Canadian Pacific Kansas City Ltd (CP) 2013 Q3 法說會逐字稿

Good morning. My name is Tracy and I will be your conference operator today. At this time I would like to welcome everyone to Canadian Pacific's third-quarter 2013 conference call.

The slides accompanying today's call are available on our website at www.cpr.ca. (Operator Instructions)

I would now like to introduce Nadeem Velani, AVP, Investor Relations, to begin the conference.

Thank you, Tracy. Good morning and thanks for joining us. I'm proud to have with me here with me today Hunter Harrison, our CEO; Keith Creel, President and Chief Operating Officer; Jane O'Hagan, EVP and Chief Marketing Officer; and Brian Grassby, Senior Vice President and Chief Financial Officer.

Before we begin I want to remind you that this presentation contains forward-looking information. Actual results may differ materially. The risks, uncertainties, and other factors that could influence actual results are described on slide two in the press release and in the MD&A filed with Canadian and US regulators.

This presentation also contains non-GAAP measures outlined on slide three. The presentation will be followed by Q&A. In fairness and courtesy to all participants, we would appreciate it if you limited your questions.

It is now my pleasure to introduce our CEO, Mr. Hunter Harrison.

Thank you, Nadeem. Good morning and thanks for joining us. I trust you have seen our press release. Nice quarter.

I have to kind of restrain myself and some of my cohorts here will add some additional color, but this team did a hell of a job this quarter. This thing is really coming together and hitting on, if not on all cylinders, it is awful close, so I was obviously pleased with the results.

I am going to ask in a minute Keith and Jane to offer some color on the operating and marketing side, and then Brian will convert all that to the bottom line and what it means to the numbers. Then I will have a few remarks at the end.

We are going to try to keep our presentation as short as possible, so we can -- I would imagine there is going to be a lot of questions today in certain areas. I would like to highlight one thing. I think you probably saw in the press release that Brian Grassby, our CFO, has decided to retire at year-end.

It is kind of mixed emotions that I make that announcement. I am a little jealous and I wish I was in a position to do the same. But Brian has been with this organization for 12 years, has offered a lot of loyal service, and has been a key the last 16 months since I arrived in this turnaround story.

So we -- congratulations, Brian, and thanks for everything you have done for the organization. I am sure they rest of the members on the call will join me in that congratulations.

So with that let me turn it over to our President, Mr. Keith Creel, and he can give us a little color on the operating side of the business.

Thanks, Hunter. Let me start by saying obviously very proud to report another strong quarter by this operating team, which you see in the operating performance measures. These are all key levers that drive our operating efficiency day in and day out, produce double-digit gains in train weight, train length, as well as higher car velocity and lower dwell.

These results effectively reflect a lot of our [whiteboarding] session ideas and opportunities we produced back in June and July, which has allowed us to optimize our train plans, reducing train miles by 13% in the quarter versus our first-half run rated of about 6%. This is an area with precision railroading that will always be under review. As we execute, we measure the performance and we adjust to the ebbs and flows of our business levels by the operating lanes.

Let me move to provide a little color on the quarter highlights. I would be remiss above all else not to commend our collective operating team; that is across the board. From the folks here in Calgary, in the field, the RTCs, the engineering teams, mechanical teams, and the guys and gals that are actually running the trains day in and day out.

This disciplined execution of our service plan enabled the car order fulfillment performance in excess of about 95% of our weekly placement plan across auto, forest products, grain, and the bulk commodities. In fact, we moved more export coal in the third quarter than ever on record with a transit time that is 13% faster than third quarter 2012.

We responded to the record Canadian grain demand moving from a near dead stop through August due to the late harvest to transporting record volumes by the month-end. In fact, we moved 12% more loads than in 2012. This obviously sets us up extremely well for the bumper crop ahead of us writing that momentum.

As we move more cars with less, we are identifying asset monetization opportunities. We scrapped about 600 more cars in the quarter with plans to scrap another 1,000 in the fourth quarter. This will get us to about a 2,700-car runway for the year. You combine this with the lease turn backs, we are on pace to reduce CP-controlled railcars by about 11,000 since we started this turnaround journey.

Locomotive productivity up another 18%. With the excess locomotives, this has created an opportunity. This quarter we are able to lease locomotives to industry partners which is reducing our equipment costs and maintenance going forward as well as creating a little bit of a revenue opportunity.

Fuel productivity continues to improve, using 7% less fuel this quarter versus 2012 while moving 2% more RTMs. This focus on continuing to lower our costs is obviously closing the gap with our competitors, which is key to allowing the Company to compete in markets we have not been able to historically. The strategy is opening revenue opportunities previously not possible by providing Jane and her team with an improved service product at a lower cost to sell in the marketplace.

Give you a quick recent example of this, we have now removed an additional 10.5 hours from the Calgary to Vancouver schedule as of the fourth quarter, so I am confident this will allow us to continue to deliver additional domestic intermodal growth versus truck. This is a natural next step after taking over 20 hours out of our transit from Toronto to Calgary, which is driving meaningful domestic intermodal growth that Jane will provide some color to in her comments.

As you are all aware, we continue -- safety remains a critical priority at Canadian Pacific. We are driving improvements in this area through our investment in infrastructure, investment in technology, safety process improvements, and the most important critical piece to success, our safety culture.

In the third quarter we improved our train accident ratio by 10% versus third quarter of 2012. This performance is even more impressive when you adjust it for the 13% train mile reduction in the quarter which dilutes the improvement. Year-to-date, in spite of the material train mile reductions and very tough first-half derailment results, we have closed the gap to the point we are close to par with year-to-date 2012 performance, which is at or is currently industry best.

Finally, as we look into the fourth quarter, I'm sure that you have seen our volumes have picked up considerably since Labor Day. We have recently had our operations team in Calgary to review our game plan. We are focusing on winter preparations.

We are confident in this service plan. This team is in a very strong position to move the traffic in front of us with unprecedented service levels for our customers. We have built a strong foundation for success. We look forward to leveraging this model during the growth period.

So with that I will pass it over to Jane to provide some color on how she is converting this in the marketplace.

Good morning, everyone. I am pleased to announce a record quarterly revenue performance with 6% growth over Q3 2012. This was driven by 2% RTM growth and strong yield and price-performance with cents per revenue ton-mile up 4%, average revenue per car up 8%.

Renewals came in again within our target range of 3% to 4%. Volumes in the beginning of the quarter reflected some short-term shifts in some markets. Volumes picked up towards the end of the quarter and we're seeing that momentum continue. We are improving the quality of our revenue. We're making good progress on delivering on our growth initiatives, so turning to the individual lines of business I will report revenues and price on a currency adjusted basis.

So starting with grain. Q3 results saw revenues up 5%. While grain was slow in the early part of the quarter due to a later harvest and (technical difficulty) [low on-farm] stocks our operations team did an excellent job as the Canadian harvest volumes came in to deliver very strong volumes in September.

