Canadian Pacific Kansas City Ltd (CP) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen; my name is Martina and I will be your conference operator today. At this time I'd like to welcome everyone to the Canadian Pacific second-quarter 2013 conference call. The slides accompanying today's call are available on our website at www.CPR. CA.

This presentation contains forward-looking information; actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described on slide 2, in the press release and in the MD&A filed with Canadian and 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 contains non-GAAP measures outlined on slide 3. All lines have been placed on mute to prevent any background noise. After the speakers' remarks will be a question-and-answer session. (Operator Instructions). Mr. Velani, you may begin your conference.

Thank you, Martina. Good morning and thanks for joining us. My name is Nadeem Velani, AVP, Investor Relations at Canadian Pacific. I would like to remind you that this presentation contains forward-looking information. Actual results may differ materially.

I am proud to have with me here today Hunter Harrison, our CEO; Keith Creel, President and Chief Operating Officer; Jane O'Hagan, EVP and Chief Marketing Officer; and Brian Grassby, our Senior VP and Chief Financial Officer.

The presentation will be followed by Q&A. In fairness and courtesy to all participants, we would appreciate if you limited your questions to two. It is now my pleasure to introduce our CEO, Mr. Hunter Harrison.

Thanks you, Nadeem and Martina. Good morning to everyone and thanks for joining us. I think it's probably pretty appropriate today that before we talk about numbers and dollars and cents and metrics that we take a few moments to reflect on what the tragic, horrific incident that we had in Lac-Megantic which we were all taken back with.

I know all our fellow railroaders here that are joining me from Canadian Pacific join me in reaching out to all of the families, the victims, people that have been adversely affected by that horrific event. Clearly that community will be -- some have reflected will be scarred forever. And it is a solemn reminder to us of the inherent danger in this business and the responsibility that we have to the public.

In that regard we have made a small donation, a CAD200,000 donation to the Red Cross to help in some ways. And certainly our prayers and heartfelt good wishes go out to all the families and the victims. And hopefully we will never have to experience this type event again.

Having said that, we are working diligently and cooperatively with other rails, with the regulators to see what additional (technical difficulty) regs, if any, need to be considered, potentially put in place. We have made some steps individually on our own. And I don't want to go into that really from a technical standpoint any further because I don't want to put myself in the position of preempting the regulators. But I did think it was appropriate that we spent that time reflecting on what has happened in that community.

So with that let me move and give you a little color on the second quarter from 30,000 feet. We are going to try today to make our presentation shorter than normal so we can have time for more questions because there were a lot of moving parts in the quarter -- both quarters. If you look back last year we had the strike and we had some obviously unusual issues this quarter. But in spite of all of that, it was a record performance by all accounts, whatever you want to look at.

Our earnings were up 138% and operating ratio of 1,060 basis points. And I think the one thing that I am probably proudest of is that of all the issues we had pre-flood, then to get hit with a 150-year flood that -- I've never seen anything like it in my 50 years of railroading. And it's one thing to get knocked down, but it is really the way this team recovered and got back up. And there was minimal disruption to service to our customers. Our employees all responded in a (inaudible) way and so I'm very, very proud of them.

And I think you will see throughout the presentation today that really what that does is position us for a very strong second-half. And I will have some more comments at the end relative to my outlook there. So with that let me let Keith spend a few minutes with you highlighting some of the operating metrics and performance.

Okay, thanks, Hunter. Let me start by saying overall I'm extremely pleased with the performance of this operating team. To say it was a challenging quarter given the number of incidents which affected this network would be an understatement.

Having said that, I am not going to minimize the service and the financial impact to our operations or the challenge they presented. Our team responded to each. But I am encouraged that in those instances there was no commonality or systemic issues at the root cause of some of the challenges we dealt with. So let me provide some color to some of those comments.

Contrary to what some have suggested or would like to assume, the root cause of our track derailments were not the result of or even remotely connected to cutting back assets, be they manpower or the capital we invest to keep our infrastructure safe at CP. The facts are we have not reduced the workforces that maintain or inspect our track, we've not reduced our inspection standards, we made them more rigid and we actually increased our capital investment and basic infrastructure, which we reported earlier in the quarter by an additional CAD100 million in 2013.

Suffice it to say, this is not a team that takes our moral or our social obligation to run this railway safely lightly. Going forward we remain seized with our goal to be the safest railroad in North America, which we have enjoyed for several years. Our efforts are centered around people and I mean more specifically compliance, the way we carried our jobs day in and day out, process through our inspection procedures and the way we deploy and apply our technologies to enhance them and our physical plant investment which are all paying off.

Our current performance ratios year to date have continued to improve. Year to date we are at a point where we are actually better than where we finished 2012 on the injury front on our ratios and actually had fewer train accidents year to date than in 2012 (inaudible) reportable accidents, as we said today, now at a ratio which is approaching our best-in-class finish in 2012. So the gap is continually closing date in and day out as a result of those efforts.

And as Hunter had mentioned, we faced significant challenges with flooding which included about 40 washouts in our western network in Southern Alberta and BC. This was a weather event, to Hunter's point, that was monumental, 150-year event that crippled our routes in monumental proportion. Just to grasp the order of magnitude, in a 24 hour span we lost both our core routes west of Vancouver from Calgary, as well as our southern route to the coal territories. Our railroad was assumed to cut off west of Calgary completely.

To imagine a team that would be able to rebuild bridges, repair washouts and restore service in most cases within 48 to 96 hours was beyond even my aggressive expectations. To think at the same time we would be able to restore service within 24 hours of getting those routes open is unprecedented in all the years I have railroaded.

I am extremely proud of the way this team, be it ops, engineering, mechanical, marketing, all pulled together working tirelessly to restore our service and limit the impact to our customers and the products that they entrust us to carry. These monumental challenges required equally monumental response as this team delivered with heroic efforts both individually in many cases and certainly collectively as a team.

So enough said about that challenges. Let me focus my comments on what we accomplished. Despite all of this we were able to make continued gains on a number of productivity measures, a few of which are highlighted on you slides. These are some of our key productivity drivers from a list of 14 or so that I pay attention to that we measure when we set best ever second-quarter performance records in 12 of those 14 metrics.

This has allowed us to continue to improve our cycle times and take cost out of the system both on a locomotive front as well as on the car front, improve service at the same time and improve capacity. This also has put us on a pace to return over 10,000 cars by the end of this year.

In addition to this, as we mentioned on our last call, Hunter and I chaired whiteboarding sessions across the property with each of the regions which have become an important driver for the next wave of breakthroughs both on an operating and on a sales front.

These comprehensive operational reviews involved a review of each element that goes into the movement of the railcars, the customers, lines of business, sightings, car fleets, locomotives, yards, terminals and mechanical aspects. It allowed Hunter and I to communicate directly with over 200 members of our operating team to explain face-to-face, eyeball to eyeball what precision railroading is, what it means to us and at the same time allowed us to evaluate the operational team and their abilities and to learn the network at a very accelerated pace.

Cost take out and service performance improvements were the focus, I can tell you on an analyzed run rate the cost opportunities we have identified exceed CAD100 million which obviously will play a key role to helping CP realize our objective to enjoy the best operating ratio in the industry in the near future.

