Canadian Pacific Kansas City Ltd (CP) 2014 Q3 法說會逐字稿

Good morning. My name is Melissa and I will be your conference operator today. At this time I would like to welcome everyone to Canadian Pacific's third-quarter 2014 conference call.

The slides accompanying today's call are available at www.CPR.ca. (Operator Instructions) I would now like to introduce Nadeem Velani, AVP, Investor Relations, to begin the conference.

Thanks, Melissa. Good morning and thanks for joining us. I am proud to have with me here today Hunter Harrison, our CEO; Keith Creel, President and Chief Operating Officer; and Bart Demosky, our EVP and Chief Financial Officer.

Before we begin I want to remind you this presentation contains forward-looking information. Actual results may differ materially. The risks, uncertainties, and other factors that could influence actual results are described in slide 2, 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 3.

The formal remarks will be followed by Q&A. In the interest of time, we would appreciate if you limited your questions to two and questions are focused on our Q3 and 2014 financial results. We will allow opportunities for questions relating to mergers and acquisitions in two hours' time during our conference call on that topic.

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

Thanks, Nadeem. Good morning to everyone. It's nice to be with you this morning. It's been a very quiet, uneventful couple of weeks here for the back end of the quarter.

But seriously, I was extremely, extremely pleased with our results. Keith and his operating team continue to impress and produce results that are unprecedented in this organization.

I think you saw and most of you have probably seen the press release, but as reported, operating ratio was 62.8%, which is outstanding in itself. But I think if you really peel back and looked at the number a little deeper, and you factor out stock-based comp, which is very hard for us to predict or control, I think you would actually find that the OR would have been 60.8% if my memories were correct. So that is another record in the organization.

And I think the significant thing then is that it really -- that's the foundation for the plan, our new plan that most of you were present with us for the last analyst meeting and so it puts us in good shape there.

Our earnings per share was up -- was CAD2.31, up 26%. We were pretty aggressive with our share buyback, which Bart will talk a little bit about later, so overall more records. We have been blessed and we have been -- I have been very pleased that with our safety performance, which Keith has led hands-on, as far as our accidents and personal injuries. And I think there's even some changes coming up there that I think will take us even further.

So overall a great quarter, starting to hit on all cylinders, and pretty excited about the future. So, Keith, over to you, buddy.

Thanks for the comments, Hunter. I can tell you very much appreciate your kind comments. We've accomplished a lot; record operating ratio for the Company and still got a lot more to do.

I can say, and we will pause for this call today, and I will let my team know how proud I am of their hard work in their efforts. Extremely proud of this talented group of railroaders, this bench that we've built, and getting stronger every day.

We look at more specifically the third-quarter performance. If I look at last year, a very strong comp. So in spite of those comps to see train length, weight, and fuel efficiency continue to improve, very encouraging. Speaks to the strength of this franchise, speaks to the strength of our operating plan that we are executing day in and day out, and delivers a superior level of service that we are able to convert in the marketplace.

On the accident side, as you have said, very encouraging results as well. This culture of change, it's evolution continues. We've got an industry-leading year-to-date frequency severity index of 1.29. Next closest in the industry is a 1.92.

I say that not to boast. Certainly again much work left to do. One accident is too many, but again the direction this is moving as we evolve this culture, as we create a culture of compliance and a team of railroaders from top to bottom that understand that safety is paramount in everything we do day in and day out. We are going to continue to create a foundation that allows us to succeed with this operating model.

If you put the two together, metric improvements and an environment of improving safety performance, that is a recipe for success, or otherwise said, is we produced a record operating ratio.

Couple comments on the revenue side, 9% up, very encouraging as well versus third quarter of last year. 4% price, 3% volume mix, about 2% FX. I think a key take away here is we are moving to the strength of the franchise. It shows the diversity in the franchise in spite of some weaknesses in the book of business during the quarter. They were more than offset by gains we made in crude, grain, domestic, intermodal -- all very strong lines of business for us.

Offer a couple comments. Very encouraging on the crude side. Improving the book of business. Revenue improved 9% on a dollars per RTM basis, which essentially signals a strong gain in the quality of the revenue, the pricing gains.

We have gotten a lot of questions, and I'm sure we will get them today, about the volatility with the WTI prices and the spreads on crude. I'd say in short term we expect volatility. We see limited impact in the near term.

Longer-term outlook we are not going to change it. It's unchanged. Most of our growth, as we said in the past and we stick to this, the reality is we are getting a lot of growth in Canadian heavy side versus the light side.

In the Canadian heavy side, the people we partner have got low cash costs. They've made significant infrastructure investments, so for the short term we are not going to change anything. We are sticking to our guidance and we see, again looking forward with what we know, finishing 2015 with a run rate of about 200,000 cars.

On the coal side, last quarter I will remind you was a very strong quarter for Teck. A record quarter for Teck in fact with CP last year, so pretty strong comps again. And also compound that this year with Neptune outages and some maintenance shutdowns, so we had some weakness in coal. But looking forward, Q4 sales are strong for Teck. We plan to finish the year on plan, so no changes there.

A couple of very encouraging stories. Although this doesn't move the needle in a huge way, it speaks to the discipline of our approach on the pricing side. Thermal side of our coal is a very small piece of the book of business. Volumes have been down but we have recently successfully repriced two legacy contracts that I am very happy about.

These were contracts that effectively didn't -- they didn't earn their keep. We didn't make cost of capital. We weren't making money on them. One of the contracts was a 10-year deal. We are actually paying for the privilege of hauling this coal, which is not a very motivating thing to deal with day in and day out.

