Canadian Pacific Kansas City Ltd (CP) 2016 Q2 法說會逐字稿

Good morning, my name is Chris and I will be your conference operator today.

At this time we would like to welcome everyone to Canadian Pacific's second-quarter 2016 conference call.

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

(Operator Instructions).

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

Thanks, Chris.

Good morning and thanks for joining us.

I am proud to have with me here today Hunter Harrison, Chief Executive Officer; Keith Creel, President and Chief Operating Officer; 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 that you limit your questions to two.

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

Thanks, Nadeem, and good morning to everyone.

Thanks for joining us.

I am going to cover a few topics today.

I trust you have seen our press release and I am not hopefully be redundant and Mark and Keith are going to cover the -- more of the details of the performance in the second quarter, which I think we all recognize has been quite challenging.

In fact the whole first of the year has been quite challenging and we have had much dialogue about that.

The thing that is exciting to me is that I have been doing this a long time.

This is not my first rodeo.

And I have never seen, I don't think, an operating group that reacted as quick as this operating group, led by Keith and Robert Johnson, has to pick some of the processes internally that needed improvement that might have been broken that are very, very exciting going forward, which certainly speaks to the second half of this year as well as, maybe more importantly, speak to next year's (inaudible).

Let me just give you one example.

To start with this group has come up with a different way to haul crews.

And net-net-net it is -- effectively on an annualized basis it is CAD40 million in savings.

Now that is not going to all kick in this year; we are going to get the benefit of 50% -- 55% of the year there.

But that shows you some of the hard work, grinding it out.

We will talk about some of the headcount initiatives that are a result of a different operating plan with our trains.

The market has turned much more positive.

Grain looks much better than we expected earlier in the year.

In fact, if you listen to the experts in Canada, this will probably be a record year of all time of production of grain in Canada.

The bulk side has pretty well squared itself away.

I think we see improvements second-half everywhere but probably crude.

And we know the question marks that are there.

And then throughout this presentation I will be speaking to some of the initiatives that are taking place that speak more to the future than the past and I think that is the point that this group is with us this morning is to think more about the future.

We have seen the first half of the year.

We have taken our licks.

We have had the fires.

We have overcome some adversity.

And we are still going full speed.

And at that reaction, as quick as it came about, was very refreshing and just gave me more confidence as I ride off in the sunset that this organization is in good hands to produce results that will I think will be very impressive to this group in the future.

So with those comments let me call on Mr. Creel to give his perspective on the quarter.

Thanks, Hunter, for those very kind comments.

I want to echo and emphasize the point that Hunter made about this environment we have been in this first half, the second quarter.

Obviously not a runaway on the volume front, very challenging headwinds.

But from an operating performance perspective what gives me confidence in what we have done and the numbers that we have produced is the foundation that we are setting for future success.

And if I had to take in my career as well and match up any operating performance, I would argue this is not one of the best operating performance quarters I have ever experienced.

From a leadership standpoint, from a bench standpoint we told our investors back after our AGM at the first quarter result that we were going to realign our regions which we have done.

Robert Johnson, who I have worked with now for almost two decades of railroading, is leaving the operating group reporting to me, working together in concert with me and the other team members here in Calgary.

Guido is in the West, Tony is in the East, Scott MacDonald and then of course [Mike Moore] running the operation centers.

That combination of that bench is second to none in this industry and that is what's producing, with the people that we lead, these remarkable operating results.

We have had quantum leaps over the past several years that even in the face of down negative volume, as Hunter taught me a long time ago, this operating plan is a gift that keeps on giving.

It works as good if not better in the down times as it does the up times.

But as we look forward to the second half and as we look forward to 2017 in 2018 with this reset base, that is where we drive operating leverage, that is how we continue to provide best-in-class service, because you do it by executing the operating model and that is how you continue to drive margin improvement.

And that is what gives me confidence to be able to produce the kind of earnings that we are talking about producing this year second half.

And then on the base of that, we talk about, and Hunter taught me this a long time as well, my number one challenge as an operating guy is the safe and efficient movement of goods from point A to point B. So on the safety front, which is all very topical in this industry, topical with our responsibility to the communities we operate in and through, although that is an area that you never get there; it is a journey, it is not a destination.

We continue to drive dramatic improvement in that area as well, which is good for business from the societal cost, a people cost, it is the right thing to do.

And it is not about being the best in class or the best in the industry; it is all about day in and day out being the best that we can be ourselves.

