Canadian Pacific Kansas City Ltd (CP) 2015 Q2 法說會逐字稿

Good morning.

My name is Aaron and I will be your conference operator today.

At this time I would like to welcome everyone to Canadian Pacific's second-quarter 2015 conference call.

The slides accompanying today's call are available at www.CPR.ca.

(Operator Instructions) I would now like to introduce Nadeem Velani, EVP, Investor Relations, to begin the conference.

Thank you, Aaron.

Good morning and thanks for joining us.

I am proud to have with me here today Keith Creel, President and Chief Operating officer; Tim Marsh, Senior Vice President, Sales and Marketing; and joining us today for the first time Mark Erceg, our Executive Vice President 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 on 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 it if you would limit your questions to two.

It is now my pleasure to introduce our President and Chief Operating Officer, Keith Creel.

Thank you, Nadeem.

Let me start with wishing everyone a good morning.

Thank you for joining us this morning.

I know most of you sitting there now expecting to hear from Hunter, which you normally would.

Although we may be from the same neck of the woods, as we say in the South, you obviously know that I am not Hunter.

So with that said, Hunter can't be with us today.

He recently had to undergo some minor maintenance procedures to his lower extremities.

His recovery process has obviously been slower than I know that he hoped for, and although Hunter has many great attributes, patience is not one of them, as we all know.

He knows one speed, which in our terms in the railroads is throttle 8, it's wide open.

You combine that with the fact that he doesn't really take instructions well; he's not really accustomed to being told what to do, so he didn't exactly follow the doctor's orders with his recovery time.

He jumped right back in the seat less than a week after his procedure.

He's been very active since, especially last week, which, frankly, has impeded his recovery and finally his doctor has put his foot down and said no work, no travel.

He has insisted that he take some time to fully recover to get back to 100%.

I've spoken to him several times; I actually spoke to him yesterday a couple of times.

He obviously trusts me and our team to carry on, which is exactly what we're going to do, so it's business as usual at CP.

We expect him to return soon.

In fact, I told him we would save him a boxcar or two for him to switch with his new and improved bionic legs when he gets back.

I would also like to say a few words about the news this morning regarding our changes on the Board, including the appointment of Andy Reardon as our new Chairman, who is in town and was kind enough to take his time out of his schedule to join us here this AM.

Welcome, Andy.

I know that I speak for the entire Board when I say that we are extremely fortunate to have an individual the caliber of Andy Reardon become our new Chairman.

Andy has been involved in the railroad industry for decades.

In fact, Andy and Hunter date back to the mid-1970s and they both worked for the Frisco Railway where they first started working together.

They served together again for Illinois Central Railroad a little later in their careers.

And then again as Andy transitioned to CEO of TTX; Hunter was a Board member on TTX and had an opportunity to work again.

Andy is a well-known and extremely respected professional across all the Class I railroads who has greatly contributed to our industry over the years.

I know for a fact Hunter has the utmost respect for Andy and appreciation, as do I, and there's no doubt in my mind that Andy is the right leader at this time for our Board.

Rest assured, he will continue to help guide the new CP in the best interests of our shareholders.

So welcome to the Chairman's position Andy.

In addition, as we advised in the press release this morning, Gary Colter and Krystyna Hoeg, have tendered their resignations over disagreements relating to corporate governance matters.

That said, I can assure you that the Board of CP is united.

We are focused on our job, which we take very seriously, (technical difficulty) in the best interest of our shareholders.

So with that said, there's not anything more I can add on these matters.

Let's move on with the financial results of another record-setting quarter for CP.

As Mark will take you through shortly, CP produced an operating ratio of 60.9% in the second quarter.

That is a 420 basis point improvement, second-lowest in the Company's history, which is a strong testament to this team's ability to adapt to a fast-changing business environment.

Our reported earnings per share of CAD2.36, which on an adjusted basis equates to CAD2.45 per share, represents a 16% improvement.

The team obviously responded to the changes in the business environment, which you can see reflected in these results.

That said, as we head into the second half of the year, you will see additional benefits from the actions we took in the second quarter rightsizing our asset base as well as our ongoing focus to constantly align our resources lockstep with our business demand -- be it people, be it locomotives, be it cars.

This operating model is one that works in any environment.

It allows us to adjust our assets, control costs as business demand reduces, and be prepared with assets in a lower cost base to leverage the bounce back rapidly when that increases.

So I'm going to give you a little color on some of the performance, which we are extremely proud of.

In what was clearly a challenging environment from a volume and a top-line perspective, with volumes at about 6% this quarter I am proud that this operating team were able to adapt and respond to these conditions by controlling what we can, sweating our assets, and executing this operating plan.

The team was quick to make changes in our daily operating plan, changing our train design to match the business, and then, more importantly, executing it to mitigate the volume weakness and reduce our train miles by 7%.

So despite this volume weakness across the bulk and the crude portfolio, which by nature has a greater proportion of unit trains, our train length was still up 3% year over year.

Now Hunter told us -- advised the team, as well as advised the market, at the beginning of the year that 2015 was going to be the year of the terminals at the CP.

And I am particularly proud of our performance to date in this area.

We vastly improved our terminal productivity and throughput helping to lower our cost structure, reduce our CapEx needs with greater asset utilization.

We've improved our product offering at the same place in the marketplace.

We've reduced dwell.

We've reduced assets and costs, while driving productivity.

Level improvements in all 10 of our major terminals in the networking side of this business softness.

This is an area myself I truly enjoy rolling my sleeves up and digging into.

I can tell you I firmly believe to run a high-performance operation you have to create and maintain a constructive tension of operating accountability within the culture, which requires, as the leader, to be validated.

So I'm personally spending time in our yards across the network.

In fact, I recently took a validation trip in one of our major yards in Canada a few weeks ago, arriving unannounced about 2 o'clock in the morning with my rental car and my handset and my radio in hand monitoring the activity in the yard.

Needless to say, after I watched the team work for about an hour I went to the tower and spent the next 16 hours in the operation.

I was able to identify quite a few productivity improvements that they are converting now, which is saving us thousands of dollars a day while improving our service offering to our customers.

This isn't to say that things weren't going right there.

They have done a lot of good things right, but it obviously says that the work is never done.

As much as we have done at this company and as many opportunities as we have converted, there are still many more left to do from a process standpoint as well as a culture standpoint and leadership development standpoint.

That is one terminal.

We've got over 30 in the network, so there's more work to follow there.

Another excited step improvement we started implementing this quarter is the use of remote control locomotives in our switching operations, which allows the conductor from the ground to operate the locomotive and switch the cars rather than the traditional method of relying on the locomotive engineer in the cab of the locomotive plus the conductors and the switch person on the ground to do the work.