But we've got those repriced. We've got those back out in the market. We are providing service. We've expanded a little length of haul on one of the contracts and certainly earning a fair return to cover the cost of capital, which I know Bart is very pleased about.

On the grain side, still seeing strong demand on grain. We had moved quite a bit of grain. We're doing well on the Canadian side as well as the US side, exceeding the government mandate on the Canadian side.

We've seen -- effectively looking forward we see a more typical crop that we are harvesting that we are moving now. We see finishing the crop year instead of the 17 million to 18 million metric tonnes of carry over, it will be more normalized at the end of this crop year with about an 8 million to 9 million, which essentially is historical levels. But, again, through this year we are going to see very strong grain movement, similar to this past year.

On the US side, I am very encouraged that we've caught up, essentially caught up with our backlog. North Dakota; grain is moving well in South Dakota with the RCP in partnership with us. So overall very, very positive trends on the service side and the revenue side with grain.

So with that said, very ambitious plan we laid out a couple weeks ago, but we are very bullish on it. Again, in spite of the volatility on the crude side. We see continued growth there.

We don't see anything that is going to prevent us from being able to -- making our guidance into 2015 and we see a lot of opportunity as we continue to drive this discipline on pricing the book of business, driving service, driving intermodal gains. Again, domestic continues to be strong, so it's all very positive trends for us as we look forward on the revenue side.

So with that said, I will turn it over to Bart and he can comment on how he's converting it to the bottom line.

Okay. Thanks, Keith, and good morning, everyone. As Hunter mentioned, Q3 was definitely another quarter of records for CP coming on the back of strong operating performance from the business that Keith just outlined. Record quarterly revenues up almost CAD1.7 billion.

Record operating income and net income of CAD621 million and CAD400 million, respectively, resulting in a diluted EPS of CAD2.31 or a full 26% increase versus last year. As Hunter highlighted, the bottom line of all of that was a record operating ratio of 62.8%, or up a full 310 basis points. Factoring out the stock-based comp and grain revenue cap items, true performance was sub 61%, so just an outstanding result.

From an operating expense standpoint, there are a couple of items I will highlight this quarter. With a 15% run-up in the stock price over the quarter of CAD39 per share, stock-based comp drove most of the uptick on the comp and benefits line. Fuel was up CAD23 million, which is really a reflection of higher workloads so the volume-variable expenses, and some unfavorable foreign exchange headwinds in both CAD7 million or CAD8 million in the quarter. But that was offset by the 3% improvement Keith's team made on the fuel efficiency front.

We did see an uptick in materials expense in the quarter, which is a reflection of higher input costs and the in-sourcing of work previously done by third parties. Equipment rents continue to be very favorable with the savings from our fleet reductions far outweighing the impacts of higher volumes and some inflation that hit us on that front as well.

And lastly, on the expenses front, purchase services continue to see improvements, driven by the lower casualty costs that Keith highlighted and the in-sourcing initiatives that the Company has been undertaking the last 12 to 18 months to reduce IT and third-party maintenance costs.

Now all that said, we are coming into the fourth quarter now. As is fairly common, we are expecting to see a bit of a seasonal uptick as we finish up our locomotive overhaul and car maintenance programs. We are also going to see a one-time benefit of about CAD18 million as a result of settlements between CP and the BC government over timber and stone rights. And that is associated with the land that was previously owned by CP. So net-net we are looking at a modest sequential uptick in purchased services in Q4.

As we look forward, costs will continue to get a bit harder here in the quarter and we've got foreign exchange as a headwind on the expense front, so the team is definitely going to be digging deeper to stay focused on cost control. Now that said, we are seeing strong RTM growth. RTM is up over 8% and cost is up less than 4%. Backing out FX, we are actually up less than 2% so we are clearly growing our revenues at a low incremental cost.

As I was looking through the numbers, if you look at those RTMs up 8% and the volume variable expense that comes with it, that was more than offset by efficiency gains. But really all of the expense increase in the quarter is due to incentive comp headwinds.

We have taken a number of steps over the last several months on the tax front to optimize our tax line strategies, as a result the effective tax rate in the quarter came in at 27.2%. That is against our guidance of 28% for the year and I expect to end the year with an annualized tax rate in the range of 27.5% to 27.7%. And as we outlined at investor day, we are continuing to work very hard at bringing our corporate tax rate down and we are forecasting 27.5% going forward. Rest assured, we're going to continue to work on that and see if we can optimize it further.

We also are blessed, given the operational results, to be producing record amounts of free cash and that underlying free cash book continues to grow. Net of dividends, we generated CAD610 million free cash year-to-date, which is more than double where we were this time last year. And that brings me to how we are putting that free cash to work for our shareholders through repurchases.

We have had an excellent start to the share repurchase program. We successfully completed the first 3% of that program in mid-September, buying back about 5.2 million shares at an average price of CAD187. That's versus the CAD193 variable weighted average price during that time period, or CAD6 per share savings.

And we subsequently increased the limit to 8%, which will allow us to repurchase up to an additional 7.3 million shares through March of 2015. Now as part of that upside, we also filed an automatic share purchase plan with TSX and simply that allows us to purchase shares during blackout periods using some preset parameters. So I'm pleased that we have been able to take advantage of some of the recent market softness by buying back stock at depressed levels.

The bottom line, we see repurchasing our shares as a strong value proposition for our shareholders. Thank you very much. With that, I will turn it back to Hunter for closing comments.