I am even more excited on the service improvement side which we have created complexity -- eliminated complexity in the network with reduced train starts, train meets, etc., but beyond that a huge opportunity was uncovered to dramatically improve our domestic intermodal service offering to create a transit performance which is not only the fastest rail alternative in the Toronto to Calgary market it is single driver truck competitive with 30 M ramp availability in Calgary.

We now have a product in the market we have been successfully running into Calgary that offers any company paying for over the road truck haul to convert to rail and have substantial savings while we enjoy a fair return for that superior service.

Finally, on the sustainability front this quarter we solidified her operating team leaders and we have realigned organizationally allowed them to roll their sleeves up continually and dive deep into their operations daily driving our service and operational improvement evolution.

Doug McFarlane, who many of you have heard us speak of in the past and have met potentially at presentations -- I want to publicly thank him for 37 dedicated years of invaluable service to CP. He has recently made the decision to retire, which allowed us the opportunity to replace Doug with Robert Johnson who is now the VP of our southern region or US operations. Robert brings a background of over 32 years of operational experience with the Burlington Northern Santa Fe.

Robert and I, our history goes back over 22 of those years when I first worked with Robert as a young operating officer who I employed at Burlington Northern and Tulsa yard hub facility. So I have got a tremendous amount of respect, both professionally and personally for Robert. He has fit this team well and has hit the ground running producing results.

Another exciting addition to the team, we brought on Tony Marquis, VP of our Eastern region. Tony brings us over 30 years of experience. And again, with Tony, 25 of those years I have worked with him at CN. So again, have a tremendous amount of professional and personal respect for Tony and his talents that he brings back to this railroad which again will be a key piece in helping us drive forward.

These two gentlemen joined our already strong operational leaders in Guido and Scott. Going forward the structure and this leadership will play a key part in leading our continued pursuit of operational and service excellence as this Company -- which we are seized with and which we are making tremendous progress toward.

So with that I will pass it over to Jane to allow her to add some color on how she is converting this success in the marketplace on the revenue front.

Thanks, Keith. We are very pleased to announce record Q2 revenue performance and our eighth consecutive quarter of double-digit growth in merchandise. Our revenue performance was driven by an operations team who worked tirelessly to restore service for our customers earning their respect and their confidence.

Outages impacted revenues and Q2 but approximately CAD25 million, half the revenue will be deferred to Q3. We are delivering on the diversity of our strategic initiatives and making good progress on improving the quality of revenue and with that, let me review our revenue results.

We reported a solid revenue gain of 9% where volume, price and mix accounted for 9% of the gain and all other impacts were negligible. RTM growth was 11% and carload growth was 3% and this was driven by a significant increase in the volume of long-haul crude oil traffic and a reduction of short-haul US thermal coal traffic. Average revenue per cart was up 6%; we delivered on the upper end of our price renewal target of 3% to 4% and expect to deliver inflation plus pricing through 2013.

So turning to grain, we were up 21% in revenue as we made our markets in grain despite slowing towards the tail end of the current crop year. Our Vancouver expert program yielded record results for service. Crop year to date, we moved 17% more grain through Vancouver than the previous five-year crop average and we delivered on our strategic initiatives with the first greenfield elevator build in 10 years on our former Soo Line network.

We also reached a long-term commercial agreement with Cargill Limited to play a major role in providing transportation services for the movement of canola oil and meal from their new canola crush facility to be located at Camrose, Alberta. This facility is projected to have traffic coming online in Q1 of 2015. Our outlook is that plantings at our US and Canadian territories are at or above five-year averages and with this we expect mid single-digit year-over-year unit and revenue increases in the second half.

Turning to fertilizer, we had strong year-over-year Q2 revenues that included all fertilizers. Our efforts to overcome the flood-related disruptions allowed us to resume export potash service with minimal delay. Strong nutrient replenishment and heavy crop planting drove double-digit increases in domestic fertilizer volume.

We developed and delivered a solid win in our strategic initiatives. We reached an exclusive long-term agreement with K+ S for the movement of potash from the Greenfield legacy (technical difficulty) line near Bethune, Saskatchewan. Production is slated to start in the second half of 2016. We expect double-digit growth in units and revenue in the second half year over year given easy 2012 compares. We are watching the exports closely as commodity pricing and Asian demand remain uncertain in the potash market pending renewed international sales contracts.

In coal revenue was down 3% year over year, but Canadian met exports were up in Q2 despite a volatile global market. US domestic volumes were down due to competitive natural gas pricing and unplanned outages at receiving power plants. PRB export shipments were down too to weak global pricing. But revenue per car increase of 6% reflects decline in the short-haul thermal traffic and the strength of met coal exports.

So as our outlook and coal we are modeling to Teck's forecast and will be watching for signs of market volatility despite Teck's strong competitive market position, diverse customer base and cost competitiveness. US domestic delivered coal will remain lower than 2012, the PRB export continues to be opportunistic and we will capitalize on it should it continue. So we expect an increase in revenue and Q3 and low single-digit year-over-year decrease in units largely because of the reduced short-haul traffic in the thermal coal sector.

For Intermodal we are very pleased with the improved service and the Intermodal product as well as what Keith mentioned in terms of the introduction of our day faster service from Toronto to Calgary. We took action this quarter to close down our Saskatoon facility and we are very pleased with our domestic growth in targeted areas that's supported by service improvements through the white boarding and discussions with customers.

We just won Lowe's award for 2012 delivery partner in Western Canada and we are growing in the right lanes with the right customers aligned to our service capabilities. We're taking advantage of our service improvements, growing where we can create competitive advantage, price for value and improve the operating income of the book.

Our journey on renewal and rebalancing is continuing. We are creating value through more cost and service improvements, selling new services to new markets, being disciplined in our pricing and ongoing book of business housecleaning. We do expect a muted fall peak; we expect to see a mid single-digit year-over-year decline in the second half of 2012 as we lap the purposeful divisions we made to let international contracts go and exited unprofitable low profit low growth markets to improve operating income.

So in merchandise our strong growth story continues, RTMs were up 28% versus a carload gain of 9%, representing strong gains for long-haul crude oil. Mix changes increased ARC by 7% and decreased cents per revenue ton mile by 10% and, as I've told you before, we expect this to continue as crude forms a larger part of our book.

In terms of industrial and consumer products, RTMs were up 34% in gains and long-haul crude traffic. Our crude by rail model continues to expand with growth momentum built on the expansion of our loading network, diversification of the destination network for optionality and on the commitments of our customers to capital.

The pace of growth has moderated in the last few months as spreads have tightened. Our churn volumes moving to refiners have been largely unaffected. But we have seen volumes by marketers shift between markets and in some cases slow as spreads have moved and tightened. We are seeing orders pick up in the fall and beyond as spreads widen again. Our crude market will always be a combination of the consistent term volumes and the opportunistic volumes that respond to the movement of spreads. Frac sand momentum continued to build in Q2 resulting in double-digit volume growth.

So in terms of our outlook, crude by rail remains a complementary and important supply-chain option for producers, refiners and transloaders looking to benefit from the flexibility of moving any type of crude to any North American market. Frac sands shipments from new mines will continue to ramp up and other industrial products will trend with GDP. I expect another quarter of double-digit growth for industrial products in Q3.