So we've got a reduced headcount demand for engineers with step improvements to matching safety productivity in the switching operation itself.

This initiative will be completed by the end of the third quarter, which will result in a minimum annualized direct labor expense of CAD12 million, but the additional benefits that are harder to put an absolute number to with an increase in safety performance as well as productivity performance.

Another area of impressive performance where we led the industry improvement is velocity and network speed.

As you may recall, back when we rolled out our multiyear plan last year, speed and velocity is a key theme in this plan, calling for a 20% improvement over the four-year plan in network speed.

So far this year we've already achieved that goal and we're accelerating the operating performance.

We've been able to take out, as a result, over 20% of our locomotive fleet and made about a 6% headcount reduction with more opportunities ahead.

And we're getting momentum in the third quarter as we speak.

So while we may have hit some unexpected business demands, macroeconomic headwinds in the short term of our multiyear plan, we are much further along from an operating point of view, which creates powerful leverage when the business demand comes back growing at a low incremental cost.

I'm going to turn it over to Tim to provide some color on the revenue front.

Good morning.

Thank you, Keith.

This quarter CP reported a year-over-year revenue decline of 2%, broken down as follows.

The volumes as measured by the RTMs were down 6%.

Our price was up roughly 3%.

We also received a 1% lift from other freight, offset slightly by the impact of the negative mix.

Our fuel and our foreign exchange FX impacts were essentially a wash.

Couple items I need to bring up that are relative to our original expectations were the weakness in the US grains and energy-related volume.

US grain saw volumes as the US farmers elected to sit on their crop, given the strength of the US dollar to global supply and the lower commodity prices.

This is largely considered a timing issue, and as we look to the second half of the year, we expect these volumes to right size.

The numbers are already starting to move in the right direction as our spottings of trains have doubled since the close of May and our dedicated train services have been ramping up significantly in the recent weeks.

Our lower commodity prices and tight spreads hindered the energy-related commodity like the crude, the frac sand, and the steel.

With additional pipeline coming online over the quarter, movements of the heavy crude were particularly challenged.

As we look to the second half of the year, the recent widening of the crude spreads has us cautiously optimistic that things may improve.

The key is the sustainability of these spreads.

We are currently modeling the 10% to 15% reduction in our energy-related commodities for the year.

Our domestic intermodal had some puts and takes this quarter with the carloads down 4%, but the RTMs up 2%.

This is largely a reflection of our lower expressway traffic short-haul and our longer long-haul Canadian traffic.

It's also fair to say that we did see some regional softness as a result of the slowing economic conditions, as well as a tough compare for 2014 in the domestic business.

I would like to point out that the year-over-year decline in spend for RTM is largely a reflection of the lower charge revenues, and with all that said, we are positioned for a stronger second half in the intermodal state.

Our RTMs are up 7% in June.

July is tagging along pretty good and we do believe that we are off to a good start for half two of 2015.

So to sum it up, there's still a lot of uncertainty in the marketplace today and we have (technical difficulty) that is prudent to revise our revenue guidance to reflect that.

Based on the trends we see today, we are assuming negative volumes for the remainder of the year, while we expect pricing to remain strong and disciplined.

With that I would like to hand it over to Mark.

Mark?

Thanks, Tim, and good morning, everybody.

I am very excited to be here with all of you for my first Canadian Pacific earnings call.

During my first 60 days, I have done everything I can to learn about railroading from the ground up, which includes visiting a number of yards and terminals across our network.

And, as part of those visits, I have had the good fortune to meet with and interact with many of the dedicated men and women who under Hunter and Keith's strong leadership are transforming Canadian Pacific into a world-class railroad.

I have also had the opportunity to ride along in the cab of the locomotive, and just for the record, it really is as fun as it looks.

So I count myself lucky to be receiving the best railroad education from the industry's best railroaders, and I look forward to working with all of you in the years ahead.

Turning to the matters at hand, and since Tim has already provided plenty of color on the revenues, I will jump straight to the bottom line.

CP's second-quarter adjusted earnings per share was CAD2.45, up CAD0.16 versus a year ago.

Reconciling back to our reported earnings per share of CAD2.36, we adjusted for two items.

First, we excluded a CAD10 million noncash gain of CAD0.05 per share related to FX translation on our long-term debt.

As you know, we're excluding from adjusted earnings per share the noncash revaluation of US dollar denominated debt on the balance sheet resulting from changes in the CAD/US dollar FX rate.

That said, our adjusted earnings per share continues to reflect the CAD equivalent debt service costs for the US dollar denominated debt, which we do have outstanding.

Second, we excluded a CAD23 million one-time, non-cash, discrete tax charge of CAD0.14 per share due to the reevaluation of the Company's deferred taxes, which resulted from a change in Alberta's corporate tax rate this quarter.

Importantly, in spite of the change in Alberta's provincial corporate tax rate going forward, we are leaving our 2015 effective tax rate guidance unchanged at 27.5%.

Operationally, Keith already mentioned that this was a strong quarter with significant improvements in network speed, terminal dwell, and locomotive productivity, culminating in an OR of 60.9%, an improvement of 420 basis points and the second-lowest OR in the Company's history.

Against this backdrop there are a couple of items I would like to provide some additional details on.

First, comp and benefits was down about 10% this quarter, with lower stock-based compensation and the efficiencies generated from headcount reductions more than offsetting higher pension expense, wage inflation, and FX headwinds.

Nonetheless, for modeling purposes, we expect comp and benefits to trend higher in the second half, reflecting the payout of long-term incentive targets that were established back in 2012.

Second, we experienced an uptick in equipment rents in large part due to FX, but this line item was also impacted by the return of some locomotives we had previously leased to another railroad.

Finally, purchased services were also up in the quarter with efficiencies from in-sourcing activities outweighed by FX, higher legal and facility costs, as well as a tough comp period on casualty items.

Moving on to cash flow, we have generated CAD485 million of free cash flow through June 30, which is slightly down versus last year.

However, the year-over-year comparison is distorted by the CAD236 million of cash we received from the DM&E West sale in 2014.

Putting that item aside, along with the CAD60 million of asset sales we've generated so far this year, cash flow was up sharply behind higher pretax earnings and favorable working capital balances.

And while we're on the topic of asset sales, I should mention that we have received SPB approval on the D&H transaction, so you can expect to see an estimated CAD215 million of proceeds from that divestiture flow through during the second half of the year.

From a capital standpoint, we have invested CAD618 million in capital projects year-to-date.

Despite the pressure from the higher currency, we remain on track to spend the CAD1.5 billion we guided to at the beginning of the year.

The last thing I would like to comment on today is our capital structure.

As many of you are aware, we amended the debt covenant on a privately-held secured note earlier in the quarter that had a 60% debt-to-capitalization covenant.