Thanks, Bart and Keith. Good job producing and good presentations. Melissa, with that we will be happy to take questions the group might have.

(Operator Instructions) Scott Group, Wolfe Research.

Thanks. Good morning, guys. So I'm sure there's going to be a bunch of questions on crude. Maybe I'll start with a few and we can tackle them early.

Can you talk about the key spreads that we should be watching and where you think these differentials need to be on a longer-term basis? Can you talk about the cash costs of production of your customers? Within the guidance for crude volumes to increase about 100,000 cars next year, what's the actual increase in loading capacity of the customers you are serving?

And then lastly, of the growth that you've guided to, what percent of that growth do you have contracts on already and are they take-or-pay? I know a bunch of questions. If you need me to repeat anything I will, but those are kind of the key concerns we have been hearing on crude the past couple of weeks.

We will probably tag team on that, Scott. Let me take the first one and we can take some notes here. We may have to ask for you to restate some of those questions, but let's start with the spreads. I will speak to those I will let [James] provide little color in some of the other items.

Effectively on the light sweet, key differential of the spread we watch is Brent to Clearbrook spread. Effectively CAD10 or so covers rail costs, so in terms of the economics most production can be economical in the CAD60 to CAD65 range. So we still see a little bit of room there for some volatility before we start to see any meaningful production cuts in North Dakota. We think we are okay short-term and we think we are okay longer-term.

Heavy crude, the spread we watch there is WTI to the Western Canada select. Again, that spread long-term to pay for all the investments and transportation, CAD20 is sort of the number. So we are under that now, but given the money that these producers have invested, we think the spread can be as narrow as CAD15 range short-term. And we're going to see things keep shifting.

You got to keep in mind these facilities they built they sunk CAD200 million, CAD250 million, so they are not going to throw the baby out with the bathwater overnight because the spreads show some volatility that they expect.

So hopefully that gives you a little color on the spread piece. James, do you want to talk about the book of business in a little bit more detail?

Yes, it's James Clements, Vice President of Strategic Planning. I will put a little color in on both capacity and some of the contracts. I think those were two of your questions, Scott.

In terms of capacity, we had outlined a number of projects that were going to contribute to the growth in the originations on our network. And, again, we don't see any risk around those projects. There is Bruderheim, Hardisty, which is up and running, Edmonton rail terminal that is under construction, and then we see some facilities in the Kerrobert area as well. So we continually look to that longer-term guidance to expect those high-quality projects to proceed.

In terms of our current book of business, we are at about 40% with take-or-pay contracts at this point in time and that is spread between a couple of our facilities. And so that will help offset any of the near-term volatility as well.

I think a final comment, something to keep in mind, the strength of this franchise -- and we talked about this a couple weeks ago -- with outsourcing the heavy crude to the West Coast obviously the spreads can be smaller because the transportation and the length of haul is not as long, which serves our franchise well. As well as going to the Texas Gulf, same story. So we are positioned well to ride this volatility out and still deliver the strong growth numbers we see as an opportunity on the crude side.

When I just one thought for you, James. You mentioned Bruderheim and Hardisty and I think a couple others. If you just add up all the loading capacity that you see coming over the next year, how much is that on a car load basis or a barrel basis relative to the guidance of 100,000 car increase that you've given us for next year?

If we add that all up and if you looked at the nameplate capacity, it would be a healthy margin above that. We are not banking on 100% market share of 100% of the nameplate capacity. We would be expecting something 300,000 carloads plus origination capability.

Remember as well Bruderheim, for example, is competitively served. The Edmonton rail terminal will be jointly served so there's some discounts there.

Okay, great. One last small question, stock-based comp. What was the -- when you give the initial guidance for the year what was the stock-based comp headwind you were modeling to? And then is there anything you are doing to smooth out or minimize the stock-based comp risk in future years?

It's Bart here. Just in terms of the first question, we had modeled in some modest stock-based comp headwinds. And at present, and if you're talking about hedging or smoothing, we are not contemplating hedging currently on our stock-based comp programs.

The other only other thing, Scott, I would add is that we are -- as a result, we have taken a look at the whole comp package, which needed reviewing, and there's a possibility that we would take part of this out and convert to options, which do not have the volatility associated with them that the [de-issues] and other comp does. So that in itself would remove some of the volatility.

And I hope you can appreciate we started budgeting. We will have to call some of you would see what the stock price is going to be so we can set our budget. It is a little difficult task.

All right, thanks a lot for the time, guys. Really appreciate it.

Walter Spracklin, RBC.

Thanks very much. Good morning, everyone. Just following up on the OR question. You have the 65% OR guidance or better for 2014, but I think with the stock-based comp that's trended where it has it probably has a negative impact on that guidance. Or are you still kind of pointing to 65% or better even despite the stock-based comp?

Because I note that in fourth quarter you typically have seasonally a little bit worse than third-quarter operating ratio, so trying to make the numbers work in the model for that as it relates to your guidance.

The short answer is that we are comfortable with gas. I think that once again that depends to some degree on stock-based comp, but at the same time we've had a nice start fourth quarter, all the synergies that we are in here and the efficiencies of third quarter in. And I would kind of remind you if you looked at last year, the last two weeks of the fourth quarter last year were pretty rugged with weather the last two weeks and hopefully we don't have to encounter that.

So I think we are anticipating a very nice quarter. We are comfortable with our data and we are certainly just, plus or minus, very close.