We hold our own self to a high standard and that is something we will never forget about.

And because of that through driving culture, change, process change and through the people we are producing some significant process there -- progress that makes all of this possible.

I will give you a for instance.

We talked about this a little bit in the past.

The power of just taking switches out of our mainline.

The number, I looked at it this morning, is, to be precise, 843 switches we have identified, about half of those in the mainline, the balance at our yards, at our back tracks, they are redundant switches.

What does that mean?

That means less capital cost.

What does that mean?

That means you take them out of track and you have got a more fluid railroad, a more productive railroad, a faster railroad relative to turning assets.

So I don't have slow orders, I don't have a potential for a derailment.

I don't have an additional switch that I may not need or don't need to replace in my capital budgets.

And as we go forward and grow this Company I now have an inventory of switches and tracks that I can cascade forward and lower my overall capital cost as we grow in the future.

So just that one simple initiative, the power of this team to be able to do that and to repurpose this network, work in progress but certainly something that is instrumental for us as we go forward.

Let's spend a little time on the revenue side.

Obviously not a runaway, 12% down for the quarter, not a very pretty picture obviously.

I am looking to the future; I am looking to the second half.

The quarter was much worse than we anticipated.

We did expect to bottom; it was worse than we had anticipated.

But as I have said before, I never anticipated the fires in Alberta.

I didn't anticipate the fact that we would move so much grain, record amounts of grain and the supply chain, that we would run out of grain to move in May instead of June or July, which is what we had forecasted.

But with that said again, the worst that is behind us.

I am looking forward.

We have still got a little bit of headwinds, Canadian dollar, the strengthening dollar hit us some in the quarter, it is still going to hit us a little bit the second half.

But the second half of the year was optimistic.

Today's rates, even with a little bit of offset headwind with the currency, the back half of the year earnings potential is substantial.

Fuel surcharges hurt us about 3% during this transition time, we track that on OHD levels, so we are paying a higher OHD cost ourselves.

The surcharge didn't kick in until the last part of June.

So that was a headwind for us in the quarter which will neutralize in the third quarter and become a slight tailwind for us in the fourth quarter.

Price, very positive story with the service excluding regulated grain was 3%, that was slightly offset by a small negative mix impact when you see the 2% price mix.

A little color on that.

And then finally, I think it is important that I point out the 2% reduction in freight revenues.

I don't want that to be misconstrued as price or misconstrued as rates.

That is all about our business changing since last year.

We sold the D&H, there are some haulage revenues that we enjoyed last year second quarter from the [NFs] who bought it that we don't enjoy this year.

And also on a positive note we have got less accessorial charge revenues.

And what that tells me is that our customers too are working with us to turn assets.

We don't have assets sitting around -- those valuable assets, be it the customer owns them or be it we own them, we are able to turn those at a lower incremental cost to drive additional volume at a lower cost, which is all good and fits well into our operating model.

So again, as we mentioned in April, the second quarter was a bottom.

Perhaps the bottom was a little bit deeper than what we expected.

But the second half we are extremely optimistic given the potential, to Hunter's point, for strong volumes and improving rates despite some continued uncertainty in crude and in intermodal.

Q3 you can expect to see RTMs down in the mid-single-digits given we have got very difficult crude compares last year.

I will point out that back in September/October, our two strongest ever crude months last year when the spreads inflected, we obviously don't have that this year.

But this team is out selling the strength of this franchise in a very disciplined manner.

We are continuing to improve our service and we are setting the foundation, as I said, for the rest of 2016 and in 2017 and 2018.

It is exciting now the value creation is pretty compelling.

But it's inspiring as we go into 2017 and 2018 as we transition from Hunter and he turns the baton over to myself and this great team that we have assembled here at CP to produce continual earnings growth for our shareholders and service for our customers.

Over to Mark to provide a little more color.

Thanks, Keith.

As Keith mentioned, we did face a very challenging demand environment during the second quarter, which was further exacerbated by the Northern Alberta wildfires which we believe negatively shipments by about CAD20 million during the quarter.

And the wildfires also increased fuel expense by CAD9 million, which unfortunately couldn't be offset to our fuel surcharge program because we source a meaningful percentage of our fuel from the local Edmonton market where fuel was in short supply for several weeks following the crisis.

So, while the team worked exceedingly hard to take cost out as quickly as possible, while of course maintaining safe operations, and then the speed and magnitude of the revenue decline during the second quarter made it difficult to offset the full impact.