This covenant was out of step with the debt covenants in place for CP's other secured notes, so we amended this particular note to 65% in order to align it with the debt-to-capitalization covenant on our other secured notes.

As a result, we now have approximately $250 million of US denominated secured notes with a 65% debt-to-capitalization restriction.

At the end of the second quarter our debt-to-capitalization level was only 56%, so while we have still got plenty of room on these covenants, we also have the option to take them out at a future date if we determine it's advantageous to do so.

Now, admittedly, these amendment negotiations delay the start up of our share buyback program, but due in large part to the execution of several private share repurchase agreements, we were able to complete one-third of our existing NCIB program during the quarter, buying back just over 3 million shares at an average price of CAD193.10 per share.

That means we have approximately 6 million shares remaining under our existing share repurchase authorization, and at our current trading price, we are very comfortable being aggressive buyers of our shares.

So to wrap things up from my end, I'm extremely excited to be here.

Over the summer I plan to focus my attention internally, learning as much about the railroad as possible and strengthening my team, but I will be looking forward to meeting all of you later this fall.

So with that, I will turn the call back over to Keith.

Okay.

Thanks, Mark.

In closing, to wrap things up here.

I can tell you before we are open to questions, in the face of market uncertain which we spoke to we thought that obviously it was prudent to revise our guidance for the year.

So if you look forward to the balance of 2015, revenue growth 2% to 3% for the year, which was previously the 7% to 8% rate.

We still anticipate having an operating ratio below 62%.

Adjusted EPS of CAD10 to CAD10.40, which still equates to earnings growth of roughly about 20% and arguably still the best earnings story (technical difficulty) sector.

Now some of you are going to think low wind on the conservative side on CAD10.

We wanted to put a wide range out there to be responsible.

We obviously do not expect and we are not shooting for that lower number.

We are striving for the higher number, but we are not accustomed to adjusting, revising our earnings and we don't intend to do it again.

So that's the reason we put the range in the market.

Finally, before I open it up to questions, as I'm sure most of you saw our announcement in early July, unfortunately Steve Tobias had to resign from the Board for personal reasons.

Steve has made an invaluable contribution to this Board since he joined in 2012.

He is not only a great railroader and a leader, but more importantly, a great friend to myself, to Hunter, and to the Board.

I know that you will all join me in wishing him well.

Rest assured this Board is committed to Steve.

There will always be an open chair at the boardroom table for Steve should he wish to return in the future.

So with that said, I will open it up for questions.

(Operator Instructions) Bill Greene, Morgan Stanley.

Keith, I wanted to ask you about the OR.

Obviously, in spite of the revenue challenges, very impressive improvement and, of course, I'm sure you saw the competition's number the mid-50%s.

So as we see the macro change, the cost story still looks pretty powerful, but if we go back to a world where we are getting growth, are we setting new normals for OR now?

Or are we going to have to sort of anticipate that the OR will move higher with revenue over time?

How do you think about how this could play out over a longer period time?

I think the way it plays out, Bill, is dependent upon the market.

In an upside market when the economy comes back, we obviously we can leverage and lower the operating ratio by growing the top line.

But I think this performance shows you that even in a downside market, we still can produce -- I will give you a for instance.

The CAD10 million multiyear plan, let's just say nothing changes, it's not billing at the end of 2018.

We don't have proved growth, which we had anticipated that plan.

Taking that into account, we're still going to get a tailwind from currency.

We're still going to get a tailwind from fuel surcharge.

That's 2 to 3 points, if you do the math, so what would've been a 60% arguably could be a 57%.

So I think it works either way.

This model works on the upside; it works well on the downside.

It's one for the long-term, Bill.

All right, that's very helpful.

Thanks for the time.

Scott Group, Wolfe Research.

Thanks.

Morning, guys.

Just to kind of follow-up on the operating ratio question; obviously we saw really good numbers from CN and the prior two quarters you guys had best-in-class numbers.

Why do you think they were able to see a bigger improvement this quarter relative to you?

And do you think that there's a timing issue here where maybe some of the cost reductions can be incrementally coming for you guys?

Well, I'm not going to speak to CN's results, but I will tell you at CP we did not have any tailwind from fuel and obviously we did not have a lot of tailwind from crop adjustments on the management side.

So I'm not sure, but those two could explain the difference.

I guess I was thinking, Keith, more -- not asking you to explain CN's results, but do you feel like you got all of the cost reductions that you wanted to get in the quarter or is that more to come?

I would say no.

I would -- in all honesty, we anticipated a stronger demand environment the first month of the quarter.

Two or three weeks into it Teck made their announcement.

We obviously are very hands-on guys; we get involved and we started taking immediate action.

So there's a little bit of lag there.

And then several of the things that we have done, the initiatives that we have enacted are going to pay dividends in the third and fourth quarter, so there's more to come from those for sure.

We definitely left some money on the table, if I'm being completely honest with myself about it.

Just a follow-up and last point here, I think you guys have talked in the past of bringing the headcount down to around 14,000 by the end of the year.

Does this change now given the weaker volume environment?

Can that get materially lower than that?

It absolutely does.

Right now, second quarter -- but I think year over year we are down 700.

Again, back to the point of some of the initiatives we've implemented that are going to play off in the third quarter and the fourth quarter.

Additional reductions are going to take us down another 200 to 300 people in lockstep with the demand.

So we're going to continue to pace demand.

If business goes down and demand reduces, then obviously headcount is going to go down in lockstep with it and labor expense is going to be reduced.

All right.

Thank you, guys.

Fadi Chamoun, BMO Capital Markets.

Good morning.

Keith, one big part of your long-term goals was pretty dependent on securing top-line growth.

Now, we are pretty assured that you are doing pretty good job on the cost side.

But for you to get the top line growing, do you feel like you have to change or improve the connectivity of the network with the US carriers or make big step function improvement in terms of your first-mile/last-mile operation in order to get the ball rolling on the top-line side?

And if so --?

Network wise, I think standalone the way we are we are strong, Fadi.

I think there's things that we can do that we are acting on now to work closely with our short-line customers to extend the reach of the network to create some additional top-line opportunities.

This lower cost basis allows us to leverage to be able to do that.

Hunter has spoken to this point before about dynamic pricing and dynamic pricing is effectively yield management.

So we got our base cost structure on trains that are running today; every incremental car that we add we can add it at a much lower freight rate, so to speak, and still be positive on the combined contribution of the income with the trains.

Those are initiatives that we are rolling out.

We're in the process of doing it.

I think it's going to continue to allow us to [seed] and grow this company top line.

In the face of what we have done, if you take out energy and you take out US grain right now and look at our numbers, in the face of a negative GDP we still have positive growth.