Got it, okay. Then on grain, I know, Keith, you mentioned there's a little bit less of a -- or a significant decline in your carryover. We were of the view that you would be carrying over a significant amount from this year's very significant crop and that would lead to another very good year for grain.

Are you -- with the volatility in the carryover amount, should we be modeling the same type of level you have been doing in grain this year off the significant crop? Or should we have a relook at those estimates for next year, given less of a carryover?

I would say through this crop year model the same. Walter, let me clarify my comment. I was speaking more to the carryover being more normal or historical from 2015 to 2016, so we will finish out the 2015 crop year into next summer effectively with that normalized carryover for the 2016. So for this current crop year model the same as you did for last year.

Got it. Okay, that's my two questions. Appreciate it.

Brandon Oglenski, Barclays.

Good morning, everyone. Congrats on the quarter. Bart or Keith, I just want to ask about the comp and benefit line. It looks like you had about CAD30 million year-on-year of additional stock comp, so what I want to ask is: where do you see the run rate of your compensation and benefits right now?

And just given a pretty robust growth outlook, should we be thinking you have hit -- and maybe this is more for Keith. But have you had the labor efficiency targets that you would like to see in the network, or how should we be modeling headcount heading into 2015?

Thanks, it's Bart. I'll take the first part of that question and then turn it over to Keith. We are running currently for every CAD1 change in the stock price above CAD800,000, CAD850,000 of headwind, or tailwind depending on which direction the share price goes. That would -- without any changes to the stock-based comp, and Hunter alluded to the fact that we are reviewing that. If we kept our current program, that would bump up a little bit next year closer to something like CAD1 million per CAD1 stock price change. Hopefully that helps you with the run rate numbers.

I would say on the headcount there's still some room for improvement. We've got -- we've talked about another 1,000 through attrition to efficiencies, so there's definitely an opportunity.

Knock on wood, we've got a collective agreement that is out for ratification on the US side that would give us some synergies. It's not all of it certainly, but it would be helpful. But again, even if we don't get that ratified now, I'm optimistic that's going to happen later. But we will still stick to the number and 4,900 is pretty strong and we expect some additional improvement on that side.

Okay, appreciate that. And for my second one, a lot of investors and analysts look at carloads, because we see the visibility every week, but you guys have been running very favorable mix on the RTM side. Is that also something that you expect is going to carry over into next year, Keith? Or should we start to see some acceleration in units as well?

I think your RTM, we are going to be pretty similar. You going to see strong single-digit, low double-digit growth for next year. You will see similar outpacings for the RTM drop more than I would on the carload side.

All right, appreciate it.

Tom Wadewitz, UBS.

Good morning. Wanted to ask you about grain and just (inaudible) of the Canadian grain yields. I know there's a bit of noise in that line, so just wanted to see if you could help us understand the dynamic with the 7% decline in the quarter. And then how we might think about that in fourth quarter and the next couple quarters just in terms of modeling the change in year-over-year revenue per car for Canadian grain.

Well, you are going to see a continued headwind through the fourth quarter, so similar to what you saw third quarter is what we are going to do in the fourth quarter. You will start to see that become a tailwind for us first quarter of 2015 and a strong tailwind second quarter of 2015.

So in terms of year-over-year change, similar in fourth quarter and then it becomes year-over-year growth in revenue for car in first half of 2015?

Yes, a little bit in first, a whole lot in second.

Okay, great. I appreciate that, that's helpful. And in terms of the operating ratio, how would you think about the pace of improvements in 2015? You guys have obviously a lot of productivity opportunities the next several years and you've got a pretty robust revenue outlook for 2015. Is it possible that you approach a 60% OR in 2015 or is that too aggressive in terms of potentially what you could do next year?

Hunter may have some comments; he normally does. Let me speak for he does, though. I'm going to have a disappointed leader if we don't see a low 60%s number in 2015.

I agree.

Is 60% unrealistic to think you might touch that or is that in the realm of possibilities?

It's certainly not unrealistic. I want to be careful about how my remarks are interpreted, but if you look at the run rate, Tom, that we are going to have third and fourth quarter, you take the seasonality out of first or factor that in what impact that will have, I think you'll see second, third, fourth quarters that will be knocking on 60% and might break through. And then whatever impact the first quarter has from a seasonality standpoint, you can factor that in. That will have some potential negative impact.

To Hunter's point, you will know a lot after the first quarter and get a little bit more color on that, because first quarter of last year was one of the worst first quarters I've ever dealt with in my railroad life and I pray that I don't have another one. I am optimistic we want it to be a more normalized winter; at least that's what I pray about every night. And if that happens you're going to see our comparables to last year be favorable for us overall for the year.

Tom, it's Bart. Just one thing to add and to keep in mind as we are going throughout the year is our pension expense as well. Obviously interest rates have been falling and that does have an impact on the liability calculations, so that is something you should factor into the mix as well.

Right, okay. Great, I appreciate that. Thank you for the time.

Bill Greene, Morgan Stanley.

Good morning, thanks for taking the question. Bart, I wanted to start with you. I know we are going to doing M&A call later today, so we don't have to speak to that, but can you speak about the balance sheet within that context? In other words, when we think about levering it up to buy back shares, do you pull back a little bit from that given that perhaps M&A would happen?

Can you talk a little bit about that? And of course, Hunter, if you have views we would love to hear them as well.

The only thing I would say, Bill, is that our balance sheet is in fantastic shape. We do have a fairly significant amount of dry powder to put to work for shareholders. You are probably as well aware of the numbers as anybody is.