With the exceptional Canadian crop now estimated at 68 million metric tonnes, or 12% larger than the previous record, our Vancouver export program was a particular highlight of the quarter as we moved 11% more grain through Vancouver than the five-year average.

In the US, we had not seen the ramp up in September as the wheat production mostly went into the bin and the late bean harvest pushed back this seasonal export program. Average revenue per car was up 9% as pricing gains were achieved in both Canada and the US.

In terms of our outlook for grain, given the record Canadian crop and the US harvest well underway, we expect that grain volumes will be strong in a number of lanes. The West Coast will be at record levels. I also expect strong eastern movement through Thunder Bay as well as a start to what I anticipate to be a strong winter rail program directed to the Saint Lawrence Seaway.

And, finally, we will see robust demand from Canada to the US. The US-originated exports that have been slow to pick up due to that late harvest will now move at more normal levels.

I will note that as we see the recovery in short-haul DM&E-originated shuttle volumes and the reflection of the 1.8% reduction in the VRCPI for regulated grain revenue entitlement in Canada, revenue per car in Q4 will be down sequentially from Q3.

So turning to fertilizers and sulfur, our Q3 results were up 13% in revenue. We had strong year-over-year Q3 revenue gains in both potash and sulfur, supported by solid price increases with average revenue per car load up 7%. Domestic potash lead volume growth as an unsettled international market resulted in a decline in potash exports.

In terms of our outlook, there continues to be strong fundamentals for fertilizer application, and both farm incomes and grain prices continue to support this application. However, delayed harvests will compress the fall season and defer some consumption to the spring. For export, many buyers continue to delay purchases while they assess the Uralkali market impact on international potash pricing.

So turning to coal and building on Keith's comments, Q3 results we saw revenue up 9% year over year. I'm delighted by the excellent service from our operations team that led to very good cycle times and a 9% increase in export met coal volumes, matching our previous best quarter.

US domestic volumes were down as substitution of lower-cost natural gas continues to displace thermal coal. The revenue per car increase of 7% reflects that decline in short-haul thermal traffic and the increase of longer-haul export met coal.

In terms of our outlook, we expect the shipping patterns of Q3 to continue into Q4 with continued strong movements in export metallurgical coal. However, holidays and seasonal wins in November affecting export loadings could mean we see a small sequential reduction in volume.

In terms of intermodal, our Q3 results saw revenue 7% lower year over year. We are very pleased with the improve intermodal product and the introduction of our new faster service from Toronto to Calgary that is taking a day out of our transit time resulting in double-digit volume increases in this lane in Q3 and sustained profitable growth in domestic. We continue to make additional improvements in our service and implemented a faster fourth-morning Toronto (technical difficulty) offering that also is providing enhanced service between Calgary and Vancouver.

With respect to import/export, Port of Montreal improvements did not fully offset lower Port Metro Vancouver volume. We are growing in the right lanes with the right customers aligned with our service capabilities and our network strengths. We are taking advantage of our service improvements by growing where we have competitive advantage, pricing for value, and improving the operating income of the business.

In terms of our outlook, the overall book of business is shifting (technical difficulty) as the outcome of these changes are being implemented. The book remain strong as we continue to focus on the segments and the customers that drive the greatest value to both parties.

I will remind you that in Q4 we are lapping an international contract we chose not to retain last year. We still expect a muted fall peak with ongoing strength in domestic intermodal on the basis of the introduction of our new services.

Now turning to industrial products and consumer products, Q3 results saw our revenues up 13%. RTMs were up 11% on gains in long-haul crude oil and on frac sand volume. A moderation of crude oil was experienced through much of Q3 as the spreads were relatively tight.

Year-to-date we have moved 65,000 carloads of crude and we continue to develop our crude by rail model. Over time we will see increasing volumes of heavy crude moving with different economics and drivers of demand than the lighter Bakken crudes we predominantly move today. Frac sand momentum continued to build in Q3 and we are seeing double-digit volume growth.

In terms of our outlook, we are seeing orders pick up in October as spreads have widened recently, although we don't know how long this will persist. Our crude market will always be a combination of the consistent churn volumes and the opportunistic volumes that respond to the movement of spreads.

We expect to hit 85,000 to 90,000 units this year and continue to be on track to achieve the 140,000 to 210,000 carloads longer-term estimate. We continue to work with customers on facility developments that have commitments to volume with the recent announcements at Hardisty, Alberta, and at Newtown, North Dakota. Frac sand shipments from new mines will continue to ramp up, but other industrial products will trend with GDP growth.

Moving to autos, Q3 results saw revenues down 11%. About half of the Q3 revenue decline is due to lower volume of one-time machinery movements. Lower volumes of finished vehicles accounts for the remaining reduction where we saw some production shift away from CP-served plants and we exited some low margin short-haul markets to improve the quality of the book of business.

In terms of our outlook, we continue to make decisions about what freight earns its way in the automotive book as we price for the value of our service. We have seen improvements in volumes in late Q3 and this trend should continue.

In conclusion, we have strong momentum coming out of Q3 that will continue through Q4. I would expect full-year revenues in the 7% to 8% range.

I'm excited to have a superior product to sell in the marketplace and as part of the evolution of CP that started with operations I'm nearing the completion of creating a new sales-focused organization with less layers, less bureaucracy, centralization of pricing, and incentive program that will reward those who excel at selling. This is with the intention of becoming the industry leader in the selling of service.

With that I would like to turn it over to Brian to give the financial picture.

Thanks, Jane. Good morning, everyone. Hunter, thank you for your comments. It has been an honor to work with you, and it has been an honor and privilege to work at this great company. Now let me get into the quarter.

Keith and his operating team continued to deliver outstanding results. They recovered quickly from the floods in Alberta, and despite softer volumes, they produced strong savings while continuing to improve service. The results for the quarter show the power of our game plan with or without [volumes].

Now let me get you into the numbers. Revenues were up 6% on an RTM increase of 2% with price mix and foreign exchange making up the difference. Expenses were down 6% despite the 2% volume increase and an FX impact of 2%. Operating income was up 39% and our operating ratio came in at 65.9%, an impressive improvement of 820 basis points.

Our tax rate came in at 28.6%, slightly higher than the range I provided, as there was a CAD7 million deferred tax item related to an increase in British Columbia's corporate tax rate. Absent this increase, our effective tax rate was 27%.

Reported net income for the quarter was up 45% and reported EPS was up 42%. Adjusting for the BC tax item, adjusted EPS was up 45%.

On the FX front, I have previously given an FX sensitivity of CAD0.02 to CAD0.04 EPS impact for every penny change in the Canadian dollar. For modeling purposes, I would use the high-end of that range going forward given our revenue mix and improved (technical difficulty).

Please turn to the next slide and I will give you some more details on our expenses. Operating expenses were just over CAD1 billion, down 6% from last year. This decrease was driven by efficiencies of just over CAD100 million, broken down as follows.