That tells me the story is working.

And as the business comes back with the leverage that we are creating with the lower operating cost structure and improved service, you are going to see pretty powerful leverage at the bottom line.

Okay.

If we drill in a little bit on the intermodal, whether it's domestic or international; maybe a little bit more on the domestic side.

I know the economy is a little bit weaker now and so the volume aren't what they could be, but you've been going to market with these new product and new service improvement in all this for a while.

Do you feel that you've got more to do on that last-mile servicing side, or you think you've got the product that you need to grow this and grow sort of share from highway over the next two to three years?

The product is definitely there.

We still have work to do converting market share and competing, but again in a negative GDP, if I look at domestic intermodal in Canada, negative GDP for two quarters and we've got positive growth.

That says that this story is working pretty powerfully in the face of some pretty stiff competition, be it truck, be it our competitors.

So, no, I think there's more (technical difficulty) work to do for Tim and the team to convert the product, but the product is solid.

I will stand up against the truck.

I will stand it up against my competitor any day.

Okay, thank you.

Tom Wadewitz, UBS.

Good morning.

Keith, I know you touched on this at the beginning of the call, but I was just wondering if you had any additional color.

The Board changes that you mentioned, can you give us a little more insight on maybe what the issue was and to the extent that you feel like that's behind you?

And also, I guess in terms of Hunter and how quickly you might expect him to be back at work; just a little more, I guess, on his situation.

If I can, I'll touch on the Hunter comment, and given that Mr. Reardon is here, I think it is appropriate that he address the Board question.

I can tell you this.

Hunter will not be gone any longer than he has to be.

My concern and my influence on him as much as I can is that he is gone as long as he needs to be.

Just last week, Thursday I think, I was on the phone with him for six hours with half the team.

He is roaring like a lion.

His will and his drive and his tenacity has not been tampered a bit, but his body, obviously, has got to heal from the procedure that he went through.

So contrary to his belief, he's not Superman.

He's a railroad guy, so to speak, but he's not bulletproof.

And I am extremely pleased for the benefit of this company long term and this team and for our shareholders and our customers that he is actually taking the time now and listening to the doctor to fully recover.

My call is it's short term, it's not long term.

So with that said I will turn it over to Andy to address the Board questions.

Thank you, Tom.

With respect to those board questions, let me answer your last question first.

Specifically, yes, it is definitely behind us.

And to your first question, we have got a very engaged and a very passionate kind of a Board.

I cannot speak to the details of the issues, but I can assure you that our Board remains united and committed to serving in the best interests of our shareholders.

Okay.

So you feel confident, though, that whatever the points of disputes were are behind you?

The Board is -- you wouldn't expect further Board changes; things are stable and you kind of focus on things and go forward?

Absolutely, correct on all three statements, yes.

Fully confident.

Okay.

I appreciate that and wish Hunter the best in terms of a quick recovery.

Walter Spracklin, RBC.

Thanks very much.

Good afternoon or good morning, everyone.

I guess if I were to look at your volume growth underpinning the revenue side, I see that you are in the 2% to 3% for revenue, but if you're getting about 4% pricing -- there's obviously foreign exchange in there, what kind of volume growth underpins that new revenue guidance for 2015?

I guess let me point out pretty strong comparable last year, because we had a grain season that didn't end.

We didn't take the normal shutdown in automotive.

We had a lot of movement throughout all 12 months last year recovering from that winter, so if I look at that comparable it's about a 3% to 4% area of magnitude on the narrow side from a volume standpoint, Walter.

All right.

And then longer term, stepping back, I know in your investor day you had indicated some growth rates for four years of 14% merchandise, 12% intermodal, 5% bulk.

If you were to take a stab at under the new environment and perhaps throwing foreign exchange in there, how might that look?

Specifically, with the lower fuel price does truck become more competitive and, therefore, is the intermodal 12% growth still achievable given a more competitive cost structure on truck?

Let me speak to what I feel confident about, some of that I would be guessing as far as taking a stab at changing it.

But specific to the intermodal, that growth rate absolutely is achievable even in the face of competition from truck or competition from a competitor.

Our costs are down.

Our service is improving.

Our domestic side in the face of these headwinds still grows, which is a positive trend that with a little bit of tailwind and help from the economy is just going to increase.

And accelerating on the international side, given that we have an adjusted cost basis, we're competing head-to-head with our competitor for those contracts as they come back for renewal.

So even in a world where energy is a little bit less again in that growth story with the help assuming that energy is down, FX is going to be similar levels as today.

You are going to have lower cost on fuels.

I still think it's a very positive story.

Okay, thank you very much, and please send my best wishes to Hunter for a speedy recovery as well.

Thanks.

Will do.

Thanks, Walt.

Allison Landry, Credit Suisse.

Good morning.

Thanks for taking my question.

First, I guess how do we think about the longer-term targets that you laid out last October within the context of basically a dramatically different operating environment?

In other words, if we are going to see the top line grow at a slower pace than the double-digit revenue CAGR, can you still double earnings by 2018 with the better cost performance that you were talking about?

Absolutely, and that's nearer that I talked about earlier; just say it's an ongoing dollar revenue story.

You get some tailwind from currency and fuel surcharge on your operating ratio; you do the math and that puts you -- the new normal so to speak isn't 60; it's 56, 57.

You put our buyback with that and you still double the EPS by 2018.

So it's definitely a very doable story.

Excellent.

Then I just had a clarification question on the pricing.

I think that you mentioned it was 3% during the quarter.

Was that inclusive of mix?

I'm just trying to compare to the 4% that you talked about in the first quarter.

The 3% was more renewals, yes, absolutely.

We see a little more strength in that in the second half than we did in the first half for the balance of the year.

So thinking about sort of an apples-to-apples basis on a core pricing number relative to what you talked about in Q1, is it roughly similar?

At 3% to 4%, it's in that range.

Okay, thank you.

Chris Wetherbee, Citi.

Great, thanks.

Good morning.

When you think about the outlook for the rest of the year, what do you see as sort of the biggest potential variables?

And with spreads widening out, is it crude by rail?

Is that an area where you could be potentially surprised to the upside?

I just wanted to get a rough sense sort of what, within the commodity mix, is the key areas that we need to be focused on in terms of variance around that sort of CAD10 to CAD10.40 range you've laid out.

I can tell you this, when it comes to crude we are extremely cautious.

We have seen some movement in August nominations for increased crude movement, which is encouraging, but at the same time I'm not going to assume that for September, October, November, and December.

So should that happen that would be a nice challenge to have.

We certainly have the assets parked in idle waiting for that business to come.

We can move it, that's not an issue.