In autos, we had revenues down 9% but two-thirds of the Q2 revenue decline was due to a lower volume of one-time machinery movement. The remaining one-third was due to lower volumes of finished vehicles. We exited low-margin short-haul markets to improve the book and through the whiteboarding that Keith referenced, we identified opportunities to leverage our network and reduce cost to drive sustainable profitable growth.

On a go-forward basis we will be making decisions about what freight earns its way in the automotive book as we price for the value of our service. And I expect to finish the year in automotive slightly below last year's revenue.

So in conclusion, we had strong results achieved in the face of two significant service outages. We had success delivering on initiatives which is highlighting the diversity of growth for CP. Our intermodal renewal is succeeding in gaining momentum with volume and growth on a stronger foundation with new service aligned to the network and our service strength.

We are continuing to press harder and faster on our work to strengthen the book of business and the quality of revenue and I reiterate my expectation of high single-digit revenue growth for 2013. And with that I will turn it over to Brian.

Thanks, Jane, and good morning, everyone. Keith and his operating team delivered another outstanding quarter despite the difficulties we encountered and the numbers show it and let me take you through them.

Revenues were a record for a second quarter and were up 10%. Despite moving 11% more RTMs in the quarter expenses were down CAD50 million or 4%. Last Q2 we had CAD42 million in management transition costs. Taking these costs out our expenses were still down 1%, an impressive result given the greater volumes. EPS was up 138%. If you strip out the management transition costs, proxy costs and Ontario rate change we highlighted last year EPS was up 59%.

Our operating ratio came in at 71.9%, an improvement of over 1,000 basis points. Or taking into account the management transition cost last year, a decrease of 750 basis points. Our effective tax rate came in at the high end of our guidance at just under 27% and I expect it will be close to 27% for the remainder of the year. Other charges totaled CAD8 million on the quarter, this is above our normal run rate of CAD5 million reflective of the impacts of FX on working capital in the quarter.

If you turn to the next slide I will take you through comp and benefits. Overall comp and benefits were down CAD24 million or 7%. Workforce reductions resulted in efficiencies of CAD40 million in the quarter. Fewer yards starts, longer trains and overall efficiencies across the Company resulted in a workforce reduction of close to 3,500. These reductions impact both comp and benefits and purchased services, as well as more efficient execution of our capital programs.

Pension expense was a positive CAD2 million. Stock incentive combination was up CAD19 million, largely a reflection of larger bonus accrual. On the stock compensation front you can model a CAD500,000 to CAD600,000 impact on a CAD1.00 change in share price. Wage inflation was a headwind of CAD11 million and the impacts of the 2012 management transition expense (inaudible) net to a benefit of CAD10 million.

Fuel was up CAD4 million or 2% on an increase in GTMs of 10%. This increase in workload was largely offset by a slightly lower fuel price and fuel efficiency savings of CAD24 million.

The remaining expense lines have some puts and takes. Materials were up CAD1 million this quarter, a reflection of higher volumes, mostly wheels, offset by efficiency improvements. Equipment rents were down CAD12 million or 21% versus last year. Our focus on asset utilization resulted in efficiency savings of CAD2 million.

Depreciation rose CAD6 million or 4%, mostly due to a higher depreciable asset base. And finally, purchased services were down CAD25 million or 9%. On the favorable side CAD22 million related to the 2012 management transitions costs, CAD7 million related to a contract termination in Q2 last year and CAD14 million in efficiencies related to lower contractor and consulting costs.

Partially offsetting these favorable items, casualty costs came in over CAD30 million on the quarter. This is much higher than our average run rate of CAD15 million to CAD20 million. In the quarter we experienced a higher severity especially on the environmental side. We are all focused on reducing these costs going forward.

Other offsets include higher locomotive overhauls and higher Intermodal trucking costs due to higher domestic intermodal volumes.

So let me close by saying Q2 was another record quarter despite the missed revenue opportunities due to network outages and the higher incident cost. Our operational improvements are driving real sustainable savings and there is more to come. Back to you, Hunter.

Thanks, Brian, and thanks, Jane and Keith, for those informative presentations. I think if you can sort through all the noise here in this quarter, I think you can certainly see that it sets a pretty solid foundation for the second half that will go far beyond what we have seen before. As I talked about the plan, the four-year plan as we moved into this, clearly, we are ahead of that plan. You can argue whether it is 10 months, a year, but clearly we are headed there.

I have more confidence all the time and in spite these setbacks in the second quarter we did not change our guidance for the full year and I feel even stronger about the ability to achieve those numbers and possibly potentially moved even beyond that. So I am pretty excited about the opportunity for some of these things start to take some real traction and with that we will be happy to address questions the group might have, Martina.

(Operator Instructions). Bill Greene, Morgan Stanley.

I am wondering if we can talk a little bit on just coming back to some of these safety issues. I understand that some of this stuff is sort of -- may be related to how we measure things and whatnot. But can you talk a little bit about how we should think about the fact that the train accidents were up 24% and what kind of things you are doing such that we don't have a casualty expense (technical difficulty) that remains up at these levels? I think it is just hard for us not being railroaders always to understand kind of how to interpret some of this stuff.

Okay, let me take that one if you will, Hunter. Let me start by saying the 24% is an exaggerated number. I'm not making excuses, but if you understand the facts when you reduce train miles, train miles are the denominator. The way that ratio is calculated, Bill, is based on the number of accidents divided by train miles.

So inherently if you reduce train miles, which we have done, to the tune of about 4% -- 4.5% year to date same number of incidents is going to give you a higher or an exaggerated frequency ratio which is what is driving a portion of that deterioration. The most important point though I made in my notes, that number is not the same anymore. The gap is closed, we are back to a point on a go-forward basis where we are clipping our year-end performance last year, which was best in class.

That is the other point. You are talking best in class performance in a comparable this year versus last year with the winter that we've had year to date which bled over into this quarter that is unprecedented. And I'll just give you a case in point. Something as simple as one of those significant derailments that cost us a lot of money, caused a lot of concern that involved crude oil Northern Ontario this quarter was a result of a catastrophic wheel failure.

When I say catastrophic wheel failure, the rim of the wheel exploded under the train, that is not a common occurrence. This year with the weather, and I want to expand on this, we have had 12 of those failures versus two same period in 2012. So 12 verses two, and of those 12 three of those resulted in reportable derailments which are in those numbers.

Now what do we do about that? We have deployed and have invested and continue to invest and to enhance our capabilities wheel detection impact systems across the network that identify these potential well defects before they become catastrophic failures. In this case those wheel defect detectors did not identify the problem and the end result was the wheel catastrophically failed under the train.

Now if you peel the onion back a lot of people would say the reason that occurred in Canada, especially when you have a harsh winter, we have this thing called shelling on these wheels. Shelling on the wheels occurs because the metal is broken down generally because of heat and/or wear and in this case heat.

And what causes heat on wheels? There are two things if you really understand this business and that is caused by sticking brake, that is caused by hand brakes, which are brakes that you manually put on a car when you secure the car be it at a yard for switching operations, be it at a customer's facility for loading and/or unloading operations.

So what do we do as a result of that? It caused myself and my team to look at our procedures and how we drive compliance in applying and releasing those hand brakes. Unfortunately those hand brakes, be it again at a customer facility or be it in a yard, are not always released.