Our workload was down approximately 3,300 positions, or 18%, driving a savings of CAD55 million. If you use July 1, 2012, as a reference point, we are down close to 4,200 positions.

Fuel efficiencies in the quarter totaled CAD16 million. As Keith mentioned, our focus on asset utilization has resulted in fewer cars per locomotive, driving material savings of CAD3 million and a CAD9 million reduction in rents.

Purchase services saw CAD18 million in savings due to lower consulting and IT costs and locomotive warranty servicing costs. The savings were partially offset by higher stock and incentive compensation of CAD5 million as we continue to accrue for a larger annual bonus given our performance to date. Wage and benefit inflation was CAD11 million and FX cost CAD22 million reflecting a weaker Canadian dollar.

As you look to Q4 you can expect stock-based compensation to be higher as our stock price is up, and as well, we will be increasing our accrual for our long-range incentive comp as we are tracking to be ahead of plan. Based on yesterday's stock close, the combination of these two could be in the CAD10 million to CAD12 million range.

Our results are translating into solid cash generation. Cash from operations was CAD1.3 billion, an increase of over CAD400 million versus last year. Year-to-date we have free cash flow after dividends of CAD318 million versus CAD21 million over the same time period last year.

Our balance sheet continues to get stronger with debt and leverage ratios improving quickly. From a liquidity perspective, we are also well positioned with no significant debt maturities in the near term, low cash tax payments, and stable pension contributions given our previous pension prepayments.

So let me wrap up. Q3 was another strong quarter clearly showing the momentum we have. Our cash continues to build and our credit metrics are improving nicely, all of which positions us well for a strong finish to the year.

With that I will pass it back to Hunter.

Thanks, Brian. Thanks, team, for those enlightening presentations. Let me just wrap up and make one comment.

Clearly, our guidance for the year clearly I think we are going to -- I have a great deal of confidence that we will achieve those and probably realistically see all the guidance that we had previously provided. I think that Nadeem is considering probably late spring, early fall maybe having an analyst meeting and at that point in time we will address -- we have kind of been playing it, about wore it out. We have gone through the numbers and maybe it is time to put another plan out that reflects the different base that we are working off of, so you can hopefully look forward to that.

With that we will be happy to address questions you might have.

(Operator Instructions) Chris Wetherbee, Citigroup.

Thanks. Good morning, guys. Maybe just touching on the OR improvement, which is obviously very, very strong, in the third quarter. When you think about the progress that you have made today and the sort of layup that you have for the fourth quarter from a volume perspective, can you give us a rough sense of how to think about seasonality?

You guys have sort of changed the dynamic here a little bit with record performances. I just want to get a rough sense seasonally how we should be thinking about the fourth quarter from and OR perspective, at least relative to the first three of the year.

Let me address that and maybe Keith will want to say it a little -- some other comments, but it really depends on what weather we see in the fourth quarter. I mean obviously we have got line of sight on continued improvements in the OR. We are to a point that with the exception of maybe a three- or four-month period that the seasonality factor is really based on the weather.

I think we are in better shape to deal with that and I think if you look at the third-quarter results, and we have a, quote, mild fourth quarter, you will see continuing movements positive on the operating ratio side. If not, then whatever impact the weather has will make those achievements a little bit tougher.

Then we are really trying to address some of the issues more in the first quarter from a weather factor to get to the point where we can, as much as possible, smooth out and move away from the seasonality impact.

Keith, I don't if there's anything you want to add?

The only thing I would say, a little flavor to that is on the weather, certainly it is an outdoor sport and that is the X factor. But I can tell you that this operating team has been pleased with that challenge in front of us in prior preparations.

Certainly we will go into this winter better prepared than we were last year, which when you couple that with improved assets, with a physical plant that is being approved, we got eight sidings that are coming online by the time the ground freezes up. Maybe not by time snow flies, but certainly before it gets to deep into winter, which will help us maintain velocity through the network. So I am very confident that our at least preparations are going to pay dividends for us to mitigate that X factor, but it is still to be determined how bad it is.

Okay, that certainly makes sense. My second question, switching gears a bit onto the intermodal side, just maybe a question for Jane.

When you think about the shifting of some business to the competitor and sort of how you think about the overall profitability of the business, I guess I just wanted to get a rough sense of maybe how we should be thinking about kind of basic modeling perspective for 2014 when we are thinking about probably some carload declines but arguably some pretty decent yield improvements potentially from mix and otherwise. I just want to get a rough sense of maybe how we should be thinking about that piece of the business for 2014.

Obviously, Chris, one thing we won't be doing is giving you guidance for 2014, but I can tell you that based on the momentum that we have had with an excellent product and service side and ability to sell into that we have seen certainly overall in the book double-digit growth in some of the key corridors in which we are selling intermodal, as well as high single-digit growth on the domestic side.

I think that when you look overall, in terms of what you should be thinking about, is that obviously market share with price is not on our agenda. And while the pricing side really is a journey that we are on, we are improving the quality of revenue.

So I think that based on that overall perspective in terms of where we are growing, we are going to see that growth continue. I think that you should be thinking about obviously improving our pricing as well as seeing growth in specific segments.

Okay, that is very helpful. Thank you for your time. I appreciate it.

Chris, let me add a little bit to Jane's comments there. I think, as I look at where we are today -- I'm not looking at quarter over quarter, but looking out in the future -- effectively what we are seeing is this. We have come to the point, as we speak, that the loss on the international side has been effectively almost made up totally on the domestic side. And that is a direct reflection of service offering.

Most of -- in my view, the numbers I have seen and looked at, most of this domestic growth has been off the highway. Those margins domestically are much better than international. I feel much more bullish going forward about domestic markets as I do international.

There is some numbers that we can't get to. We have continually said that in the plan that there is some business we are going to have to walk away from. If that is the market, at those levels we can't be a player, but I think that Keith has really led this effort and there has just been special emphasis added on service with this domestic intermodal.

It really boils down to how you value service. I know some people it is a politically correct thing to say to talk about service, but they really say, look, it is not anything about service. It is all about price. I don't believe that and we will see.

Really the factor going forward that is going to say how far can we go is going to be how quick and how effective we can be in converting service to the bottom line given some of Jane's earlier comments with her reorganization of that marketing sales function.

And just to clarify, the domestic intermodal moves are typically running at a higher revenue per carload per se than the international moves would be?

Yes, pretty significant.

Make sense. Thanks very much, guys. I appreciate it.

Allison Landry, Credit Suisse.

Wanted to dig into the frac sand business a little bit. You mentioned volumes were up in the double digits this quarter, so I was wondering if you could give us a sense of what volumes might look like in the midterm from some of the new production coming online next year and where some of the primary destination markets are for that business.

And I guess, ultimately, what are your thoughts on the potential to move frac sand down to Mexico should the energy markets open up down there?