I think you are going to see pick up in US grain obviously, back to more normalized shipping opportunities.

The Canadian grain side, right now all the final numbers are not in yet on the harvest, but we are expecting an average, maybe a little bit on the low side an average, five-year average as far as the harvest.

Depending upon how the weather does, there may be upside even in that number, given that there may be some demand to move corn product, which we serve well in our northern part of our US operation up to the Alberta and Saskatchewan markets for feedlots.

There are some things out there that could turn favorable for us.

We are just trying to take a conservative approach and again that's why we made the range as wide as we did.

We just simply don't want to come back and change any numbers again.

Okay, that makes sense.

Then just a follow-up on the buyback.

When you are thinking about sort of -- there's a little bit of pause obviously, understandably so, in the second quarter when you think about the outlook.

How do you think about completing that up?

I know you said by year-end.

Any opportunity to take advantage of where the shares are right now and try to get this done shorter term?

Just to get your thoughts around that.

This is Mark.

What I would say there is, look, one of the most important jobs we have is to deploy our capital in an efficient way and at these share levels we are very comfortable doing that.

We did have to take a slight pause.

We did acquire 3 million shares during the quarter.

We do have some private purchase agreements ready to go in the queue and right after we get out of the blackout period we will execute against those.

And then we will be active buyers at these levels and that's why we are comfortable saying that we can complete the share repurchase program ahead of schedule.

Okay, that's helpful.

Thanks for the time, guys.

Appreciate it.

Cameron Doerksen, National Bank Financial.

Thanks, good morning.

Just one question for me.

I'm just wondering if you can talk about the practical implications of the change in the SEC reporting requirements.

I'm wondering if this maybe portends a potential switch to reporting in US dollars.

What I can tell you is that we have been contemplating this change for a period of time.

The biggest difference is that instead of a Canadian 40-F, you would file a 10-K.

Instead of doing a Canadian 6-K, you'd start doing 10-Qs.

You'd have to do SBRL reporting on a quarterly basis versus annually.

None of those are things that we think are going to give us any great pause or difficulty.

Because of our revenue base being split as it is between US dollars and Canadian dollars, there is an opportunity for us to potentially continue to report in CAD and we're working through the SEC's process right now as it relates to that.

But in either event we will continue to provide accurate and timely financials going forward.

More to come on our ability to seek and obtain SEC's approval to report in Canadian currency.

That is our desire.

We just got to make sure they approve.

Okay, very good.

Thanks very much.

Matt Troy, Nomura.

Thanks.

Keith, to your earlier question, I just wanted some clarification.

You talked about the technology of the remote control for switching on savings of about CAD12 million per year.

I'm just wondering if you could maybe clarify what exactly that is.

We know we had belt pack 10, 15 years ago that was a big deal.

Is this residual execution what prior management didn't do?

What was the catalyst or what makes this possible now as opposed to previously?

Hit the nail on the head.

It is an opportunity converting which previous management did not take an opportunity to convert.

Okay.

And my follow-up would be simply, I just want to clarify; in company and benefits expense it looked like stock-based comp was, on a year-over-year basis, favorable to the tune of I think CAD44 million.

But in the comments it was offered that comp and benefits would trend higher in second half due to longer-term targets.

I just want to get some clarification around that if I could.

Are you talking about higher sequentially versus 2Q or higher year over year in the back half versus year ago?

I just want to make sure we're all thinking about that piece correctly.

Thank you.

Your numbers are generally right.

Stock-based comp in the quarter we just printed I was showing you was a CAD46 million benefit.

As we sit here today and we look forward there's really two pieces to the compensation element.

One just relates to the stock price itself.

For every dollar increase in CP's trading value there's about CAD1 million more stock comp, and I can't be predictive of what will happen with respect to that.

But that aside, there are some performance share agreements that are in place going back to 2012.

And based on where we think those are trending, we believe that there will probably be higher comp in the second half in the CAD20 million to CAD25 million range.

(multiple speakers) Thanks for the clarification.

Brandon Oglenski, Barclays.

Good morning, everyone.

And I apologize in advance, because we have been having some telephone problems here.

But Tim or Keith, I just wanted to come back to the growth outlook in the back half because I think, Tim, in your prepared remarks you talked about things, if I understood it correctly, getting sequentially better, which is pretty normal I think for seasonality.

But from a comp perspective it does get more challenging, I believe, from an RTM basis.

So are you calling for some sequential acceleration in some of your bulk markets where we can get RTMs close to flat or are we still going to be looking at negative comps across the network?

At this point in time we believe that we are going to be coming in -- we look at the three different lines of business and the challenges on the bulk side, we hope to come in flat by the end of the year.

On the international and the domestic intermodal, we do hope to come in just a little bit above our plan.

And as far as -- probably not to come in above our plan, but to come in on our plan.

And then as far as our merchandising side, we are still going to be challenged with the different commodities.

With the commodities, not knowing the certainties of that market, we really can't give you any definitive answer at this point in time.

What we have a line of sight to, we think from a volume standpoint, probably about sequentially year over year compares second half this year to second half last year, which were very strong comps.

It's about 3% to 4% less.

Okay, got it, Keith.

Appreciate that too, Tim.

And then, Mark, just -- thank you for the compensation assessment.

I think when you said that CAD25 million that would be thinking sequentially from where we were in 2Q, right, in the answer to the last question?

Yes.

Okay.

And on the purchase services side, I know last quarter there were a lot of moving pieces, but we jumped up to roughly CAD275 million this quarter.

How do we think about that going forward -- purchase, services, and other?

I would expect to see that trend a little bit lower into Q3, but it is an area that there is some volatile items contained within so it's hard to be completely predictive.

But I would expect to see that come down just a little bit in Q3.

Okay, appreciate it.

Benoit Poirier, Desjardins Capital Markets.

Thank you very much.

My question is related to domestic intermodal.

I was just wondering, so far in the quarter your carload trending down 4%.

So at this propensity versus international, is it more a matter of the Western economy or is there any implication on the market share side?

And I'm just wondering if there will be any change in the strategy given the new management change in intermodal?

It's actually a mix issue, Benoit, so when you see from a volume standpoint on a carload basis the business that is down is actually the stuff that is a little more suspect to the economy, which is our Express [freight] service between Montreal and Toronto.

So carloads are down, but RTMs are not very significant.

What's up for us, which is a trend that we feel very good about, is converting the long-haul service domestic.

For instance, East to West, which is driving RTM growth.

So it's a mix issue trying to understand that.

As far as strategy, strategically the strategy is not going to change with the leadership changes.

Jacqueline is taking over the group.

She is obviously a very well-equipped, seasoned railroader.

She certainly understands our network.

She has hit the ground running.

She is out with Tim; she is meeting with our key customers.