Which is why despite bringing operating expenses down by 11% and finishing the quarter with over 2,000 fewer employees than we had last year at the same time, adjusted income came in below year ago at CAD312 million or CAD2.05 per share.

Now within that comp and benefits was down 8% versus last year driven by lower headcount and positive pension income.

Fuel expense was down 29% due to lower volumes and improvement in fuel efficiency and lower fuel prices.

And purchased services declined 13% due to lower locomotive overhauls and maintenance costs, fewer contractors and a CAD17 million gain from the sale of some surplus freight cars.

Land sales were only CAD2 million in the quarter but we do expect an additional CAD20 million of land sales throughout the balance of the year with most of that expected to occur in the fourth quarter.

All in that would bring total land sales for the year to about CAD75 million which is unchanged versus our last update.

Below the line, other income and charges as reported was a CAD9 million credit during the quarter due to an CAD18 million foreign exchange benefit on our non-US dollar denominated debt portfolio.

If we were to exclude this nonoperational impact, other income and charges would have been CAD9 million, CAD6 million of which related to one time fees associated with our proposed offer to acquire another Class 1 rail.

Interest expense was up 37% to CAD115 million due to the additional debt we issued in 2015 to repurchase shares and a weaker Canadian dollar versus the US dollar.

And then our effective tax rate, excluding the FX translation on our US dollar denominated debt, also came down this quarter which was consistent with our expectations.

Currently our year-to-date effective tax rate is 27.25% and I am pleased to report that we are actively pursuing a number of promising tax initiatives which may lower our full year all in 2016 effective tax rate another 50 to 100 basis points before the dust settles.

Finally, from a capital allocation standpoint we remain committed to returning capital to our owners within the confines of our current credit rating.

Consistent with this you will recall we announced a 5% NCIB share buyback program and a 40% increase in our dividend in conjunction with our Q1 earnings release.

As of today we have purchased 5.3 million of the 6.9 million share authorization at an average price of just over CAD169 per share and our key leverage metric, which is adjusted net debt to EBITDA, currently sits at 2.9 times.

At this point we don't have any plans to issue any incremental long-term debt.

So we should see some natural deleveraging and expect to end the year with around 2.7 turns of adjusted net debt to EBITDA.

So admittedly after a challenging first half we have our work cut out for us in the second half of the year.

But the team is digging deep to manage cost and improve service and we are confident that both OR and EPS will strengthen sequentially during both the third and the fourth quarter.

And with that I will turn the call back to Hunter to close out our prepared remarks.

Thanks, Mark and Keith, for those remarks.

Chris, we will be happy now to receive questions from the group if there are any.

(Operator Instructions).

Scott Group, Wolfe Research.

So I wanted to ask you about the outlook.

I am not sure if you guys still see a path to double-digit earnings growth.

I know most of us don't think that that is realistic.

But maybe share, if you do think that that is possible, kind of what some of the assumptions for maybe RTMs and then operating ratios are in the third and fourth quarter that gets you there?

Well, I mean clearly, Scott, I think that we certainly see a path there or we would have informed you otherwise sooner.

Now clearly this is not a slam-dunk, it is going to be a challenge.

But if you look at the net-net-net effect of what we discussed so far this morning with Mark and Keith about revenues, grain much more positive, cost initiatives that people hadn't dreamed of and you put the net-net-net effect of that altogether you can come up with CAD100 million.

Now I mean you can do the math.

If you look at the first half and you are trying to look at the full year, and most of the questions I have had lately have not been on the full year but have been on next year that the focus is, there is certainly a path to get there.

Now if we see if something happens to the Canadian dollar, if something happens, quote, beyond our control and this gets to the point where we see that we can get there and it is a material difference, then, as I have said to you earlier and before, we have an obligation and we will report that to you and say, look, for the following reasons here is where we think we will be.

But if I didn't think that was realistic, we've all -- I spent last -- I don't know if it was last weekend or the weekend before -- the basic weekend going through all of these verse assumptions, the puts and takes, the pluses and the minuses, there is a lot of moving parts.

And anybody that says they can tell you exactly where we are going to be, tell them come see me because I have got a job for them.

Scott, the only thing I would add from an RTM perspective, right now we are around year to date 7% to 7.5% down.

We see line of sight with the strength in bulk be it grain, be it the fundamentals that have changed on potash, coal, all those things setting hitting the bottom so to speak and inflecting positively, line of sight just like we said at the beginning of the year around 4%, RTM down year over year.