And our view on it is simply this: whatever is going to garner the absolute highest return for shareholders is where we are going to put our dollars. Right now we see that in our share price. I can't speak for the M&A space. Hunter is going to talk a lot more about that in a short while here, but obviously if something ever did come up we would direct the dollars there if it was more beneficial. But it's absolute highest return for shareholders.

Bill, I don't think there's much to add to that. I think I agree with Bart totally. We are going to proceed like we're going to proceed and then we will react as the market potentially changes.

Okay. Hunter, can you speak to the potential for a labor deal? Any updates there; anything that's new on that front?

To Keith's remarks earlier, it's certainly encouraging, number one, that we got an initial agreement. That just indicates that the labor leadership and management agree.

Now, we've got some issues that we've got voters we've got to deal with and there's some issues about change and trust and so forth that we're going to have to deal with. If I had to put some odds on it, I think it's probably 50/50 at this time.

But to Keith's point, I think it indicates a major breakthrough attitudinally, and if it doesn't happen this time, it's close. So I am very hopeful, but if we don't quite make it, then we've got another alternative to look at. And I would imagine we would come back with another of that same type agreement, maybe fine-tuned to the voter a little bit and hear their responses. And it's -- bottom line, it's all good.

Great, thanks for the time.

Ken Hoexter, Bank of America Merrill Lynch.

Great, good morning. If we could just take a little bit more on the yields, you talked about Canadian grain turning down, negative growth rate in the quarter. Can you kind of dig into the why it was down?

And similarly potash slowed sequentially and also turned down negative sequentially in chemicals on a yield basis. I'm talking just strictly on yields. Was there an impact on congestion that decreased yields? Was there something else that kind of overhung on the yield growth potential there?

The yield on the grain is all about the MRE in Canada. So last year, to simplify it, we overcharged effectively in the third and fourth quarter and you've got to adjusted it. If you don't give it back in rate concessions then you are going to pay a penalty, so that is effectively what it is. So we will get to a comparable again first quarter and second quarter where we are not giving back and it's more consistent approach.

We've changed our approach. We are not overcharging. We're trying to stay right with MRE on an annual basis, so you're not going to see this happen again to the best of our ability as it occurred in the past. That's what's driving the yield difference or deterioration on the grain side.

Any comments on the others, on the other two that were down? I guess in terms of bulk, the potash chemicals also seemed to come in in terms of growth rates. Was there anything kind of on the yield basis? As I mentioned, was congestion an issue in terms of yields or huge mix changes on those?

We wouldn't say there was any congestion impact on the yield. In potash there certainly is a little bit of a mix play between how much you have on moving domestic versus export lanes. The characteristics of the moves are quite different.

We saw the export side quite strong in Q3 and that's where it drove a little bit of the mix in there. If you look you had FARC up 6%, average revenue per car, while your sense of RTM on potash was down a little bit, and that is because of the longer haul on the export moves. So that is what we were seeing there.

On chemicals, maybe I'm not following what you are looking at because we saw the revenue per car up 7% on our chemicals and plastics business and our dollars per RTM up 6%. We think we have some good pricing practices and how we dealt the contracts and the mix of business in that area. So it was --.

I guess there I'm looking sequentially, just to throw it out there. It was almost 3185 and below 3100 this quarter, so from second quarter to third quarter, and then the growth rate got cut in half from over 13% to 6.5%. And that's similar to each of the commodities that I mentioned. It was the same thing in potash and obviously Canadian grain we saw it, but that's what I was referring to on the chemicals side.

Chemicals is moving along nicely. I don't have the sequential number right in front of me, but we are doing the right thing and we are happy with how that book is performing and the mix of business we have there.

All right, thanks for the time. I will follow up later. Thanks.

Turan Quettawala, Scotiabank.

Good morning. I guess my question is just to go back to your guidance for a second here. Obviously it looks like you guys are up pretty much on track to deliver your EPS and your OR guidance. And you probably would have beaten here quite nicely had it not been for the headwind I guess from the winter as well as stock comp expense, which has been talked about.

I guess my question is are those really the two major headwinds that you had maybe in the year, or is there something else that maybe either went better than your plan or maybe went against your plan? Just trying to understand about some opportunities and challenges maybe with regard to your guidance for next year, thank you.

Turan, it's Bart. I think you captured the two big areas. And as we are sitting here today, we are not seeing much in the way of material items that we would say are going to be big tailwinds or headwinds. Foreign exchange is obviously working a bit for us right now and I mentioned pension expense being something that could be a headwind for us next year just depending on how interest rates perform over the last few months of the year. So those are two things that I would see. The rest of it is --.

Let me add one thing that I'm encouraged about I think from a tailwind for us. We talked about it a lot; our domestic intermodal product continues to be well received in the marketplace. Strong demand actually exceeding some of our capacity at times on domestic intermodal trains.

We got an opportunity to improve the quality of the book, the freight that is moving on that train, and we are starting to see recognition in the marketplace for the service as well on the international side. So more to come on that later, but very optimistic on some opportunities international as well as domestic that could give us some tailwind that I'm pretty happy about.

That's great, Keith. Are there -- did you just say that there were some contracts coming up for renewal? I believe there is a few of these that are coming up over the next year, is that right, on the international side?

Yes, we are in the process of negotiating with our current contracts. I can tell you that one of our three we've just recently successfully renegotiated, again favorable to the book of business and certainly one that reflects the discipline on our pricing side that recognizes the service we are putting in the marketplace. But more to come with some additional opportunities as well in the near future with some other contracts that we are negotiating. So we are pretty encouraged.