She will drive the level of accountability in that team from a revenue standpoint similar to what we drive on the operating side.

I feel very confident about that and she will convert this product.

So I've got a tremendous amount of faith and support and very strong optimism that this is going to be a growth story that is going to exceed your expectations on the intermodal side.

And also some additional additions you don't see at a more senior level; Tim has brought some of his knowledge to the table as far as talent.

He has recruited some external candidates that are being very accretive to us on the international side that certainly understand the markets and understand the opportunities.

Okay, perfect.

Very good color, Keith.

My second question, if we look at automotive, you are down 17% on a carload basis quarter-to-date, but if I'm right, you are overlapping the tough compare with Chrysler.

So any color on the automotive side what we should expect in the near future?

Actually that's a little bit misleading.

Let me just for the record -- that contract ended end of July.

There was a transition time; if I step back to last summer, we had a transition time with CN, who took that Chrysler contract or the lion's share of the Chrysler contract, which delayed and allowed us an opportunity to still move some of their traffic in August and a little bit in September.

So to get a true, clean compare you are really going to have to get to a September number.

If you back out the noise from the Chrysler business we are actually up to, so it's a positive trend as well.

Okay.

And just on the coal side, you are up 15% in the quarter so very good performance on the quarter side, but what should we expect given Teck's announcement of a production slowdown in Q3?

And any color on the expectation for Q4 for coal?

The growth that we have enjoyed has actually been on the US side, which is not a huge piece of the overall portfolio in coal.

But specific to Teck, we are expecting flattish volumes.

They are taking rotating shutdowns.

They are doing maintenance, but at the same time, if I look at last year's numbers, the run rate and what we expect is around that 25 million metric tons.

The positive story to that, the opportunity that we are converting both for Teck and for ourselves is reducing our cost base.

So the contribution on the business is going to improve; has improved.

We're running that business now with 17 coal sets.

The story before us go back to 28 or 29; fewer locomotives, fewer people.

The cycle time booked for Teck at the mines as well as at the port and on the railway are hitting record numbers.

I'm talking numbers below the 100-hour cycles.

A year ago there were probably 110, 115.

Now we are down in the 90s.

So another very compelling story that allows you to take this operating model, and while the revenue growth might not be there, you can certainly control the bottom line and still add contribution in operating income.

Very good color, thanks for the time.

David Vernon, Bernstein.

Good morning.

Just as a first question on pricing, I think you guys mentioned that price mix was plus 4% on an RTM basis.

Can you talk a little bit about how much of that was core pricing versus mix?

Sure, about 2.93% was core.

The balance was mix.

Excellent.

And is anything changing on the core pricing side right now as far as getting better, getting worse as you guys feel the market right now?

We actually see a little bit of uptick the second half versus first half.

Okay.

And then maybe just on the operation side, Keith, can you talk about how much of a role, if any, the lower volume played into terminal productivity and velocity improvements, and whether there's any risk that when volume growth returns you might have to give back some of that productivity gain?

Absolutely not.

We are not going to give it back.

The role that it plays is it motivates you to make sure you got people doing the right thing and managing all the costs, controlling their costs.

It obviously motivated me to go to Winnipeg to take a look at what was going on and uncovered quite a few opportunities.

Saw a lot of things that were going right, but a lot of things we're still missing.

I remind folks, Rome wasn't built in a day.

We're not going to change this culture in three years.

We've converted a tremendous amount, but at the same time this is a big network.

So as we convert through leadership, as we teach consequence leadership, as we create this culture of accountability in our terminals and in our leads and with our employees, in the finance shop and across the board, so to speak, and even in Tim's shop with revenue and accountability with our commission sales program, you are going to continue to drive additional opportunities.

So from a productivity standpoint, there's still mountains of accomplishments left to achieve in this company.

All right, thanks for the clarification.

Ken Hoexter, Bank of America Merrill Lynch.

Good morning.

Keith, can you talk a little bit more -- you mentioned briefly the dynamic pricing.

Can you kind of walk through how that's been rolled out?

Are you leaving -- do you find yourself leaving some more on the table given some other rates are being taken up maybe a bit more aggressively?

And how you are winning business with that dynamic pricing trend?

The dynamic pricing trend, it's starting to gain a little momentum for us.

I will talk in very simple terms about the way it works.

This isn't about going out and setting our price.

This is about understanding where we have capacity based on existing trains, on a train-by-train basis and on a lane-by-lane basis and going to some existing customers.

If they want to increase the share that they give us, then they will recognize on a sliding scale a little bit of a rate reduction, but overall the contribution per car to the bottom line is going to be positively impacted by it.

And it's also not going to customers that we don't enjoy their freight today; knocking on doors converting truck through a lower cost and it's about controlling it.

This isn't a long-term strategy.

It's actually reacting to the demand market that we are into, so I'm talking specifically to -- about a salesperson going and knocking on somebody's door and say, listen, in exchange for a commitment to move your freight over the next 30 days this is what your rate is going to be.

And we're going to add you to existing service; we're going to review this on a weekly basis.

We're not going to allow it to add train starts.

We're going to allow it and use it to grow the number of cars that are on our existing trains.

So it goes almost straight to the bottom line.

Very, very powerful operating leverage.

If I can just do a follow-up with my second question, you talked a bit about the Board changes before.

I just want a little clarification, because you mentioned to start that there were -- the resignations were because of -- specifically because of corporate governance issues.

And you obviously had one member of management that was old CP and one that was post the proxy battle.

Just wondering if you can be maybe a bit more explicit, given that you did state they were corporate governance issues.

Is that something we should be concerned with on the financial side, on the management side?

Anything you can kind of extrapolate on that.

Andy Reardon; I will be happy to answer that question.

No, it was purely a matter of Board governance and the issues, as I noted a few moments ago, are clearly behind us.

Board governance is a very serious manner that this Board embraces and will continue to embrace.

But, no, there are no further changes contemplated, nor expected, and we are anxious to move on into the future.

If I could add a little color to that with this perspective, Andy was the chair of the finance committee.

He's now the chair of the Board, so that should give you some assurance that there's no issues of concern in that area.

Appreciate that insight.

Thank you for the time.

Turan Quettawala, Scotiabank.

Good morning.

Keith, just on the guidance side I hear what you said about not wanting to cut your guidance more than once in the year and also about what you said on the cost side and the catch up I guess on the cost side.

I guess your question is 2% to 3% top-line growth that comes in weaker.

Is it safe to assume now that there's enough flexibility on the cost side that the EPS numbers aren't going to change too much?

Absolutely.

I guess my second question; on the marketing side you talked about competing with CN, I believe, on some market share on the domestic intermodal side on some contracts.