And from the operating performance the leverage we are creating from a cost standpoint, the cost takeout which we will see the benefit from more so the second half than the first half, mid-50s type operating ratio performance in the second half.

And, Keith, just so I am clear, you are saying down 7% for first half, you think RTMs for the full year down 4%.

And then are you saying mid-50s operating ratio is kind of what you think is possible in third and fourth quarter?

That is exactly correct, which is what gives me -- I mean you work the numbers.

It gets us to a sub 59 operating ratio and it gets us knocking on the door right at that 10% double-digit earnings growth.

Okay.

And then just --.

I don't want to beat a dead horse here; I am going to talk a little bit about grain.

This is what gets me excited, and I got into this a lot yesterday.

We are assuming an average grain harvest -- I am going to give this to you, and this is something that is fundamentally different this year than last time.

So the key -- you can have a record grain harvest but the supply chain has got to be able to handle it -- to be able to move it.

So you have got to be able to load it, move it, unload it, circle the cars, cycle the cars back.

So back in 2013/2014 that was a 73 million metric ton best ever record harvest.

We are looking at a potential now to exceed that.

The last numbers we've gotten as recently as yesterday says it has the potential right now to be 70 and north.

Our numbers assume like a 68.

Last year it was at 64.

So we have marginal upside.

Now the key again is I have got to be able to turn those cars.

But what gives me confidence in the ability to do better than we have ever done before is the investment that has been made.

We introduced dedicated trains in this marketplace two years ago.

We are sold out, Scott.

They want more.

They being the grain companies in Canada, they being the grain companies in the US.

They are speaking with their pocketbooks because when they commit to those dedicated trains it is a 12-month commitment.

They have got known resources, known assets, they can go out and make sales and they can depend upon this railroad to move those sets faster than they ever have to the marketplace.

They have invested hundreds of millions of dollars on the West Coast be it in by [Viterra] investment, North Shore investment, South Shore investment.

Richardson has invested tons of money.

So suffice it to say if they have invested hundreds of millions of dollars they know how to unload grain and how to load their own ships, I would expect their capacity is going to be increased.

I mean I can talk about this all day long.

Another margin issue that I think is critically important to understand.

The day of the 112 car grain train at CP is done.

We are moving to 134 cars.

Why are we doing that?

It takes the same amount of locomotives.

There is a 17% or 18% pick up in cars per train, which means at the end of the day same amount of grain is lower cost, lower locomotives, lower train starts, it is an immediate margin opportunity for us as well as an additional opportunity for the farmer and for us to work in concert with the grain companies to move more grain.

That is a powerful, powerful thing especially when you are facing what might be a huge opportunity for us both in 2016 to make up some of what we have lost the first half, but the true power is going to be in 2017 in those lull months which we've experienced this year.

So this is all a very positive story for us.

That is good color.

Just one real quick one for you, Mark.

What is the run rate on your diluted share count right now?

Just because we saw the big buyback in the quarter, but didn't show up much in 2Q.

As far as -- I am sorry, I'm trying to make sure I understand the question.

We repurchased about 75% of the program that was initially authorized.

Obviously as we get into the quarter end we go into a blackout period, so we have been out of the market the last couple weeks.

In the materials that are posted we have the June 30 share count which I would refer you to.

Okay.

And are there any thoughts about upsizing the buyback given that you have done most of it already?

I think what we would say that our thinking on the matter hasn't changed at this point.

As always our first call on cash is the needs of the operation.

Whatever is required to support the safe and efficient movement of cars and provide our customers with excellent service.

Once those needs are satisfied we look to return any excess cash to our owners through either dividend increases or share repurchase.

And of course we want to do that within the confines of our existing credit metrics.

So as we sit here today, given where our leverage ratios are, it is our expectation that we will complete the existing program.

And then as we committed to, we will pay that down a little bit and likely end the year around 2.7 times debt to leverage effectively.

Okay, thanks a lot for the time, guys.

Ravi Shanker, Morgan Stanley.

Thanks for all the color on the specific steps you're taking to kind of I would say boost operating efficiency.

It almost seems like you are trying to send a message that there is a lot more room to kind of get that OR down over time.

Is that the right takeaway, or are you just kind of giving examples of the blocking and tackling that you guys do on a daily basis that we may not appreciate sitting here?

No, I think the first takeaway is the right way to look at it.