Obviously -- I will start with your last question first. When we look at the marketplace, obviously, our first intent is to take the breadth of our network and apply it, based on our relationships, to new markets as they emerge. When I look at the frac sand market and I think about where we need to be as a company, we have aligned ourselves -- and you would have seen in our announcements, we have aligned ourselves with very strong players that sell a very high quality product.

I think at the end of the day this is an industry that may see some consolidation, may see some shake out just based on how quickly this is ramped up and how quickly they responded. We have basically aligned ourselves to players that we will be in the long term, and we expect these volumes will ramp up as they reach their production capabilities over the next year.

Okay. Then just a follow-up question. I guess it relates to your comments on increasing your accruals for long-run incentive comp in the fourth quarter. Should we use that sort of as a run rate for how to think about dialing that in for 2014?

My comments on the CAD10 million to CAD12 million were made up of two comments. One is the share price impact and I have given sensitivity on that in terms of about 600,000 per dollar. The other part is the long-range incentive plans, and so about half that amount you would build into sort of a quarterly run rate for next year.

Perfect. Thank you very much.

Turan Quettawala, Scotiabank.

Good morning. I guess my question is also on the volume side a little bit. I am just wondering, in 2013 you have been working quite a bit obviously at improving operations, but have also been taking quite a close look at your book of business with repricing some business and obviously exiting some as well. I'm wondering if you can give us a sense of how much more of these opportunities are left within your book over the next 12 months.

I would say that this is a constant process because contracts come up, contracts renew. Obviously, a key part in this journey is taking a look very carefully because it really is a cost take-out strategy, is to look as we make those improvements what pieces of business become more attractive as that cost profile changes, and how we might upgrade the book accordingly.

I would tell you that we don't have any legacy agreements left. That largely is a contract that we don't have anything large to price out in 2014. But I would say that obviously, a key part for us is that service is our strength right now, and this is giving us the opportunity to get into markets that we haven't been able to get into before.

And as Hunter indicated, some of these marketplaces have better margins. And so this process that we are going to be going through from an intense part of selling the service and also working at changing upgrading the book is really part of this continuous journey we have, where we have been making progress in improving the quality of revenue, but there is more for us to do.

Okay. Thank you, Jane. Maybe for Keith, how much of the whiteboarding execution [and for that fully] at the beginning stays right now, considering what's going through the planning here in the summer? Just wondering, can you give us a sense of where you are in that whiteboarding execution?

I would say probably about 80% of it is implemented. The balance would be dependent upon capital investments we are going to be making over the next couple of years.

Great, but I guess a lot of the benefits of that will probably start to accrue here right now, right, if it is implemented?

When I say 80%, I mean you think about 13% train miles in the quarter, that is over 10,000 a day. That's pretty meaningful. So that will continue in the future, but have those kind of quantum leaps, no. So 80% of the benefit we are realizing day in and day out. We will continue to tweak it, balance it against the business levels, and then that additional 20% we will see over the next year to two years.

Great, thank you.

Scott Group, Wolfe Research.

Just first real quick, Hunter, just want to clarify what you were just think about the margins in fourth quarter. Were you suggesting that if weather cooperates, and I understand that is a big if, that you could see sequential margin improvement from 3Q to 4Q?

Yes.

Okay, great. So one of the things we hear from people is kind of the pushing and then selling the stock, and potentially as an overhang. To the extent that you are ahead of plan and free cash flow is starting to get really good, does that accelerate in your mind, Hunter, the timing for when you want to start buying back stock?

Look, I don't know what purging is going to do. You all can say better than I there is an overhang out there. I do think this; I think Brian's comments to the strength in the balance sheet and free cash flow, and we are not going to sit on a lot of cash that will get us closer to some buyback program.

I would anticipate -- this is a Board decision, not my individual decision. I would anticipate that if we continue to have the kind of performance we talked about that we would probably be taking a strong, hard look at a buyback within the next 12 months.

Okay, that is helpful. Then just last thing, Hunter. You made a comment, somewhat in jest, a little jealous of Brian and his upcoming requirement. To the extent that you are ahead of schedule and based on your comments on an analyst day next year, maybe two years ahead of schedule, how does that change in your mind the timing for how long you are going to be here?

Well, if it is totally my decision, I am not sure it is going to significantly change it. We have kind of pointed that had this four-year plan, but that is 2.5 years away. A lot of things could happen between now and then, but we are on a pretty nice roll here. I don't want to walk out too soon, although Keith is every once in a while suggesting that.

I think that probably, if I had to make a guess, I think I will probably be here 2.5 years and then potentially maybe I will continue to have some seat on the Board and stay with the organization in that regard. That is why we worked very hard and really Keith was the key that kind of strengthened us as far as a succession plan. So I think, whether I am here or not, you are going to see this organization continue to produce these kind of results.

I appreciate your thoughts on that. All right. Thanks, guys.

Fadi Chamoun, BMO Capital Markets.

Good morning. If we can talk a little bit about maybe framing the revenue picture for next year; I know you are not giving maybe specific guidance, but if you can talk about how do you see things coming together, especially in light of some of the share loss that you have had in auto and intermodal or choosing to move away from a couple of contracts. Maybe where do you see the growth coming from and the areas that you feel that you have a good visibility on at this state?

Maybe Jane or Hunter take a stab at that.

Let me address that. Number one, I would say this, given all of the comments I have read; our guidance for this year, year over year for revenue growth was high-single digits. We are going to hit high-single digits in not the most robust economic time to be at high-single digits.

I happen to think it's a pretty good performance and I can tell you in my career as CEO there was a lot of years I would have loved to have had high-single digits growth. Having said that, clearly you have as much knowledge as we do relative to the commodity. So let's just -- we think our position with grain and with potash and with the bulk commodities is going to be good.

The big area that we have that strategically we are attacking is what I would call the merchandise side in domestic intermodal. Now are we going to try to gain international? Obviously, but I am a firm believer that the market gives you the price. We decide whether we want to play or not; we don't set the price.

The marketplace out there and the price, that is an area we don't want to play. So I think our longer-range guidance has been 5% to 7% CAGR over the next four years. And I think that is probably going to turn to be a very conservative number, because I happen to think that this issue of service is going to play a big part in our growth.

When people see the service, they actually see it; it is not where we were just talking about. They can understand what it does to their fleets as far as asset turns and their inventories and so forth. Plus the fact that during this time, if we see interest rates go up -- and I think we are going to see them go up.

We are not going to stay where we are. And the cost of carrying inventory and so forth is going to go up. All of those things creates value to service and that is going to be really the kicker that says how strong can our growth be.

Okay. Only one clarification maybe. So given some of the business moving away next year, you still think realistic we can be in that 5%, 7% in 2014?

Yes.

I would say that, Fadi, we have always set our expectations with our guidance that we would see that contracts could flip back and forth. And I think to Hunter's point, we are obviously confident that we have the service that creates opportunities and we are going to win those opportunities. So there is nothing that has happened so far that has changed any belief that we have in our guidance as we set out on our 4% to 7% on the CAGR.