Are you willing to share some maybe be with us what the hit rate might be for you?

The comments on competition with our competitor is more related to international intermodal.

It's not the domestic.

Obviously, there's a competitive market out there on the domestic side as well, but you can tell by RTMs that we are faring well in that competition.

So --.

Okay, fair enough.

Thank you.

Steve Hansen, Raymond James.

Just a single one from me as it relates to the crude and I guess more specifically the crude mix.

Just trying to get a sense for where you might be seeing some of those cautious signs of optimism in which lanes, whether it be to the Gulf, etc., and how you see the distance evolving here over the next 12 months or so?

No visibility to the distance.

I'm a little bit apprehensive about looking beyond August, but the strength that we are seeing, some of the signs of hope, are actually on the heavy side, more Gulf destinations.

Are you seeing weakness, conversely, in any of the Bakken or the Dakotas originations?

We are partnering with very good players there, low cost producers.

We are seeing sustained demand there, so we are not seeing any weakness.

Okay, helpful.

Thanks.

Brian Ossenbeck, JPMorgan.

Good morning, thanks for taking my call.

Just a follow-up on crude-by-rail, it seems like there's a bit of a shift maybe in the market structure in the Western Canada.

You had a high-profile rail terminal that was -- changed hands basically at a sizable discount to what it was originally constructed for.

I heard some discussions of cutting transportation price in order to stimulate some demand.

I don't know if you can speak to that, if that's a source of any of the caution, or if it's just more on the spreads and waiting for those to stabilize and remain at healthy levels?

It's all tied to the spread.

So if the spreads improve the appetite and need and the economics are there to move to heavy, so that's what we're seeing.

Okay, then just a quick second one.

Keith, last time we talked about the ECP brake mandate that actually went into effect shortly after we spoke on the last conference call.

I'm assuming your view has really changed on that, but is that something that you feel CP and the industry really have to start preparing for implementing?

And I guess the two questions that come to mind is how much pressure would that put on the crude-by-rail spread if you start to have more equipment that is mandated to move it?

And then is this something you need to basically equip the entire locomotive fleet to ensure interoperability?

Or can you kind of segregate, hive off your crude-by-rail by hazardous flammable trains into one section versus the other ones that don't need that sort of equipment, if it comes to pass?

Thanks.

Segregation and trying to isolate locomotives would be extremely disruptive to the network.

It would be extremely disruptive to the industry, so that's not something that I would be encouraged about doing in any regard.

We've got to have interoperability.

We've got to have an ability to take a locomotive off a crude train and put it on a freight train, put it on an intermodal train, so I'm not going to create a dedicated set of locomotives for crude.

With that said, the ECP initiative, although it was mandated, it is being debated now.

It's currently -- I don't want to speak out of context here, but there's some changes which differ that that are included in the bill that is being debated at Congress now on the US side.

Suffice it to say, that side is not done yet.

I happen to believe that cooler heads will prevail.

Once people truly understand how disruptive it will be to this industry, how disruptive it will be to all freight movement, not just crude movement, I just don't think that that is going to be called upon.

We would much rather take the money, take the investment and spend it on safety enhancements that truly benefit the public, not something that's been created by some misinformation that allowed that to get passed in the first place.

Okay.

Thanks for your time, Keith.

Jeff Kauffman, Buckingham Research.

Thank you very much and congratulations.

A tough quarter.

I just wanted to get clarification on something you said earlier and then I have an operating question for Keith.

Did you say that mix was a positive 3 to the quarter or a negative 3 to the quarter?

When you were talking about price mix on an earlier question.

It was positive 1%.

1%, okay, thank you.

I didn't hear that clearly.

Keith, you have a lot of track projects coming on.

In a slower volume environment, you said you were losing a little bit more unit train business than manifest.

Can you talk about the next phase of getting to longer train lengths and heavier trains?

I know the near-term environment is slowing that down a little bit, but what capital projects do you have going on and where do you think you can take train lengths, say, over a 12-month period and further out, say, over a two- to three-year period?

It's obviously slowed us down a little bit, but over the two- to three-year period I don't see a lot of change.

Not quantum leaps, but certainly if I am running trains today at almost 7,000 feet on average aggregate, you are going to be 72, 73.

[Deep lanes] we've had some of this reduced business; we are still spending money.

We have cut back some of the capital and we are not adding the capacity where we don't need it, but we are still driving our investment with that CAD1.5 billion number -- adding the sidings, increasing track speeds, putting ballast down -- that will create an ability to create additional operating leverage.

In some other areas that still have yet to become it's more additional opportunities.

I will give you a for instance.

Right now we run export potash trains.

We've got two different models.

Canpotex is the customer.

We're running 170 car models on the West Coast to their export facility.

We're running a 130 car model to the US West Coast via our connection with UP.

If you can get those homogenized and increase that length and get one solid set, there's definite ownership synergies for Canpotex.

There is cycle turn synergies for both Canpotex as well as CP and UP, and that's an area that we are continuing to invest in.

So in lockstep with our investments, UP is investing.

They are currently under a capital expansion plan at the facility where it goes in Portland, Oregon.

2016 you will see, in spite of the headwinds of the business, you will see that get homogenized and you will see another step improvement that will be accretive and help us on improving train length.

So that's just one of many several initiatives that we've got in the multiyear plans that are going to allow us to continue to increase it.

Okay, Keith, thanks so much and congratulations.

Thomas Kim, Goldman Sachs.

Good morning, thanks for your time.

Management has done a fantastic job driving down OR, despite pretty modest volumes over the last few years.

And as we look forward to 2016, I am wondering how comfortable are you with consensus revenue assumptions of sort of a rebound back to that 7%, 8% level.

And then, to what extent do you actually need volumes to grow to see your OR improve further next year?

I will take the OR question and I will let Tim handle the revenue question.

We can have various conservative growth on the demand side and with the synergies we are creating on the operating side we can still improve the operating ratio.

I feel very confident about that.

There's still much more to be done.

Even in a down environment and a similar environment to what we are facing today, you are going to see operating ratio improvement.

Tim, do you want to address the revenue question?

Sure, on the revenue rebound, it's still too early to tell.

All I can tell you is that we are doing 100% to go out and make sure we get everything that we can, but it's still just too early to tell if it's one time.

Thank you.

All right, I will leave it at that.

Thanks very much.

Jason Seidl, Cowen and Company.

Thank you, guys, for the time.

Keith, I want to jump back on domestic intermodal.

Obviously a little bit of pressure in the quarter.

You mentioned that some of it was hard year-over-year comparisons and I was just curious: do you feel you maybe lost a little bit back to the highway as trucking capacity has loosened up a bit?

Back to my point about domestic in the Montreal and Toronto market, we absolutely have.

