay. So when you say that you still feel that things are on track for some of those longer-range margin targets, are you more confident in some of the things that will come out of the CapEx, the Digital Railroad, the things that you have described as longer-term opportunities that will allow you to offset some of the headwind you faced here or were you being conservative maybe in the kinds of opportunities those represented in the early going?

Well, I think the only answer I can provide, because we are not going to provide any kind of guidance, is simply to say to you that, if you can take those really tough two quarters for the reasons we have described and just put a big circle around them and we would ask ourselves has anything changed to the fundamental proposition that we originally put together and the answer is no. I mean the demand at this time, particularly on the Asian side, appears strong. The adoption of these technologies and the initiatives I listed six or seven of progress as expected and planned.

So our game plan remains intact, but obviously the noise of the first and second quarter given the events on the heels of rapid growth took us off track for a couple of quarters, but the principles remain the same, the aspirations remain the same.

Okay, thanks, everybody.

Benoit Poirer, Desjardins.

Yes, good morning. Just with respect to your speed and dwell, they are back to better levels. We see that. However, when we look at your volume in the last two weeks, it remains soft versus peers. So I really understand the explanation around intermodal, but with respect to the other commodity group, are you confident that volumes will follow your solid improvement stats? Or again, is it more a matter of the economic environment weakening or again a funny comp or timing issue?

So it is Fred. I am not sure the sources of that set of conclusions. I will tell you what I think is happening and you can maybe reconcile or we will take it off-line. We are doing tremendously in the Canadian grain business, up nearly 30%. But it is being offset by, as Jane said, the US grain business is down by 21%. So we are up, whatever, 4000 carloads, we are down 3000 carloads. We net and look like we are only up 1000 and that is a function of US grain circumstances. But that grain is in the bins. It will move. It is just not going to move in this time period.

On Canadian coal, we are up by 20% month-to-date, but we are down by 22% on US coal for reasons that Jane has explained every quarter for the last three quarters with regard to our elimination of the short haul. So you may not be seeing a net, apparent net increase, but there are some very clear and discernible reasons for that.

Autos are up 12%, so we have kind of got, I think, a very clear set of evidence that -- in merchandise, as Jane said, we are doing very, very well, faster growing, equal or faster than most people. In bulk, we have got some great stories, but they are almost bilateral stories in that you have got an up and a down, but they are very discernible and one is temporary and one is good long-term growth.

And the intermodal story has been well told. So I am not seeing -- to be candid with you, we are up on gross ton miles and we were up even more on revenue ton miles in October this year over last year. So we are actually performing quite well and we wish a couple of these unique markets like the US grain would be resolved and in fact, we have seen some of that in the last four or five days with some of the Eastern grain starting to break open for us.

Okay. And maybe just a follow-up question. With respect to the spread between carload and RTM, is it fair to say that or fair to assume that it will remain at a comparable level, similar level in Q4 in comparison to Q2 and Q3?

Yes, I would expect that that would be similar in Q4. That would be due to the performance that we are seeing, as Fred indicated, on the potash side, on the export coal side and in addition to the strength of our merchandise franchise.

I will just make one comment. I mean it is a very fair question and Jane is giving you her best assessment, but when you see US grain off by 21% or you see US coal off by 22%, these are major mix issues. So be very attentive to those emerging issues as they materialize and it will affect that ratio of RTMs, GTMs, RTM carloads. We have given you the fourth quarter, but it is something that is kind of -- I wouldn't say not within our control, but it is more a function, it is a derivative of mix and when some of these big swings occur, it can move that ratio around pretty significantly.

Okay, thanks for the time.

David Tyerman, Canaccord Genuity.

Yes, good afternoon. Just one quick question. On the Campotex contract, when would you expect to have an idea of the volume and pricing on that contract that you will be looking at?

Well, I think it would be safe to say that our focus, as we have told you from day one, is that we are focused on working with Campotex every day, working on moving their business. And I am not really going to be in a position where I'd comment on any negotiations with any customer. So I really can't give you any visibility.

David, it's Fred. The only answer we can provide is that the contract runs through June of 2012. If the shipper wishes to make a decision prior to that and to communicate it, that is when we will be in the position to communicate it subject to the shipper's concurrence. And so we are kind of at the -- the shipper should and will make those types of decisions.

Sure. That makes sense. Is there any typical on this in that it's -- the decision -- presumably there is a planning timeframe and all that sort of thing when this is normally done that we should be thinking about?

Over my years, I've seen everything from a year leadtime to 22 minutes leadtime, so we really don't know. We would hope it is done in a thoughtful, organized way and they are a very professional group, so we will just have to let that play itself out.

Okay. And then just one other quick question. On the long-term low 70%s goal, you mentioned, I think it was Kathryn, back in New York, mentioned the oil assumption was $100 a barrel. I was wondering if you could, since WTI isn't a very reliable guide to diesel anymore, if you could put that into a diesel price roughly what you are thinking.

I know crack spreads do have a bearing. I will work with Janet and we can work up some sensitivities there. But I don't have that off the top of my head.

Okay. Fair enough. Thank you.

There are no further questions at this time. Mr. Green, please continue.

Well, thank you, everybody, for spending so much time with us. We appreciate it and obviously the market is performing quite well and we are performing well within it. So we look forward to reporting out in January on our fourth quarter, fourth-quarter accomplishments. Bye now.

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