Okay, that is helpful. Thanks.

Bill Greene, Morgan Stanley.

Good morning. So very impressive results. Hunter, one of the things that you mentioned in your prepared remarks is you will address the guidance at some point, long-term guidance, some point next year when you do the investor day, if you plan it. But something else you have also gone on the record to say is you think you can get this company to be the most profitable railroad in North America.

The competition sort of stepped it up with a pretty impressive OR yesterday, and I am wondering if you think there is anything about the CP network that says that comment that you have made in the past maybe you have to kind of have to reassess.

Well, I am always reassessing. Look, the competition had a hell of a quarter. They did a great job, outstanding performance.

But I would also -- let's take a look back a little bit. And, by the way, I congratulated them for that performance. Where we started this journey 16 months ago they were somewhere around 17 points ahead of us. Now they are 6 or so, so we have made some gains.

They see us in the rearview mirror but really, look, it is not about who is the lowest. When I made those comments I didn't think they were going to be going to those kind of levels, so maybe I underestimated their ability. But I think the market would be pleased if they are at 59 and we got to 60 everybody would love it I think.

So if somebody is going to -- in 18 months somebody says, hey, you missed it. Well, so I missed it. But I still think we are going to go down, we are going to go down further. If we are at 65% now, with all the things we got in the blender, that sure is not the end. And there ain't a lot of space in between and so we are going to stay after them.

It is not a driving force here. I said early on in this game when I got here, there is plenty of business for both these railroads to do well. Take business off the highways and put it on the rail and both of us to be very successful.

Yes, that makes a lot of sense. Great.

Second question, just Hunter something you said recently as well was you think that there is probably in the range of CAD2 billion or so in assets that could be monetized. Can you offer some color about how we should think about that kind of flowing into the cash flows? What is sort of the timing on monetizing some of that? That would be helpful. Thank you.

That is a hard one to answer. We are now reviewing that further. We are trying to get the right model to optimize those assets and there is several alternatives that we are considering and exploring, but it is not going to come all obviously in 2014.

It might be 2015 before you start to see the full value depending on which way we go, but it is nice to know that we have got something that is convertible that has got value that is in that CAD2 billion range that is kind of gravy to this whole plan.

Appreciate the time. Thank you.

Tom Wadewitz, JPMorgan.

Good morning and congratulations on your really impressive results. Impressive all around.

Wanted to see if you could help me think about 2014. It's just when the pace of improvement in the margin is so strong as you have had this quarter and in second quarter as well, it is hard to know how much can you keep delivering in 2014. There is the assumption that it would slow down.

How would you think about maybe the absolute margin level or OR level you might be able to achieve in 2014, or the factors that would affect what kind of a piece is realistic for margin improvement in 2014?

Well, let me make some comments and then Keith can fill in the gaps. Clearly, we are nonseasonal factor. We are at the 65% level now, 65% and whatever the fraction was. We have got line of sight on a lot of areas that we have had improvement, but it is not over there. So I think every initiative that we have undertaken there is some more to ring out.

We have talked about, for example, headcount. I think we are right now at the 42% range. I would expect by year-end we will be 45% on the way to potentially a number of 6, and you can do the math there. So clearly, Tom, we ought to have the opportunity to move with -- particularly second and third quarter to move in the range of lower than 65% and you got to get to the low 60%s or shame on us.

Can we go below that? We will see. That is probably going to be dependent upon how well we convert on the revenue side the service conversions. And so would I really like the possibility that we could get to low 60%s and have a little more aggressive growth? Absolutely.

So I guess then when you originally rolled out the plan in December last year it was kind of a 65% midpoint in 2016. I think your comments have indicated along the last whatever through this year maybe you would be 65% a year early. It kind of feels like it could be 65% full year even in 2016. Is that -- excuse me, in 2014. Is that a reasonable way to think about it?

Yes.

Okay. And then a quick one for Jane. On the crude by rail, I know there is some spread sensitivity but you had some new loading terminals, unit train loading in Western Canada. How would you think about the impact of those in 2014? How much volume might those drive in 2014?

I think as we think about the profile of the book, I mean I'm not going to speculate on where we think the volume is going to go except to say that we are feeling very comfortable about the guidance that we have provided regarding our plans over 2016. I think what we can safely say, though, is that as we see these new facilities rolling out they are largely on the heavy side.

And so as we think about those markets and we think about that business, we certainly expect that the production and the construction of the facilities are going as planned. But we also expect that these growing shipments of heavy from the West Coast will also -- from the Western part of Canada will also help us in making sure that we are not as susceptible to the spreads.

So I think that we feel confident that the people that we are working with we have line of sight to the expansion. Again, we will give you more detail in Q1 as we see that rollout in terms of where we think we will be with our crude rates.

Okay, great. Thanks for the time.

Walter Spracklin, RBC Capital Markets.

Thanks very much. Good morning, everyone. Just following up on the market share question, I know that there has been some shifts here and Jane you mentioned that there is no significant contracts coming up in 2014.

Let's flip it around a bit and, Hunter, you mentioned that as your service improves there is opportunity to gain market share. Is there any areas that you do have your sights on in terms of specific groups of areas or even specific companies that you see the contract coming up that you might be able to leverage that improved service to gain market share back in 2014?

Yes, the list is extensive. If we start to really produce the service door-to-door effectively where there is value to the customer, and one of the issues that Jane and her staff is addressing right now is training, coaching, mentoring our people on how to sell our service. They have been price sellers. They didn't have a service to sell; they sold price and so this is not something that happens overnight.

Number one, the market doesn't like change to begin with and people are resistant to change. But if they start to see value in that, as we have seen with the domestic, I think we will see on the domestic intermodal and this merchandise book, excluding crude, that is where we are going to -- in every one of those areas as far as products, metals, minerals, you name it -- I think we are going to see some growth. And that is without any boost in the economy.

If we get a little bit of boost with the economy and convert this service, could we exceed the 7% CAGR? Yes. Are we going to have some losses? Yes. It is a competitive world out there and there is some places we can't play, but I would point out this. There is more places we can play when we are at 65% than we were when we were at 80%. The margin obviously -- the marketplace is opening up to us as we make these improvements.

So in spite of the fact -- and I mean we said this in the plan that we weren't going to chase price, we weren't going to chase market share. We were going to go after it and we were going to provide a service and try to make a buck, but that is all in the plan.

So I think that obviously the revenue stream is going to trail the operations, the operating performance and the expense control. And that is going to have a leveling factor. We are not going to see these kind of improvements ongoing. But I think when that tails out the revenue will pick up, and I feel very bullish going forward.

If I could, Hunter, let me add a couple comments, Walter. I can tell you this, not anecdotally but factually; customers that in the past that value service, be they rail, be they road, that historically would have never given CP an opportunity because we didn't provide that compelling service offering, they are calling. Conversations I have had; conversations Jane has had.