Thank you very much, that's helpful.

Benoit Poirier, Desjardins Capital Markets.

Yes, thanks. Good morning. Just to come back on the crude by rail question, you mentioned about the potential for 300,000 carloads for the origination. I was wondering if you could provide a number once you include all the new terminals that have been announced. I would assume that you are not including the potential with EnCana, Dakota Gold, Port Arthur, and also Kinder Morgan.

Kinder would be in that -- Bruderheim, Connexus, Kinder, as well as USB. Those are the three. And then -- no, Kerrobert is going to be in 2016, right? So yes, those are the primary three that are driving this, Benoit.

Okay. Just with respect to Hardisty, revenue per carload on the crude by rail side was close to CAD4,400. Should we expect this number to come down a little bit as Hardisty is ramping up, given there's more focus on the short haul?

No, no, I would not model that.

Okay. And just for the second question, when we look at your RTM quarter-to-date -- obviously it's only a few weeks -- we are up 3.5%. What should we expect in Q4 and especially on the coal and grain side?

Benoit, it's Nadeem. I would just point out we had -- the RTMs we have reported there is a bit of noise with Thanksgiving and year-over-year kind of changes, so we are right now actually closer to 6%, 6.5%. You should see a similar kind of quarter both on RTMs and on cents per RTM.

6.5% with demand growing. Our seven-day numbers, our recent trends are even stronger than that. Hunter mentioned this a moment ago; I will just tell you October could be a record revenue month for CP Rail. That's what we are seeing right now, so we are very confident in our outlook on the fourth quarter, Benoit.

Okay, thanks very much for the time.

Chris Wetherbee, Citi.

Thanks, good morning. Keith, maybe a question on the US operations side. Just kind of curious how things were trending towards the end of the quarter and as you head into the fourth quarter. How much more progress do you need to make there, particularly if you think about the interchange with the RCP&E? I think you mentioned things were getting a bit better.

Yes, the RCP&E, they've got their legs under them. They've got locomotives. They've got cars. I think they are doing a pretty solid job of moving the product they've got out there and we are working well with them taking trains over Tracy in interchange, so I'm very encouraged with the progress there.

Minneapolis-St. Paul we continue to work closely with our partners there. As you know, the investments that we made last year we are seeing some improvements. We have taken those westbound trains out of that grid, so to speak, over our own route.

Starting to see year-over-year increases in train speed, reduction in dwell. Chicago is and will remain a focused area for us. It's very fragile. I guess I'm being optimistic with my comments.

I can't predict what's going to happen in Chicago, but I do know enough about this business that if we have a winter like we had last year or close to it I'm concerned. With that said, again we are being very proactive, some might say aggressive. I would say we are engaged.

We are trying to do all that we can do to ensure that the bridge carriers, the belt, the harbor, those that benefit the entire industry are performing to their utmost best, which will benefit CP, which will benefit every other carrier that utilizes their services. So we are doing all the things that we know how to do, but again I don't have a crystal ball for winter and I do remain concerned about the fragile state of that overall terminal in Chicago.

That's probably the biggest area of concern as you're heading into this winter, just from an operational perspective, has got to be -- still be Chicago. It's always going to be that.

As long as it's steady-state and current state of operations in Chicago it's going to remain my number one concern today. And I'm sure first quarter, second, third, and fourth and next year. It's not getting any better in Chicago, that's for sure. As this business grows for all the railroads it just puts additional pressure on a place that's already very fragile.

Okay, that's helpful. Then just a follow-up on the coal side. Just trying to get a rough sense of how you guys are thinking about maybe the Teck business, the export business of the West Coast. As you think about 2015 obviously that market continues to be a soft one, but Teck appears to have the ability to produce at a relatively low cost. Just want to get a rough sense maybe how you are thinking and framing up the volume outlook for 2015.

I say model the same thing, pretty flat 2014 versus 2015. Teck is -- they have sort of taken off less in their dependence upon China. It's only 25% of the business.

They are a strong low-cost provider and we effectively are the ones that are helping them play in that game, so as long as Teck is competitive in the marketplace. They're going to be strong. We are going to be strong as a result. It is a great partnership. And I would -- again, long answer to your short question -- assume the same for 2015 that you see in 2014.

Great, that's helpful. Thanks for the time, appreciate it.

David Newman, Cormark Securities.

Good morning. Just back on the crude for a second; obviously in this kind of commodity price environment the likelihood of more pipelines getting built is probably tenuous at best. Do you think there is a chance that the rails could pick up a greater share or conversely maybe take the take-or-pay percentages up over time?

I definitely think the take-or-pay percentages the strength of our franchise can go up over time and I do think there's an opportunity to take more share. Again, I don't have a crystal ball, but in this environment for a pipeline to be built, if they pull the trigger, you're still talking seven, eight years out. So what I call long-term in our four-year plan again I am very bullish on.

As you shift over to more crude, wouldn't that naturally flow that you can probably take that take-or-pay percentage up, Keith?

Yes.

Okay, very good. Just maybe, Bart, you are at CAD610 million on free cash flow year-to-date and I think the soft for guidance was CAD1 billion to CAD1.2 billion. Are we assuming that Q4 is going to come in very strong on the free cash flow basis and maybe what are sort of the puts and takes around that?