But overall, if I look at the base of the core network, the balance, I would say no.

You've got to recognize and realize that last year year-over-year we grew about 15%, which was in addition to the 12% or 15% from the previous year, so we are looking at the last two years about 30% growth in domestic intermodal.

Once you start comparing yourself to that, it's a little bit harder to make those kind of quantum leaps.

But I'm extremely encouraged, again in the face of very uncertain economic times and in the face of a pullback in GDP in Canada, we're still growing from an RTM standpoint.

So I think that's a very, very positive side that just says, assume the same, we're going to continue to compete.

We're going to continue to win business, and if the economy comes back, it's pretty powerful leverage on the other side to take it straight to the bottom line.

Just a quick clarification.

You mentioned on the tax rate 27.5%.

Is that for the year or for the back half of the year?

For the full year.

Okay.

Thank you, gentlemen, for your time.

David Tyerman, Canaccord Genuity.

Good morning.

I just wanted to ask about your comment, Keith, about expecting to maintain the EPS growth through 2018 in the -- even if volumes decline.

So if volumes decline, obviously your top line is worse.

As you point out, the OR will come down, but that is mainly because -- I imagine because of the fuel effect and that's supposed to be zero profit impact.

So I am wondering: wouldn't you have a lower profitability under a lower volume environment in that scenario?

Let me try to explain it this way.

Our revenue story -- in your model we talked about crude being a big piece of it or -- just say [CAD10 billion] of it by 2018.

Discount that; take CAD1 billion out of it so we've got effectively similar levels of crude that we move today.

We're still going to grow on the merchandise side.

We're still going to grow on the intermodal side.

We're still going to convert the service, so instead of CAD10 billion it's CAD9 billion.

Now given the crude isn't there, I'm going to make the assumption that we are going to get the same help that we would today with FX as well as our fuel surcharge.

That is 2 to 3 points, so if you do the model, a 60% operating ratio, given those prevailing conditions in 2018, is not a 60% operating ratio.

It's a 57% -- it's a 56%, 57%, 58%.

A range of numbers that are very low that if you combine that with a CAD9 billion revenue base and our buyback program that we are executing you double the EPS.

Okay.

It just seems to me that you would be losing something here.

I understand the math you are talking about here, but it sounds like, compared to the previous situation, that you are in a worse position if you lose CAD1 billion of revenue.

Not with currency.

I'm not --.

So the currency is the difference then, it sounds like?

Well, the help from the currency.

I mean the difference is obviously our assumptions in revenue; the top line is not going to be there.

If it's at CAD9 billion, it's at CAD10 billion, crude doesn't exist; it's not the growth story we thought it was.

With our operating performance and our leverage, we don't have it today and we are producing close to that 60% number.

Do the math -- I'm assuming again that you've got the help from currency and fuel surcharge -- a 60% is a 57%.

Okay, that's fine.

I won't go further.

Just the other question I had was on asset sales.

Aside from the Delaware and Hudson, is there anything else that you expect in the second half on asset sales may be related to the extra properties you have?

Nothing at this time.

Okay, thank you.

Steven Paget, FirstEnergy.

Good morning and thank you.

Best wishes to Mr. Tobias and Mr. Harrison and also welcome Mark to the call.

First question, Keith, given your comments to Fadi on revenues, are you starting to see comparable margins on the smaller and shorter hauls as you might see on bulk unit trains?

From a margin standpoint?

It all depends on the line of business.

On the merchandise side we obviously have favorable margins compared to some of the bulk business, so it's a tough question to answer.

I'd say in general margins are strong and they are even better on the merchandise, even if it's shorter haul.

Effectively we still have the discipline when it comes to the pricing.

Our cost base is lower.

Our RCRs are improving with our costs coming down, so we still see margin improvement on the short haul as well as some of those longer hauls.

Thank you, Keith.

Second question, with terminal dwell down 22%, network speed up 21%, what does this mean for improvements in car travel time?

Could we say that a car got from source to destination 25% faster than in the second quarter of 2014?

That's a fair assumption.

But obviously what it allows us to do on the leverage -- operating leverage side, take assets out, so effectively today we have 20% fewer cars online than we did last year same time.

So it's not actually a one-to-one correlation, but it's very similar in what it allows you to take out.

From a locomotive standpoint, again 20%, 21% fewer locomotives.

That's about 250 less locomotives.

And the terminal dwell story, as I said, actually this quarter is improving over second quarter but there's more to come there.

Thank you, those are my questions.

John Larkin, Stifel.

Good morning, everybody, and thanks for taking my question.

There was a lot of talk earlier, mostly from Mark, about the motion of moving all the debt agreements so that they had a common debt to total cap covenant of 65% (technical difficulty) that currently the leverage is somewhere around 55% or 56%, so that implies you got a lot of room to move.

Does that suggest that without much of a cut, if any, in your CapEx program that you will continue to add incremental debt as you continue to buy shares back at roughly the same pace of about 0.5 billion a quarter?

And at what point as you do that do the rating agencies start to sit up and take notice?

Is there any point along that curve where there's a risk of a lower rating being achieved here?

Good question.

We finished the quarter with a debt-to-EBITDA ratio of 2.2.

We are very comfortable operating the range of anywhere between 2 to 2.5.

For short-term opportunities we could even see ourselves going little bit beyond that.

The cash generative abilities of this railroad are so strong that we can easily delever rapidly if we choose to do so.

We have had conversations with the rating agencies.

We've spoken with them very recently.

We've to them the value that we see in buying our shares at these levels and so we've been keeping them fully apprised.

So we think we have a lot of opportunity within our current rating structure to continue to be aggressive buyers of the shares.

Got it, thank you for that.

And then as the second question, with a big operating ratio drop here year over year, even with the decline in volume, how much do you figure --?

What percentage of that drop do you think was related to the big drop in the zero margin fuel surcharge revenue?

It looks like it could have accounted for most of the drop.

Is that a fair way to read it or was there something else going on here?

No, of the drop only about 200 basis points related to fuel directly.

Over half of it was operationally driven.

So roughly half fuel, half efficiency?

Correct.

Thanks very much.

Mr. Creel, there are no further questions at this time.

Please continue.

Okay.

So before we wrap up, there's one point I want to clarify in pricing; maybe we can save you a little bit of confusion out there.

Same-store pricing: first quarter we had 3.8%, second quarter roughly 3%, the back half we expect about 3.6%.

The timing of the contract is what has the influence, so just for clarification for your models that is effectively -- a little bit more color and specific detail on where we stand on the pricing standpoint.

So that is it.

Thank you for your support.

Thank you for the questions and the time spent today.

We look forward to sharing our results with you next quarter.

This concludes today's conference call.

You may now disconnect.