We have got to earn our street credibility by what we produce, which we are doing. The service that we are offering between Calgary and Toronto is unparalleled. It is not just rail competitive, it is truck, single-driver truck, competitive. So we are exercising and we are sweating and we are leveraging the franchise strength that a lot of people before even internally didn't recognize.

We have got the shortest route period from Toronto to Calgary. If you leverage that and you actually convert that, how do you compete with that? Be it truck, be it rail. We have got the shortest route Vancouver to Chicago. If you leverage that and you compete with that it is compelling.

So if you [earned] asset turns, if you own your own equipment, if you care about service, if you have got to get the product on the shelves, who are you going to give your business to. It just takes a little bit of time for us to earn our keep, earn our reputation, and once we establish that the business is going to come.

I'm not nervous about it at all. We are going to earn a return and through this reduced cost we are going to leverage it right to the bottom line.

I appreciate that. One area that I think is a good test on that would be grain I guess. You have got a big crop coming up. We know it is not price sensitive. There was revenue caps in place, so pricing doesn't really come into play.

Typically it's a market you have shared roughly 50/50 with CN, but it has varied by as much as 10 points. How do you see your market share capture in what is shaping up to be one of the best crop years ever when you leverage that service that you are now enjoying? Can we see more than 50% market share in the grain -- for this year's grain crop given that pricing is not going to be a factor?

I will let Jane provide some color, but short answer is, yes, you can expect it. I mean there is certain elevators that are in play for CP, that are in play for CN that is jump-ball business. If we have got the assets, the cars available, and we are making the turns to the West Coast where most of this grain is going then we are going to be in play. That opportunity is there and we expect to try to convert some of that.

I mean, as we said, we ramped up fast. Numbers that are staggering compared to what has happened in the past. It is not just what we have unloaded at the port; it is what you loaded in the prairie so to speak. You convert those two.

You provide the customer -- in a nonregulated environment now with the Wheat Board gone some of these customers want to get that product to market. You keep their export elevators full, you are going to be rewarded with business; that is what we are seeing.

I would just add to that, Walter, that when we look at our franchise we are really, I would say, arguably have one of the best franchises in North America when it comes to origination and certainly the range of destinations that we provide.

In the last year we have shown that as the markets have changed or as they are dynamic we have gone to the market with pricing, we have gone to the market with opportunities where we have been moving Canadian grain to US ports and US grain into Canadian ports. So I think that when you look overall and you think about what we can do, not only on the regulated side in terms of working with our customers, working with our operations team, finding ways to improve asset utilization and velocity, that is step one.

But when we add into that the opportunity that we have to take advantage of the destination, reach, and origin capabilities we have, this is what really gives us the opportunity to really focus on moving the record volumes of grain that we are at today.

Appreciate that color and congratulations on a very good quarter.

Ken Hoexter, Bank of America.

Great, good morning and, again, congrats on a great quarter. Brian, good luck in retirement and the next phase.

A clarification, Hunter. Maybe just one -- we have heard a lot about how customers were upset, I don't know whether it was your pace of change or what have you. Back in the CN days and that was Claude's big thing when he stepped up to do a smoothing of service.

When you step back and you look at the lost intermodal business do you get a feel, was it just on price? Was it on service? Was it the pace of change? When you kind of do a postmortem look at it what was that?

The recent losses in international?

Yes, I guess on the international.

In my view, it is strictly a price decision. Look, they are going low. Some of them are saying to me that they are cutting back the speed on the high seas to save fuel. If you go to some of these intermodal facilities, there is containers stacked 20 high. They are dwelling and so service is not a factor there at this point, I mean more globally.

So when service is not a factor and it is just who is going to give the lowest price that is when you win the business. And we have decided to not go that low.

Okay. Then when you I guess look forward has the mix between pricing and volume since you started in terms of your outlook on that top-line growth -- or maybe that is more of a Jane question -- but has that shifted at all since you set those original outlook targets?

I would say that basically, Ken, if you can look at it this way, I think that we obviously want to grow the business in a sustainable, profitable way. When we set out and looked at how we want to look at revenue growth, obviously our pricing is a journey. We are out there selling value. We are going to get that much better and command better value for the price that we put out there.

So when we look at overall and the mix and we think about the book of business, it is our job to continuously adjust and improve that quality of revenue. I think to Keith's point is what Hunter said, our service is really our strength right now. Getting into the market, being able to sell that service, and focusing on how we bring that to the bottom line that is what we are doing with the emphasis being on improving that quality of revenue and commanding the price for the value that we put in the marketplace.

Ken, it is really a timing issue. We started off -- first to go was we had to get our costs under control and get our act cleaned up and build a foundation to build service off. So that took us -- that has taken us nine or 10 months to make the first big breakthroughs there. Now we are starting to see a really better product out there.

But the market is not going to change overnight based on the fact that you go out and you blow your horn about your service. They have to see it. And so there is going to be some lag, a year or so, and it will dribble out over time until people convert and make this change.

I think you will see the revenue growth start in 2014, but probably 2015 we will really see a big jump on the service side if we are right in what we are saying.

Appreciate the insight.

Thomas Kim, Goldman Sachs.

Continuing on the line of improving the service; first off, can you give us an idea of the service improvement is on existing services versus adding or expanding service to improve the network. Then as we think about improving and expanding the overall services, to what extent should we be thinking about the impact for CapEx as there is going to be anticipated reinvestment in the network and equipment? Thanks.

You know, right now I don't see any need where we have talked about these issues is going to affect the capital spend. If it does, it will be modest.

But I think one of the things that we will concentrate on to some degree is rail is typically set -- if you had somebody six or eight years ago with intermodal you had to have an 800- or 900-mile haul before you could make a buck. Well, I don't think that exist anymore. So I think in some of the domestic markets in Canada that aren't huge markets, but hopefully will grow like the Edmonton, Calgary, Regina, those type markets, we are going to really go after from the highway perspective.

There is going to be creating better, to Keith's example of improving Toronto to Calgary, in those big lanes that we have domestically, but at the same time offering new services to the shorter-haul intermodal.

Thank you. If I could just switch topics with regard to financial leverage and capital structure, can you give us a sense of what sort of target you are looking at in terms of your overall financial leverage, whether it is a net debt to equity or net debt to EBITDAR number? And how should we think about that in terms of the capital return? Thank you.

I think, Thomas, without being specific on the ratios, we are targeting to be solid mid investment grade and looking to have -- although it is a conversation with Hunter -- but sufficient cash on the balance sheet. So the ratios that you would see for solid mid investment grade would be the ones that we are aiming for.

Thanks a lot.

Brandon Oglenski, Barclays.

Good morning, everyone. I know it has been a long call here so I am just going to keep it to one. Hunter or Keith, I think it is good to benchmark yourself against the best in class here and your peers out East are running with labor expense at about 20% of revenue. The way I see it for your network right now closer to maybe 23%, but that has improved by about 300 basis points this year.