If you don't have employees or if you don't have customers that understand what can happen as a result of not doing that and dragging that car and dragging that brake steel on steel creating the heat that results in these shells, then eventually it develops to a point especially in winter when you get ice and snow and melt inside the shelling on these wheels. It compromises the wheel and you have a catastrophic implosion.

Again, it is a rare occurrence, but it happens and unfortunately that was part of what happened in the second quarter 2013 for CP Rail. So it is not something that is going unaddressed, it is not something that should cause concern that is systemic, that is going to continue to repeat itself, but it is something that caused us to take a look inherently inside at ourselves what more can we do driving compliance be it policies, be it procedures, be it technology to dramatically decrease the likelihood something like that occurs again.

Okay, wow, thank you for a very thorough answer. Can I change a little bit now and just turn to kind of core earnings power? I think there is a little bit of difficulty trying to figure out on the second quarter given all these puts and takes how we should think about what the core earnings of the Company is here in the second quarter looking forward.

You obviously are ahead of plan on a lot of your cost-cutting, which is great. But I don't know exactly what you think kind of the core earnings are given these changes you have made to some of the procedures here that Keith just walked through. How do you think about what the right either EBIT or OR or whatnot is that we should think about as a good run rate going into the third quarter? Thank you.

Bill, this is Brian. I think in my remarks, if I look at the quarter clearly and we highlighted in Jane's remarks and the press release about a CAD25 million impact on revenues, the outages. The other item that I would highlight in the quarter and what I talked about were the higher severity and the casualties and Keith talked about it.

But in looking at the quarter, I would take those out in terms of looking at what is a sustainable run rate. We have also said we are at 3500 down in terms of workforce reductions and Keith and we talked about getting to 4000 and beyond the 4500 we talked about in November.

And the final point is the whiteboarding sessions you will start to see some of the impacts kick on there. So I think what you will see in the balance of the year and the future years is again strong cost containments, cost reduction. And you will see that in our numbers in the future quarters.

Sorry, just a point of clarification. The CAD25 million has some cost associated with it or it is just a pure revenue number that we should sort of add back? Or how do you think about that number?

I mean in terms of the lower revenues you would have some costs associated with that. But it did mean just running fewer trains as well as you will see a small reduction on the fuel side.

Okay. Thank you for the time.

Tom Wadewitz, JP Morgan.

Keith or Hunter, I wanted to see if you could provide a bit more thoughts on the whiteboarding sessions and what -- you identified CAD100 million, what is underneath that CAD100 million that you are changing? And what is the timing that we can anticipate that CAD100 million coming in? Is there some of that in second half or is that really a 2014 impact? Thanks.

Tom, let me if I can take this question. I can tell you now that the CAD100 million -- I will stress that's an annualized number, but they are certainly some immediate savings and we are starting to see those in our metrics as we started to execute. Not all can be done immediately; there are some things we looked at, opportunities identified, maybe potentially rationalizing part of the railway that we may or may not need on a long-term basis.

But immediately from an operational standpoint it means the underlying factors are reduced crew starts. We have eliminated assignments, road switchers, train starts, train miles to the tune of about 10,000 train miles a day, that is a meaningful number on a base of about 112,000 average daily. Car miles, which allows you to turn in more leased cars, which falls into that number that I talked about 10,000 by the end of the year, and pick up on the revenue side more loads with a reduced fleet which means less maintenance costs, etc., etc., etc.

And then lastly, the second part, the real leverage on this is driving the revenue side. We put a service in the market -- and Jane can provide color on the opportunity here. But rest assured as we educate our internal marketing department, because you have got to think about this as a marketing department that is learning how to sell service. We are giving them a hell of a product to sell and they've got to go out and convert it in the marketplace.

A part of that is educating internally, part of that is educating externally. If I am a trucking company and I am spending a significant amount of my expense on over the road truck call and the premium for that versus equal service in a rail opportunity is about 40% or 50%, it is going to cause me, if I am doing my job, to look at that opportunity.

So as we get out and educate the market and they understand that we actually have a service that is second to none and that is head to head truck competitive I am confident, extremely confident over the next year to 18 months we are going to convert some of that truck traffic to rail traffic and realize those revenues and the profit margins that we realize and enjoy on that as we reduce our cost structure base.

That revenue opportunity would be on top of the CAD100 million cost? That CAD100 million is a cost number, right?

That is absolutely correct, Tom.

Okay. And then I guess for the second question on -- Jane, on the crude by rail, can you give us I guess a little more granularity in terms of the spread impact? I think some of your business is probably on term arrangements. So if the spreads were going to have an effect it might be delayed, so maybe that is a year out or something. But how would you think that your -- let's say in 2014 that your crude by rail business would grow if you don't see a significant widening in the spreads from where they are today?

Well, I think that first off what I would like to say is that we do believe that rail is going to be a permanent part of the transportation of crude to the marketplace. I think the basic proposition that it offers in terms of optionality, in terms of being able to move quickly between markets and the value proposition vis-a-vis pipeline that is complementary, this is being supported by customers who have indicated to us we continue to work on delivering our longer-term initiatives to build out that infrastructure to deliver those volumes.

As I have said to you in the past the real key here is that we are going to start to see more of our growth coming from the Canadian side. So when we get into the question around how does the work vis-a-vis term contracts versus those that play the ARPs, what I would say is that the industry ships crude really in those two ways, the larger producers and refineries ship volumes to basically support ongoing needs and these volumes move on a term basis. And again, these have been largely unaffected by the movement of the spreads.

We are seeing a lot of the larger producers and the refiners move into the rail market in this meaningful way with these assets and with these investments. And as I said, that proportion of volume that moves under term will increase as we move these volumes and complete our strategic initiatives with these customers.

There is always going to be a portion where certain number of customers do ship crude to capture the economics of the spreads. And as these spreads move the volumes quickly move between the markets and this is part of the benefit of the rail model. So in the last few months, as you said, we have seen the spreads have tightened and we have seen that the volumes between the players have shifted and in some cases reduced.

But the overall rate of growth, as has slowed in the last several months, as we look forward we are still online to deliver our -- two times to three times our current initiatives by 2016 because we see power in the long-term benefit of this model.

It sounds like you are skewed towards the term side versus the other?

Yes, we have -- the majority of ours are term contracts.

Okay, thank you very much.

Jason Seidl, Cowen and Company.

Hunter, you mentioned that you have a lot of confidence in the guidance that you guys just reiterated today and then you kind of said that -- maybe even confidence and exceeding it. So I guess maybe if you could just give us a little more clarity on what is giving you that confidence today.

Well, if you look at the first two quarters it gives you some directional indication. To Brian's point earlier, if you start to pull out some of these things you can quickly get to some of the reports I've already seen this morning and have done the math. Plus the fact that that did not include (technical difficulty) much of the whiteboard exercise, which is incrementally on top of that. Plus the fact that one of the things that, as I had fine-tuned and gone back through the model and in my initial estimates, I thought this would be more linear stair step as we got into this phase.

I think you are going to see that quarter over quarter the difference in second quarter this year and third quarter are going to be the biggest spread that you have seen in incremental improvement. So you start to lay those kind of numbers on the back half with the front half and you can get there easier than I can. And I am not so concerned at this point about the market. I mean there are a lot of vagaries out there, a lot of issues.