David, we don't actually guide on cash, but the CAD610 million is net of dividends of course. And we are looking -- Hunter and Keith have outlined what we believe is going to be very strong fourth quarter, so my views have not changed on where our free cash is going to end for the year.

I know it was just a couple weeks ago, but any further developments on the monetization of the assets so you are not as reliant on the balance sheet to do the buy backs?

No, nothing new there. We talked about the D&H at our investor day. We are in great shape, though, from a balance sheet point of view and with some cash on the balance sheet currently that we can put to work for buybacks. So you are going to continue to see us in the market.

When do you anticipate the D&H might close or when you finally get an agreement [against demand]?

It's James. We think that we will have an agreement this quarter and then it needs regulatory approval through the STB, so that would put closing sometime in 2015, probably second half 2015.

Very good. Excellent, thanks, guys.

David, the only other thing I would add is that any asset sales, whether it be on the real estate side or any part of the network, cash flow coming from that is entirely incremental to our business plans, so it's all upside.

Very good, thank you.

Jason Seidl, Cowen.

Getting back a little bit to some of the comments made regarding some repricing of some legacy contracts on the coal side. Were they reflected in the 3Q results or is this something that we should see start in 4Q when we are looking at your yields?

You will see a little bit of it in fourth quarter. You'll see all of it in first quarter. Nothing in third quarter.

Nothing in the third quarter. Okay, fantastic. Also, when I'm looking at the yields, a little bit surprised that the domestic intermodal side didn't start creeping up, especially when we're looking at some of the pricing on the truck side. Is that something that was impacted by mix, was it shorter length of haul business? Is it something we should expect to trend up sequentially?

It's the mix issue you've got to look at. What we are trying to do is balance the network, so we've picked up a lot of eastbound backhaul freight, which obviously is not as profitable as the headhaul. Overall, though, the book of business in our intermodal is improved, so bottom-line focused it's moving the right direction. So as we continue to evolve this thing we pick up a little bit of increased profitability on international, we are going to do that same thing on domestic and you will start to see a change a little bit next year.

Appreciate the time as always, guys. Thank you.

Allison Landry, Credit Suisse.

Good morning, thanks for taking my questions. I wanted to ask another question on crude but from a different perspective. You've clearly laid out that you are comfortable with the near- and long-term guidance, but in the event that the opportunity does end up being significantly smaller than your initial expectations, what are some of the key or different other levers that you might be able to pull hit the targets that you laid out a couple of weeks ago?

I think we've got -- number one you've got to understand that we were conservative for the opportunity of the crude side, so it would have to take a meaningful, meaningful drop for it to really be material to the point that I would be talking about guidance. So I think that's important to understand.

I think it's important to understand that we remain very strong in our digital merchandise from our service. Our boxcar business is picking up. Chemical business is doing well. The frac sand; even if crude production goes down, just the changes they've made as far as the way they are effectively mining for this crude is increasing demand for frac sand. It's 2 to 3 times out oversold -- overprescribed, so there's a lot of pent-up demand that we can see some softness.

And again, from a material standpoint, I'm not going to lose a lot of sleep at night. Certainly now with what I see today.

Okay, perfect. Then in terms of pricing, you mentioned it was around 4% during the quarter. A couple of your peers have talked about the rail pricing environment strengthening, and in light of your comments that the quality of the book is improving on intermodal side, as well as what you have done sort of on the coal side, though that may not be hugely incremental, what do you think about the potential for the 4% to accelerate in 2015?

I would say model about the same. The 4% is a pretty conservative number. We think it's a number we are comfortable with. We think we can grow with our customers. There's puts and takes every day, but that 4% is a solid number.

Okay, great. Thank you very much.

Kam Mangat, Salman Partners.

Good morning. Just wanted to circle back on the domestic intermodal business. You continue to see a nice growth rate in that business and I know that that is one of your key growth areas. You are making some gains as a result of your service-level improvements on some of your key routes.

Just wondering if you could break down the growth as it relates to some of the key underlying economic trends. Just wanted to kind of get an understanding how much of that growth is related to the service-level improvements you've made.

I would say the preponderance of it is all about service level. It's taking trucks off the highway. We have taken some share from our competitor, but the main driver is trucks off the highway.

There's such a compelling difference in price in cost of moving it rail versus truck it gives us a lot of strength there. As long as we've got a consistent service, which is what we have had to put in the marketplace and effectively establishing street credibility, doors are opening and opportunities are presenting themselves from decision-makers that effectively put their job on the line when they put this time sensitive freight on the rail.

Again, outside of economic drivers, just existing opportunities there, there's still a lot of meat left on the bone and an opportunity for us, even with our existing customers as we shift away from contract business to tariff business, to continually improve the quality of the book of business on that train. Then, of course, once you do that the whole next level of growth is you get to a point that maybe you want to add another train.

We are not there yet, but certainly some opportunity still left to be mined for that service.

Okay. Just thinking about 2015, when you are during your guidance or you outlined your target, how much of the domestic intermodal growth did you attribute just to the service-level improvement and how much to improving economic climate?

We will get into our 2015 guidance in January. Typically that's when we will do our guidance. We have outlined 2018 kind of targets and the key drivers for the long-term plan. We will get into more kind of near-term 2015 in January.

Okay, great. And just one last question on hiring trends in some of your key regions like the Bakken. In the past you have mentioned that sometimes attracting labor in those regions has been a little bit difficult just given what's been going on with oil and gas. How is that trending for you as of right now and how do you see that going in Q4?