Should we be assuming a similar progress in labor productivity for 2014 and 2015 to maybe match that benchmark?

I hadn't looked at those numbers specifically as compared to the competition, but if you look at the headcount numbers, for example, and some of the other initiatives that we had, clearly our comp and benefits line is going to go down relative to revenue. Now as comparing it to the competition, I don't know there is a different mix and there is potentially different operating agreements that will be signed.

But I think that we will continue to make improvements in those areas, and as I kind of that to him jokingly yesterday, they have become a moving target. So congratulations to them. I think we understand what we need to do and we are going to drive to get that done.

Thank you.

David Newman, Cormark Securities.

Good afternoon, gentlemen. So your CAD2 billion in potential asset sales here overall is that inclusive of the DM&E and where does that stand at this current juncture?

David, that is not -- the CAD2 billion is not the DM&E.

Land sales, right, mostly?

That is right. But, no, we are on track for the DM&E West. The process has gone well. The parties have done due diligence and we will update you when final decisions are made.

Okay. And so with CAD2 billion in cash and then you sell the DM&E, besides buyback and dividends, any strategic uses of the assets or the money, Hunter, that you could anticipate, other rails or supply chain? How would you like to augment the franchise in the future?

Well, I mean one thing we are looking at right now, for an example, is we are looking at our position with short lines. We have got some agreements out there that I really don't like that have been signed and we are looking at should we re-acquire some of the smaller short lines?

Should we terminate the lease? Should we not extend it when it comes up? So we will be looking at the short line network.

I think we will move to the point and, hopefully, I can lay a foundation for the rest of this team that anything that is in the, quote -- we hear this term so much -- supply chain; the more we can control the more effective we can be. So we would look at anything in that supply chain that is up for sale that we think is at a reasonable price that we can get a return on we will take a look at it.

Now as far as any major, big acquisitions or anything strategic, I don't know of anything that is on -- I don't think we are in that position right now. We do have an eastern property that we talked about initially that there is some potential opportunity to do something with it, but that is about what is in the bucket right now.

Now, you have got a 65% OR potentially for next year as a result of your whiteboarding exercise or brainstorming. Have you identified anything sort of chunky or beyond what you have already anticipated in your first plan? I am sure we will get an update at the analyst day, but any thoughts as to how you might get this down to where your competitor is today?

Well, I will let Keith add to this, but I will just mention a couple things. We are going to what I call a stable workforce with our maintenance of [laypeople] that maintain the track. We are not going to have a case where we are hiring in this season and laying off. We are going to have a stable, and that provide savings.

We got a big effort that we have talked about before that Mike Redeker is heading up with IT. So we think that at the end of 2014 is kind of a bubble and we will take a significant amount of people, mostly outside contractors, out of. So that is kind of all gravy, plus there is a lot of initiatives right now.

The game is not over with increasing train size, which lowers train starts. It is just doing -- in addition to that it is just doing all the things we are trying to do now; do them a little bit better.

Our managers out in the field are going through a big learning curve. This has been a hell of a change; is a hell of a change for them, so they are going to get better every day. They are going to get smarter.

We have come a long way from optimizing this. The competition shows us where the numbers can be and we have experienced before numbers that started with a five. So I am -- I feel pretty confident that we are going to be able to produce those kind of results.

The only thing I would add to that, this isn't about grand slams on a go-forward basis; singles and doubles. But there is some key opportunity levers in there. I can tell you now that the safety culture in this company is nowhere near where it is going to be. This is a journey, it is an evolution.

As we evolve and as we create a culture where more and more employees comply day in and day out, as we increase the robustness of our infrastructure, some of these derailments which we have experienced and certainly can draw concern to the Company and has drawn some naysayers to the Company, we will reverse those trends and you will start to see an improvement in that area.

And that goes straight to the bottom line, both in the revenue and asset turns. It goes way beyond just the tangible, direct costs that are associated with these incidents. So that is another area that to me is going to be a significant performance enhancer as we go forward.

Physically, if you look at the franchise, we were told for years that there is a gap between your other Canadian competitor just because of the physical layout of the infrastructure or the network. I mean you have been on the property for quite a period of time now, do you think that holds true or do you think that is just a fallacy?

I think it is a case-by-case basis and, quite frankly, I think it was an excuse. You can look at any franchise, any network. I can look at theirs and there is some benefits to theirs. I look at mine and there is some benefits to mine, so all that offsets is how you execute with what you have got.

I can say the more meaningful opportunity, if you want to compare apples-to-apples, that we are on this journey at CP are these extended sidings. We are putting eight in this year that allows us to run longer trains to make effective train meets. We are not done; that is a two-, three-year journey.

There is a meaningful part of this railroad that doesn't have CPC that gives you incremental impact as far as velocity and productivity. That is something that we are on the journey. That is a two- to three-, four-year plan for us, so all those things are in the blender and that is what you get to the number that we are talking about as we go forward.

Excellent. Great quarter, guys. Thanks a lot.

Cherilyn Radbourne, TD Securities.

Thanks very much. One thing I noticed in the quarter was that your average revenue per RTM took quite a jump in Q3 versus the first half of the year to kind of CAD4.31 versus the low CAD4s. It looked like maybe there was some mix impact in sulfur and fertilizers, industrial products, and grain in particular.

Could you just address that issue a little bit and help us think about whether we should assume the mix prevailing in Q3 continues?

I think, Cherilyn, you really hit the nail on the head. Obviously, we did have some impacts that were there from mix, largely with the long-haul industrial products. Some of the -- certainly the domestic potash and the overall impact on the grain side.

I think that what you should do on a go-forward basis is obviously our grain remains strong. We are going to see some with -- as the spreads widen we are going to see some of that return on the oil side. As you know, a lot of RTMs and our average revenue per car is impacted by those volumes as well.

So I think that overall I think that the mix should be pretty much in line with what you are seeing this quarter into Q4, so that is how I would model it.

It has been a long call, so I will keep it to one. And, Brian, I did just want to just say good luck to you.

Thanks, Cherilyn.

Jason Seidl, Cowen and Company.

First off, Brian, congratulations and best of luck to you. I will keep it brief since it has been a long call.

Going back to the crudes and rail, you guys were talking about your sort of mix between some of your more contractual business and the, quote-unquote, opportunistic business. What is that mix currently between the two?

What I would say is that about 50% of our crude contracts have volume commitments, and this is pretty much consistent where we started in the business. As I said, there is also a percentage that is going to move with the spread.

But as we expect greater volumes of heavy crude to be developed, obviously given some of the investments that people are making up in the north, we expect that as the heavy crudes will form a larger part of the book on a go-forward basis that we will have a greater portion of those term commitments that are locked in as well.

Fantastic, I appreciate the color. Thanks, as always.

Matt Troy, Susquehanna.