This still is a cost take-out, cost containment, improve the service. That is what we do best. And the issue that Keith mentioned earlier is this market, for an example, from Toronto to Calgary. Our domestic intermodal is having phenomenal growth. The international is soft by design. The margins are a whole lot different between international. And so everything I look at just says that you ought to do your own whiteboard or you are going to miss it.

Thanks for a little bit of that clarity. And if I could just shift gears here for a moment. Can you guys give us an update on any of the potential divestitures on the network including the DM&E?

Jason on the DM&E we are into the next round, we've got -- we've narrowed it down to four to five interested parties and we are going through a due diligence session. So I would expect the end of the third quarter I will update you where we are on that.

What was interesting during the whiteboarding sessions that Keith and Hunter and the team went through is looking at different parts of our network. And I think it is just going to be a continual review in terms of making sure that we have the optimum network. So bottom line I think on DM&E West I will give you an update, but it is going well.

So with the whiteboarding sessions did they indicate if there are any more potential divestitures out there?

I think there are plenty of opportunities that came up and I would leave it at that for now, Jason.

Okay, fair enough. Thank you for the time as always, guys.

Steve Hansen, Raymond James.

Just was hoping you could speak a little bit to the K+ S legacy agreement. It strikes me as a pretty important win for your long-term potash franchise here. And I was just hoping you could walk us through some of the key factors or selling points that allowed you to get this exclusivity of theirs. I was a bit surprised, frankly, that they would lock up with a single carrier. But again, it probably speaks to some of your selling points. If you could walk us through that.

I would say that first and foremost we have developed over the years a significant expertise in the potash business and a deep collaborative relationship for those that want to develop and manage their own unique supply chains. And K+ S was certainly a candidate in this direction.

I would say that by and large when we look at this, and we do see this as a solid win, because it is the first greenfield potash place in the last 40 years certainly in Saskatchewan. But our key value proposition that we had with them was we had the network capacity, we had the flexibility and the market access to develop a supply chain for them that included the potential for their export volumes as well as for domestic volumes.

I think that the team -- I'm very pleased with the way that they worked with the customer and the fact that the negotiation and the outcome was such that it really underscored the collaborative approach that our team has been taking in the model to really deliver on the diversity of the growth prospects that this great franchise has.

Okay, that's helpful. Just maybe a follow up here. The one item that did stand out as a large variance from our perspective was the bonus accrual in the period. Given the strong operating performance and gains you have been achieving here and I suppose the second half strong base that you described, can you just give a sense for -- help us understand what we should be modeling on a go-forward basis?

I think I mean what you have seen in the first and second quarter you will see in -- assuming we are keeping on track of where we are you will see it in the third and fourth quarter.

Okay, that's helpful. Thank you.

Brandon Oglenski, Barclays.

Jane, I wanted to follow-up on your second-half revenue outlook. You are maintaining your prior guidance for high single-digit revenue growth I believe. But if we look at your results for the last few weeks, even outside of some of the derailments and flooding issues, it seems like volume trends have slowed a little bit. And your peer was highlighting a little bit softer outlook for the commodity market. So I'm just wondering what is driving your more favorable outlook as we are looking at it and especially with the weakness in potash markets developing in the second half of the year.

Well, I think that the softness that we have seen in the first several weeks is really a combination of the difficult compares, the southern flooding and just -- and there is some market weakness. But earlier in the quarter we had experienced some moderation for some of our lines of business and we have been flat year-over-year through to -- certainly through July 17.

But my remarks that I provide to you on the market are really inclusive of this softness which we expected to see, as well as we have looked and assessed what the upside and downside risks are and we feel that our revenue guidance that we've provided is in line with the nature of the products and the franchise that we have.

I think that it is really too early to call the crop, but we really feel that we have good diversity, we have an excellent franchise and that the trends are there in place. I think that the potash fundamentals are strong and that we do expect double-digit growth on the potash side. Certainly there is some risk, but we feel where pricing is today that if there was any interruption we hope and we sincerely expect that that would be short-lived.

We also see some benefits on our side on our met coal franchise. We are modeling to Teck's forecast, they are indicating given the strength of that market the product that they sell into that and their diverse customer base that we should be modeling to their forecast. And I think our oil franchise, we continue to deliver on that side. We continue to deliver to the benefits that we have outlined around the projects.

The timing of some the projects, as I have told you in the past, could be a little slower coming online. But as we have always told you, we will give you advice when that occurs. So I think the intermodal side, as Keith indicated, this is giving our team a whole new potential set of products and service for us to get out to the market. Different group of customers, different targets, people who are very active in the marketplace. So I think from that perspective we are certainly optimistic and giving you as much color as we can on how we think that will move forward.

Thanks, Jane, that was quite thorough. My second one, Hunter, I mean CP is now in a position where it sounds like you are achieving the guidance even faster, by your own words. You are going to have a lot of cash flow looking forward. What are the priorities at a Board level? Is it -- are there discussions right now of increasing the dividend? Is there an idea that you could start repurchasing shares? Or are there other capital projects that you would like to accelerate for market opportunities or increased efficiencies? What are the priorities?

Well, I think on the shorter-term we would still like to see the balance sheet be a little stronger and we would still like to see us be in a little better cash position than we are today. And I think once we reach that level that we have kind of determined internally of where we would be comfortable with and the cash position -- and there's not a lot of opportunity from a debt standpoint now to do things differently, that once we reach that point.

Now whether that's next year first quarter or the second half of next year, whenever that is, if you look at our run rate for what we project cash flow will be, I think at that point in time, when we've got sufficient funds available and have -- and gives us some -- a great deal of flexibility, then at that point we will look at those other potential options of buyback and dividend.

All right, thank you.

Cherilyn Radbourne, DT (sic) Securities.

I will start with a bigger picture question. I just wondered, if you could speak about as you reshape the cost structure can you just talk about how you stay nimble enough to respond to a slowdown in the economy, if that occurs? And conversely leave enough surge capacity to cope with a bumper crop if we get one or a sudden surge in potash exports as has happened from time to time on the network?

Well, one of the things that we have done to some degree, and I don't want to overstate this, but is to keep as many of our costs variable as we can. This -- we've got a responsibility to our shareholders in good and bad times to produce returns. I personally stayed closely involved in the planning process going forward and our headcount. And we have said many times that there are certain amounts of business at the top of that mountain that we can't go after unless it has got just huge tremendous margins there.

So as we improve productivity -- less people can produce more. We are looking right now at changing some of our crew districts. We have the shortest crew districts in North America, about 120 to 125 miles. And I'm just making a guesstimate now, but I think probably you would see in North America, if you looked at the other carriers, they are probably more in the 190 to 200 mile range at least; some of them are running in excess of 300 miles.

Well, if you can take, if you improve the infrastructure, if you improve the precision of your railroad and you're able to run people 200 miles as opposed to 120 miles that is a whole lot of leverage there that the same amount of people can do the same thing. So there was policies here in the past that said we wanted to have 125% of what we thought the forecast was. Now that proved not to be a very good strategy because, for an example, there was tremendous cost associated with it and the business didn't hit.