Number one, we've been successful with our initiatives trying to attract employees. We've been able to hire. The long-term game, of course, is to be able to make it stick and sustain employment, so so far, so good. Although we have had some headwinds there, we've done some pretty creative things with incentives to get people to relocate there. We've actually created some lodging facilities for our crews to stay in, so we are trying to provide some creature comforts that allow an employee the motivation to pick us as an employer of choice.

The real gain, though, is the collective agreement. If we can get that nut cracked, you're talking about an opportunity for the employees to make a whole lot more money, for the Company to be more productive, to have a whole lot better quality of life. And all those things are powerful, powerful motivational levers for attracting and maintaining employees. So more to follow on that, but we are encouraged with it.

Okay, great. Thank you for taking my questions.

Jeff Kauffman, Buckingham Research.

Thank you very much and congratulations, everyone. I just wanted to follow up, Bart. A lot of my questions have been answered at this point, but just to quantify, you mentioned that if you don't do anything to stock comp it will be about CAD1 million for every CAD1 change in stock price. I assume if the stock price drops, you are clawing back some of that accrual, correct?

Absolutely. It's CAD1 million either way, depending on which way the share price moves.

Okay. And you mentioned about pension with the interest rates. Do you have kind of a ballpark idea if we just took today's interest rates kind of how meaningful that impact could be?

Just for back pocket for you, I think for every -- the way to think about it is every 10 basis points move in the underlying interest rates is about CAD13 million on the expense. At investor day we had outlined a view that next year would have a modest expense. I think we were around CAD10 million and that was assuming 4.55% on the interest rate.

Rates have come down a bit since then, so I don't have the numbers sitting here right in front of me, but that number would be higher going into next year if rates held the same. That is the most sensitive part of the calculations and it's purely just the math.

Okay, and then final clarification. Currency, I don't think any of us expect the Canadian dollar to drop the way it has this year. Who knows what happens next year, but your average price on the dollar so far is around $0.91, $0.92.

Generally we think for every penny I think it's CAD35 million annualized revenue benefit, CAD20 million higher expenses. Is there anything you are doing to change those relationships or is there any reason to believe the relationship would be different in 2015?

No, in fact, we understand our currency exposure very well. There's some big components that are in it, fuel being one of them in particular, but we are very -- we've got a very strong natural hedge within our book of business. And one of the things to keep in mind as we see the Canadian dollar weakening here is it's highly correlated with crude.

If you think about our book of business and how revenues will move up and down in relation to the currency as well, we've got a strong hedge there on the revenue side. So we are very comfortable and probably would look to give you the same guidance going forward.

Okay, I just wanted some clarifications on those items. Thank you.

Jeff, I would just add that below the line, as you lever up, and you take on US dollar debt that also helps support that natural hedge as well. Just one thing not to overlook as well.

Steven Paget, FirstEnergy.

Thank you and good morning. On business development, one of your biggest recent successes was your new haulage route via CSX on the south side of Lake Erie. Can you maybe fill us in on how that came about and are you working on other high-impact partnerships?

I would just say that that sort of came from a decent necessity. For us to be competitive in that lane which is an opportunity between Montreal and Chicago, we needed to have double-stack economics. We currently don't enjoy that through the previous route through Detroit. It has sort of knocked us out of the market, so to speak.

Now that we have done this deal with CSX, as long as we do our part and they do their part and can provide consistent service to our customers, we get the benefit of economics on the double stack and improved service level. So it's very encouraging development for us on the international cross-border intermodal service.

Are you working on other similar partnerships?

You know what, we are always keeping an open mind. I don't know any right now that are front of mind that are going to knock the ball out of the park, so to speak. But we are always keeping our eyes open and looking for opportunities to partner with our competing or partnering railroads to provide a service that converts to the marketplace. We certainly [come to you] and we will be highlighting those in future calls.

Thank you, Keith. Length of haul on US grain is way up. What's behind that?

Growth in the Pacific Northwest, so you've got grain that's coming out of North Dakota that's coming up to Canada, going across to the (inaudible) Kingsgate going to West Coast.

Thank you, those are my two questions.

Keith Schoonmaker, Morningstar.

Thanks. Within domestic intermodal up 20% and RTMs in the period pretty strong, how impactful do you consider the limitations to truck driver availability as a key driver?

I think that that is going to embolden our strength and our opportunity. I think as we go forward and see some of those -- some of their constraints and our service changes affect that industry, you are going to see additional demand for our domestic intermodal products. So I think long-term it's very favorable for the rails.

And is that pretty impactful on both sides of the border, Keith?

Yes, the same old story both sides of the border.

Let me ask a quick one on a section the maybe wasn't so favorable in the period and that's autos where your RTMs declined 21%. Is this idiosyncratic, unique to this period or is this more of a secular trend?

Chrysler, we lost the Chrysler contract, generally long-haul business. So you are seeing full impact of that in the third quarter, which is the first quarter of loss of that business. You will see similar impact from a comparable standpoint fourth quarter.

Thanks. Do you expect additional declines with MEG fuel production coming online or does this present some opportunities as well?

I think it presents an opportunity. One other point I will lead everybody to, in spite of the loss of revenue or the contract that we walked away from, our quality of revenue on the automotive side is increasing. So again very encouraging as we drive a disciplined approach to the book of business.

Okay, thank you.

David Tyerman, Canaccord Genuity.

My questions have been answered, thank you.

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

Okay, thanks very much for joining us. We will be talking to some of you in about 50 minutes, so thanks a lot again.

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