Keith, just a question for you, pretty straightforward. Your RTMs were up 2%, gallons consumed were down 7% that is a very impressive spread. Just wanted to ask is that -- was there anything unique in the quarter or is that really intuitively, as it would seem, just a culmination of a more fluid network, a more steady-state network, and then progress you have made across operations?

You answered your own question; that is exactly what it is. It is a combination of all those things.

Great. It has been long; that is all I got. Thanks.

Keith Schoonmaker, Morningstar.

Operations questions for Keith. Strong double-digit improvement in train weight and lengthen, and I heard Hunter say that this is not done yet, but how far along is the improvements. And perhaps you could comment on in this system with the current mix what are the practical constraints?

We won't make those kind of quantum leaps quarter after quarter after quarter, but certainly there is still more upside. You will see more incremental percentages on a go-forward basis. Those sidings are key to this.

As I said, there is eight sidings that come on. They allow you to effectively -- you are limited by how many double saws have to make if you're going to run long trains in a territory that doesn't have appropriately spaced long siding. So as we go forward that will allow us as we convert them to increase, so it is a combination of all those things.

We will continue to invest strategically in siding in some of those pinch points we have got. You will see some improvements between Edmonton and Calgary which will allow us to take some train starts out. You will see some improvements from some siding investments next year west of Calgary to the West Coast again that will allow us to increase train size and take out train starts that will be incremental to our progress.

Does the long-run goal figure to zero double-saw lines?

I don't know if you will ever get to zero because there are some territories -- you got to have traffic density to justify the expense. We are not going to make foolish investment decisions, so I don't think we will ever get to zero if we are going to be operating the railway efficiently. If there is an opportunity to do a double-saw, increase train lengths, and take out train starts we are going to convert it.

Thanks.

David Tyerman, Canaccord Genuity.

Good morning. A question for Jane. Jane, if I take your comments on the yield it sounds like it is not going to change a whole lot in Q4. The RTMs are obviously going to be a lot higher given opportunities you have in the quarter. It sounds like you could have and you could exceed the 7% to 8% revenue growth you are giving for the year. Is that a fair assessment?

I think that the one thing you should keep in mind that I gave you guidance on is obviously we are pricing for value in the market, but we do seasonally price and I have asked you to keep a careful watch on the sequential price on the grain side given what the VRCPI is.

I would love to see us come in above our 7% to 8%. I think that when we look at the carload volumes that we need to achieve to set those targets, I feel that we are in a pretty aggressive place. But our operations team continues to do astonishing things for us each and every day. So as long as they are capable and able to move it and we are in the marketplace out there selling it we are obviously going to do our level best to challenge that target.

Okay, thank you. Hunter, on the CAD2 billion of assets that is quite a lot since you only have CAD16 billion total. I was wondering if you could you shed some light on what you are talking about, where you would get all of that, and if there is much EBITDA or EBIT or whatever attached to that CAD2 billion.

No, it is basically all what I would describe as surplus assets. A lot of it has been the result of closing the hump yards and movement and consolidation of yards and terminals. It has opened up, for example, in Chicago we put all our intermodal business into Bensenville and closed the other facility. It is just a lot of that.

Then the Company had not focused a lot on what we owned. In fact, I don't think there had been a very extensive look at all of those properties for probably 25 years, so we found properties in northern Ontario that I didn't even know we owned.

So as we took all these structures, all these lands that has been made available, which that makes up a high percentage of it, at this point our best estimate of what the, quote, appraised value might be today -- now I don't think appraised value gives you a lot -- but I think that we got to figure out how the best way is.

And I can tell you this; I don't think we will do it in some traditional way of just selling off properties at a discount rate like typical railroad. We are going to look and optimize this to the best of our ability to reward the shareholder.

Okay, thank you.

Jeff Kauffman, Buckingham Research.

You guys got a lot of analysts that follow this stock.

What did I tell you, Jeff?

Congratulations. This is fantastic and, Brian, best of luck in all your future endeavors.

I have got to be honest, my questions have been answered. I will just ask a quick one to Jane and that will be it.

Jane, when we look at the yield -- and I think you have done a very good job explaining this -- basically either we can charge more to carry the same car to the same place, maybe because it is better service, maybe because it is just price increase; we can carry more high-value stuff versus low value stuff; or we can move stuff further distances. If I had to break out how you think the yield growth plays out going forward, how would you throw it into those three buckets?

Boy, that is a tough question because of the fact that it is always a combination. I mean I think that what you are doing on a regular basis is when you are looking at your marketing and sales at your portfolio and your book of business you are trying to capture and align opportunities as they appear with the best combination.

I think the one thing that we have learned from Hunter overall is that you really have to start thinking about getting focused. You have to start to simplify the service and to sell to that. And I think the other thing you have to do is that when you move away from being a price taker, as he said, and we are selling service, we have got to get really focused on not just a customers' whole book of business but where can we largely be successful without trying to dilute that down to just one combination or package.

I think I would love to give you a combination, but I think that you really hit the nub of what it is we have to be at every day, so thanks.

All right. Good luck, everybody. Thank you.

Steve Hansen, Raymond James.

Jane, as it relates to the new domestic service offering that you are starting to sell here, can you help us understand the relative importance of speed in this new offering and how that might rank versus some of your other key selling criteria? Because it does seem that the subtle message coming out of your competitor is that speed is becoming slightly less relevant, at least relevant to other perhaps criteria that is out there.

I think that, back to Hunter's point that he made, that speed is a different element. When you think about the international business and the extent to which containers move across the sea at a certain pace and the extent to which they move into terminals, etc.

But when you get into the domestic business, where we have really achieved our growth, speed is one of the core components that we are selling to. I think that when we look at customers that are in the domestic market that are looking at stocking distribution centers, replenishing inventory, thinking about inventory turns, all those things; these are the key core components that when I look at my team and the enthusiasm they have selling this Toronto to Calgary service is this ability to sell into what a customer's proposition is for how they want to manage.

Knowing that this is going to create rail value to them in terms of managing inventories and getting product out on customer shelves. It is very important and I think there is a bit of a distinction between what market you are talking about.

Steve, the other thing that I would add there is -- maybe you would debate what speed is worth -- and once again, if interest rates are at zero as opposed to 20%, there is a lot of difference in what speed makes in inventory. But I think it is a bigger factor maybe than others.

But I would also say that one of the issues that sometimes we overlook is it's also the low-cost way. Because when we did the first -- took the first 20 hours or whatever it was out of the transcontinental schedule from east to west that saved us about 40 locomotives by turning the assets quicker. So I am a strong believer that good service and low cost are compatible; they are not opposing forces.

Very helpful. Thank you.

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

Hopefully we have covered all the ground. We are very pleased and we are -- but at the same time hopefully there is a little humility in this shop. This journey as far from over and I think you are going to continue to see the type of results that this group has produced.

Thanks for joining us. Brian, once again, congratulations and good luck in the future.

Thanks, Hunter.

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