So that is something that we stay right on top of. We try to stay on top of the market, the interactions between operating and sales and marketing. And so, that is not an area that I see problems with.

And then I've got more of a modeling question for Brian. The purchased services line has been pretty noisy for the last couple of quarters. If I just take this quarter's number and adjust for the increment in casualty costs that you called out, is that sort of a reasonable run rate to think about?

Yes, I think, Cherilyn, you will see some movement as we go forward over that line. Let me just give you -- I would direct you to the MD&A where we give some good breakdown as to what's in the purchased services line. But I mean the other movement that we saw in the quarter, which is the good news, is on the Intermodal side we saw our domestic business go up. So that drives cost. But a big chunk (technical difficulty) of purchase services, roughly CAD100 million, contains things like property taxes, which unfortunately go up year after year.

But also contain a lot of IT consulting there where we have outsourced service -- certain services as well as building maintenance and rent. So you will see that portion come down over time as Mike Redeker, our CIO, is in sourcing some -- or a lot of the services and you will see it show up in the comp and benefits.

Also in the building and maintenance and rent -- at least on the rent side you will see that really start going down in 2014 as we move into our new headquarters in Ogden. So I think in the short term, Cherilyn, I think you will be close. In the longer term you will see purchased services come down.

That is my two.

Ken Hoexter, Bank of America.

Jane, during your -- at the end of your kind of run through on the revenues you noted that you are targeting inflation plus only through 2013. Was that -- is there a reason why you are bulleting the end of this year or maybe you can kind of talk us through your thoughts on pricing?

Well, I mean obviously we are pricing for value and a big part of what this franchise is focused on is creating sustainable value. I mean I just bookmarked it because it lines up with our revenue outlook.

As we look forward and as we think about the increasing value of the service that we put on this network and we think about what our job is to continuously improve the quality of the revenue, at this point we're targeting this range for this point in time. But over time we would like to be able to be in a place where we are reflecting those increases along with the quality of the service and we are commanding in the marketplace.

Okay, so then it sounds like it would still be maybe even more than inflation if you are creating value from what you are improving service?

Yes, that would be it.

Okay. Keith, on the whiteboarding sessions and your legacy contracts, I just want to understand, I think Brian was just throwing this out there on the outsourcing contracts. You have talked to a lot of opportunities in the past. Is there still a lot of legwork on outsourcing contracts? Are there time limitations on waiting until they expire over the next few years? Can you kind of maybe just give a ballpark of what we could look for from cost savings on outdated contracts?

Ken, this is Hunter. Let me take a stab at that for a moment. From an operating standpoint, non-IT, we don't have any legacy contract, I am thinking out loud, that are causing us any issue there. In fact, we had two facilities that we were doing component work for engineering and mechanical that was an odd setup -- I'm not sure I understand all of the background -- but where it was our employees and we paid the pensions and the salaries but somebody else managed it for a management fee.

Well, we brought all of that back in-house and so we are cutting the cost there. And I don't know of anything from a contractual standpoint on the operating side that presents any hurdle to what we are trying to achieve.

Okay, helpful. Appreciate the insight.

Allison Landry, Credit Suisse.

If I remember correctly the second quarter of 2011 was also a very tough year for CP with respect to flooding. And I understand there was a different management team in place back then. But I was wondering if you could give us some perspective on the key drivers or changes that were implemented that allowed the network to bounce back so quickly this time around?

Let me take a stab at that. I can -- well, there is no silver bullet here but it boils down to focus, it boils down to passion, it boils down to understanding what you -- of the steps that you can take proactively while you are out of service, while you are out of commission and you don't have an ability to advance trains, that determines how quickly you bounce back pay.

So in the past, I can tell you I don't know what they did then, but I can tell you what we did was due to the team. This time, as opposed to just letting the train sit and wait for the line to be open we took proactive steps to consolidate trains, reduce the number of trains, to do downstream blocking on the train.

So in essence if you are out for two or three days, to simplify this, and you I've got a particular train that goes to a particular destination they might have three different blocks on it, instead of having three trains with three blocks we consolidated it to three direct hit trains with solid blocks.

So the time that you lose in transit while you wait for the track to open you pick back up on the other end by direct hitting at the terminals as opposed to driving it to the destination terminal, switching the cars out and delivering it to those three locations. So if you multiply that across the network it's the difference between taking a week to recover and taking 48 hours to recover.

Okay, that is really helpful. And then just as a follow up question, on the materials expense, you have talked about efficiency gains of about CAD10 million in the second quarter. Is that sort of a good run rate to use going forward?

Allison, the CAD10 million I referred to was on equipment rents. And so, that -- and that really and Keith talked to over 10,000 cars that will be returned by the end of the year. So it was on equipment rents. Now what you will start to see is in Q3-Q4 we will start to lap as we reduced our fleet last year. So the CAD10 million will reduce, although the absolute amount savings will go forward.

Okay, perfect. Thank you.

Walter Spracklin, RBC Capital Markets.

My question I guess is more now on the revenue side, we will start with that one first, is on market share gains versus either your main competitor or on the trucking side and how that impacts your yield progression. I know, Hunter, you talked about explosive growth in domestic, although international challenged.

I don't know if, Jane, you have the breakdown between the two of those. And that kind of growth would not be something I would expect in this current economic environment. So where are you stealing market share if that indeed is the case?

Well, Walter, I think first off what I would say in the intermodal section, as I defined, we certainly are lapping some of the changes that we made quite purposefully around the international side and around getting our cost down. This really is a cost take-out story for us on the intermodal side. Obviously I want to grow market share, but I want to grow it in a way where we have sustained profitable growth.

Our growth plan, as Keith indicated, was really around playing to our network strengths, it is where we can develop quality products and services, we can develop them and we can price to them. So there is always a component here that we are going to identify that is around truck. There's obviously a component where from a competitive perspective we are offering a different range and a broader range of services to existing customers and we also hope to attract new customers.

And what is the split between export and domestic? Do you have that there?

I would say that when you look at our domestic growth this quarter it was over 10%. So again, this is where we are really focusing on developing where we can have line of sight to profitable sustainable growth and where, again, we can sell a really unique and premium range of services to new customers, to existing customers and to customers that have the opportunity to make a modal shift.

Okay, and then switching gears I guess, Hunter, on the expense side. You mentioned you are ahead of schedule and absolutely that is an impressive achievement. You had guided us toward 4,500 headcount reduction when you first kind of laid out your plan from 19,500 to 15,000. Clearly having achieved I believe you said 3,500 of that now.

I guess on the flip side, are we -- do we only have 1,000 left? Or now that you have a chance to get a little bit closer to the operation, is 4,500 the right number or can we go -- or are we still sort of targeting that or can we go higher than that?

We can go higher than that.

So in terms of order of magnitude I guess where I would be coming from here is that if you have gotten to 3,500 and we are at a low 70s operating ratio, to get to low 60s do we need another round of 3,500 or can we do it with -- or can we do with less than 3,500?

No, you can do it less than -- this is not all driven on headcount. I mean, there is a lot of value creation. There's a lot of other things, initiatives that we are doing. And look, we are not obsessed with headcount.

This is kind of a byproduct. You create efficiencies, you take 500 locomotives out of the fleet, you take 10,000 railcars out, obviously you don't need as many mechanics. So you spend more capital on the infrastructure and get it in better shape you don't need as much maintenance cost if you don't need as many people maintaining it.

So kind of like I used to say with the operating ratio, that it is a byproduct of providing good service and low cost. You don't walk up and say I'm going to do whatever I got to get to this operating ratio. At the same time the only reason why I really came out with the headcount issue is because everybody wanted to understand the plan, the detailed plan. But they had about five minutes to get me to explain it. So nobody bought the plan until I came out with the headcount number and everybody bought it.

My sense is going forward we will go -- we're on track to be beyond 45 and the initiatives we see now going forward will take us much beyond that. Now if there were other contracting in opportunities where we could bring more work in and that is going to adversely affect the quote headcount getting to 6,000 am I prepared to do that? Absolutely.

Just on kind of a same-store basis with this strategy there has been -- we will have a critical decision. There are a couple of critical points here. This year I want to go to a stable workforce with our engineering forces. I don't think the ups and downs and the seasonality is the right way to go. So -- but this wasn't the year to make the transition, to Keith's point earlier.

So I would expect when people are taken out this fall from the seasonal workforce we're going to be in a position to say, what do we need on a 12 month basis to run the railroad. And then we'll take additional numbers out of that. Next year in 2014 we have the expiration of some of the IT commitments that we are contractually bound by. So those are two rather large buckets, if you will, that will hit on the headcount issue. But look, we can do this with or without the headcount.

That is great color. Much appreciated, thanks.

Scott Group, Wolfe Research.

Good afternoon. So (technical difficulty) I wanted to just follow up on the pricing question. First, you've got -- carload yields are up a lot and revenue ton mile yields are down a little bit. Jane, do you have a sense on kind of what underlying same-store pricing is? And then maybe for Hunter on the pricing side and this idea of opportunities to get more pricing ahead, any update you can give us on some of the longer-term contracts that you were hoping at some point maybe you could do some better things with?

Well, let me start off with number one. I mean certainly average revenue per car was up and our RTM was down. But again, I will signal that I have given you guidance in the past that as crude oil growth as part of the book, because of its shipper supply cars, this unit train model and certainly moving longer haul, this is going to have the impact of lowering our cents per RTM in this segment of the business. And again, this is because the growth that we have had in the crude oil segment has been significant.

I would also say that if you look at this quarter we also had some of the impact that we had on decreased volumes on shorter haul thermal coal which obviously impacts cents per RTM. So I think when we look at where our price and where our yields are trending, they are where we expect them to be.

I will also tell you that in terms of our same-store pricing, it's within the same range trending with our renewals that I spoke to of being at the upper end of our 3% to 4%. So I will turn it perhaps over to Hunter to talk -- you asked a question, Scott, of Hunter around various components around contracts, etc.

Well, Scott, I would just add this, all my career I have learned one thing -- if you provide better service you can extract better price. Now does it happen overnight? No. But if we can build and continue to provide the better service, continue to improve that, we are going to get rewarded -- I'm not sure exactly of the timing there.

And at the same time while our cost is going down it opens up opportunity that internally wouldn't meet our hurdle rate, if you will, that now we have got a different set of obstacles or issues there. So I am pretty bullish in the out years of this plan and going beyond that we will start getting -- the first portion of it is driven basically on cost. The second half will get to a point where there is -- you can go only so low that it will be kicking back in on the revenue side, which will be the driver.

Okay, thanks. Just second question. The 10,000 railcars number is bigger than I have heard from you guys before. Is that incremental or cumulative? And then are there any kind of rough numbers that we can help think about the -- how to quantify what you save on every car that you return?

So I think, Scott, at the end of last year I talked about 6,000 returns, so the 10,000 is cumulative. And I have talked to CAD15 million to CAD20 million in terms of lease savings. And it will be higher than that. But I do caution you in Q3-Q4 we are going to start to lap some of the returns that we started in Q3 and Q4 last year.

And, Scott, this is not only returns, this is also taking system cars out of the fleet that are not needed that are old and obsolete that are high cost that we are scrapping, leasing, monetizing or whatever. So that is an all in number as we see it now, 10,000, I think it will go higher over time. And it to some degree involves TTX with Intermodal and how fast we were to turn that equipment if we can turn more with less cars and so it is an all accumulative effect.

Okay. So an incremental 4,000 cars or CAD10 million to CAD15 million essentially? Okay.

Actually CAD15 million to CAD20 million over last year.

Okay. Great, okay, thank you.

Cameron Doerksen, National Bank Financial.

Just one question for me on locomotives. One of the operating metrics that really stands out in Q2 is that locomotive productivity was up 32%. Just wondering if you can update us on where the locomotive removal process is at the end of Q2 compared with a year ago and where you expect to be at year end.

Rough numbers year over year for the quarter about 3 -- 300. I would expect as we improve our service, continue to increase our velocity, barring any 150 year floods and things I can't predict I expect another 40 to 50 locomotives to come out of that number.

Okay. And do you expect to -- that obviously to continue into 2014, right?

Well, it all depends on the business. With the growth of course they take locomotives, so making those monumental gains I would say no. But continued incremental improvements I would say yes.

Understood. That is all for me, thanks.

Keith Schoonmaker, Morningstar.

So, Jane, a longer-term question for you. We hear a fair bit of chatter on industrial development in various networks, particularly concerning Mexico. Aside from truck conversion and growth of your existing clients, can you add some color on new business that may be coming onto your network?

Well, I think we have been really clear in terms of where our volume growth is and how we intend to grow the franchise. First obviously we are going to make our markets given the proximity of the network that we operate. This means growing organically with our customers, improving service and in terms of offering them a broader array of products and services.

The second area obviously that we are growing is on the crude oil side. When we look at the natural reach of our franchise and we think about our origination we certainly have capabilities. And we believe that given our partnerships with the other Class 1s we can virtually access any North American market that is out there.

I think the other area again is in our bulk sector, when we look at the quality of the bulk services that we offer, think about the successes that we have had on the grain side, think about what we have done in potash. Our bulk team is continuing to press on that. When we look at Mexico, obviously we have got to have that aligned with our franchise.

We are always having conversations with other Class 1s on how we can extend that reach. But when I think about where our growth is coming from I would say that you really want to be pointed on those three areas that I just suggested.

Great, thanks. Let me turn to operations briefly. It seems like these whiteboarding sessions and implementations of learnings that you had at these sessions were a critical step. One thing you have mentioned, I think Keith mentioned is sales learning to sell this higher service and I'm sure they are delighted to have that. But other than executing on takeaways from these sessions you have already had, are there more stepwise changes like these whiteboarding sessions that you have given so much attention to?

Well, listen, the story is an evolution -- it is not a destination, it is a journey. So after you implement these changes and you bed this operating plan down the ebbs and flows of the business as we bring on business in certain lanes --we've got to constantly reevaluate that. So that is what precision railroading is about.

You develop the best plan, you execute it and through the execution of it or through the changes in business, be it up or down, you adjust it. With the endgame being continual operational and service excellence improvement. And track record says we can do it, have done it previously in previous assignments and I don't expect any different result on a go-forward basis in this one.

Thanks.

Turan Quettawala, Scotia Bank.

Just a quick one for you, Jane, on the Intermodal side. Is it possible to give some sense of the total market that maybe you are going to go at with this domestic new intermodal service that Keith talked about?

Well I think, Turan, obviously the issue that we have in front of us is this is highly competitive business. So I think that from the perspective of what we are doing and what gives us the greatest sense of excitement is not only that we have this opportunity to go to our customers and to talk about lanes of business that we previously have not been able to participate because we haven't had that consistency, we haven't had that reliability and we haven't had this kind of premium service, that is number one.

But number two, I think as Keith pointed out, there is a whole range of customers out there that have been underserved. And where when you look at having a service that is best in its class, clearly what we are going to be doing is taking advantage of all this opportunities, showing them what our track record is and being able to sell that service.

So I think that I am not able to give you kind of an exact number of what that looks like, but I can tell you that we are very active in the market and we are going to continue to deliver on that because this is a real source of opportunity for this Company.

Great, thank you very much. I will limit it to one.

Chris Wetherbee, Citi.

Maybe a question on the productivity measures. I think, Keith, you mentioned your records on 12 of the 14 that you kind of keep a close eye on when you think out into the second half of the year -- obviously probably better operating conditions coming here. I guess where do you see yourself in the process here of improvement, how much left I guess is there to go? I know it is kind of an evolutionary scale, but just curious where you see yourself in that process?

Well, as far as making monumental leaps I think we are there. As far as making again continued year-over-year and quarter-over-quarter improvements there is definitely some meat left on the bone. They all have their own stories, a couple of these like this fuel consumption story -- it is a pretty dramatic increase year over year. Last year same time this company was about middle of the pack relative to our peers and air fuel productivity. We are knocking on the door best in class today.

And don't think that I don't expect and require this team to excel and blow right by that number. So that is something that we're going to continue to work on. Will it to be an 8% improvement year over year? I would say no. Will it be several points of improvement? I would say absolutely, yes.

So a similar story looking at all of the different metrics. So it is something that -- monumental improvement so far, you won't see the same double-digit improvements year over year but you will see continual single digit and improvements on a go-forward basis.

Sure. That makes sense, thanks. And I guess maybe transitioning, Jane, from your perspective with the improvements that Keith and his team have been able to make. I mean how quickly do customers kind of realize that and how can you affect kind of change as far as selling the product? I am just curious kind of customer receptivity to that type of dramatic improvement we have seen so far.

Well obviously the key thing that we need to get into the market and that the team is focused on is, number one, getting out there and selling the service and looking for the value and extracting that value. I think that that transition, whether it is cultural or not, has moved away from apologizing for service.

I think the other thing is that the operations team has done a fabulous job of working with us to demonstrate the facts behind that. With fact-based information, with the track record that we have out there in the market, the aggressiveness of the sales team and enthusiasm to sell the product -- those are the things that we are doing around that area.

Okay, that is helpful. Thanks (technical difficulty).

Benoit Poirier, Desjardins Capital.

Just to come back on the previous intermodal question, we are hearing some comments that it is not easy for shippers at this time. We also understand you provided some very good color about the Intermodal in the second half. But I was wondering about the contracts that are up for renewals in the coming six or 12 months and whether you feel you have the proper cost structure right now in order to be part of it or any color on the intermodal dynamic at this point, Jane?

Well, I would say first and foremost this story, as we have indicated to you, is one of renewal and rebalancing. A big component of what we need to do as we look at each individual contract is to understand how do we focus on selling to where our capabilities are and where the network is. This is again made choices about when we look at a package do we need to be looking at the whole piece or do we need to sell into those components where we know we can be successful in those lanes.

I think the other reality is about 20% of the book turns over on a yearly basis. I mean I think that given where we have come from in terms of being able to sell to what the segment wants, which is consistency, reliability and a demonstration of that, we have an excellent track record for us to sell to. So I feel confident that we are in a place where we are going to price for value. I am certainly not going to use price as the means of developing market share, we have been very clear on that, because our mandates around sustainable profitable growth.

We're going to continue to focus and work with the operations team to make sure that the product we have is cost competitive and that we continuously work on that. So as Keith said, it's certainly not a destination, it is a journey. But we are feeling very good about the progress that we are making.

Okay, very good color. And my second question, you -- Hunter mentioned color about the potential divestitures. Now let's talk about some M&A opportunities. You mention in the past that you were obviously looking for a short line. I understand it is maybe too early. You are building a financial position here. So I am just wondering if there is any comment about the opportunities on the shoreline especially after the tragedy in Quebec?

Well, I don't think there is anything in our sites right now, I mean I have just simply said this, we think we do a pretty good job of railroading, we're going to get better and better and, depending on the price, if it is a fit contiguous to our property clearly and we can get it for the right price it is something we would take a hard look at.

Okay, thanks for the time.

Jeff Kauffman, Buckingham Research.

Congratulations. Just two quick questions. One for Brian. Brian, you answered the question on capital redeployment, but what are you thinking in lieu of some recent events on the CapEx budget for this year, next year?

I am not sure what you are referring to, Jeff. I mean Keith talked to we increased the CAD100 million so we have advanced it. But I think we are going to be in the range of CapEx of between CAD1 billion and CAD1.1 billion going forward. So I mean we are going to spend CAD100 million more this year. I am very pleased with our free cash flow to date, but, as Hunter said, we want to strengthen the balance sheet, build cash and look forward to other conversations next year.

Okay. And Hunter, as you have gotten deeper and deeper into this, and I know you have talked a lot about the whiteboarding, I'm just kind of curious, what aspects of the plan have come easier or faster than you expected? What aspects of your plan have been a little more challenging to capture?

Well, it is clearly the execution part. I mean it is pretty easy to go up on a board and draw Xs and Os. And we have to be careful, and I'm talking to myself when I say this, that we don't get ahead of ourselves. So clearly this whiteboard exercise, as Keith alluded to.

To some degree we identified certain opportunities, we are in the process of executing those now, finding out where there are flaws and where there are efficiencies and where we need to beef up until we move to, quote, phase 2 of a whiteboard, which is kind of like getting your masters degree. So, but clearly the toughest part is the execution part of changing the culture, changing the behavior, getting people to understand, that is the challenging part for all of us.

Okay. This is been a long Q&A so I will just say thank you.

David Tyerman, Canaccord Genuity.

Two related questions for Jane. Jane, I was wondering if you could give us an idea of what the normalized increase in revenues were in the quarter? I guess taking out the strike effects and also taking out the flooding? And then related to that, do you expect the growth rates in the second half of this year to accelerate, decelerate or what relative to the normalized Q2?

I would say that if you wanted to adjust for the impacts you would be talking about the 5% range. I think what we look at the growth rates in the second half I have been pretty clear that you really need to refer to my remarks on the individual lines of business. But this franchise has always been a second half company. We always have, given where we are looking with the crop, looking at the dynamics of how the bulk once to move, looking at the improving quality of the service. I mean, again, I have reiterated our guidance again on the revenue side, so we expect the growth to come in around that area.

Okay, thank you.

Okay, well as Jeff said, it has been a long call, we tried to accommodate all the questions and hopefully it has been helpful and informative to you. And I just wish we were talking about third quarter tomorrow because I'm pretty excited about those opportunities. Thanks.

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