And, look, in the interest of full disclosure, I don't have a Teleprompter here, okay.

But look, this is different than what we are doing.

And I think given Keith's remarks you will see the bar being raised over time and us stepping over the bar even in better shape than we have been in the past.

Great.

And, Hunter, you are now entering or you will enter next year a three-year consulting agreement with CP.

Almost sounds like you still have unfinished business here even if you are not doing the day-to-day stuff.

Any particular new focus areas that you have or that you are going to have in your time as a consultant or what kind of role do you see yourself playing in the next four years?

Well, I am going to do what Keith says.

That will be a new change (laughter).

No, I mean, seriously.

Look, I think I wasn't necessarily privy to all the dialogue with this, but I think the Board said, look, we have got an opportunity to have two pretty good railroaders during a transition period and that is not the worst thing in the world.

Look, I don't know how much I will be called on.

I think it's to be determined.

And I am a hired hand.

And as Keith and the Board sort out what they would like me to do or work on that is where I will spend my time and energy.

And Keith and I -- this is not a new relationship.

We have been doing this 20 some odd years.

So it is not like we don't understand each other.

We talk the same language.

Philosophically we are pretty closely aligned.

I don't like his style and dress, but we will work on that and he doesn't like my style.

But, look, I think this is kind of a work in progress.

Yes, if I could add a comment.

Hunter and I have been skating together and put pucks in the net three railroads over two decades, it is nice of the Board to support me in the fact that I know that I have got him as a strategic advisor if I need him.

And if nothing else from a coaching standpoint he has got 50-plus years of experience, I have got half of that.

I have seen a lot with him; I mean a lot with him but there is still a lot I haven't seen.

So to know that he is there if I need him during those three-year periods, he is part of this family, I am thrilled that we have him to call on if we need him.

Great, congratulations, Keith.

A quick housekeeping question if I may.

You gave us the revenue impact from the fires.

Do you have an EBIT or an EPS impact as well (inaudible) to get the conversion on that revenue?

I think what I would do is I would just take the CAD20 million of revenue and I would take out the volume variable elements from that, which is probably call it 30% for rough math.

And then of course with the additional CAD9 million expense from the fuel side that could back into it pretty quick.

Thank you very much.

Steve Hansen, Raymond James.

Just a quick one on one of the revenue silos in potash in particular.

The back half comps look pretty easy and we are starting to get some visibility emerging on international contracts.

Just trying to get some color around any timing, visibility you have on the ramp up of those volumes.

And I guess as a secondary to that is what direction is it going to be heading?

Is it all heading west or are we starting to get some eastbound volumes this year as well?

Yes, the preponderance -- I will start with the last, westbound export stuff.

The domestic markets are not that strong so this is driven by export demand.

Russia settled their contracts last week I believe it is to Canpotex is sort of in the final stages of handling their stuff.

They have got stuff booked next month.

You will see a ramp up from a run rate standpoint, tonnage is all back half, to your point.

Third quarter/fourth quarter should be about 20% more on an RTM basis than what we saw in the second quarter.

So it is coming.

The beautiful thing is from a competing resource standpoint we have got a lot of capacity on this railroad, so I have got no qualms and no concerns about maintaining a fluid network, running grain as well as running potash at the same time.

We obviously don't have any crude out there so, no pun intended, it is not in the mix.

So grain and potash we are looking forward to moving it (multiple speakers) to a much higher degree than we did in the first half.

Okay, great, that is helpful.

And then just the Canadian coal has been quite impressive here, at least for the last four or five weeks, after a relatively tough second quarter as well.

And do you have any visibility on the back half of the year as well?

Yes, actually that is something that is pretty encouraging.

To your point, the prices have stabilized, the price for the third quarter [size] and the price for the second quarter, so I would suggest that that is inflected as well.

From a run rate standpoint we are tracking well with Teck.

We have cut 17 sets out there that are running 90 hour cycle times which are unheard of.

The service is great, we are controlling our costs and I see line of sight to a little upside there.

We finished last year just under 24 million metric tons.

The run rates we are at now I see us coming in closer to 25, 25.6 in 2016.

That is great.

Very helpful, guys, thanks.

Steve, let me add to that.

This is a little bit of the challenge we have on the forecasting side.

If you look at what we were expecting and what we were hearing anecdotally out of Teck, our largest customer, in the first of the year was whether they were going to stay in business.

And they bounced back and now things are going very well.

Just in a matter of effectively six or seven months the whole applecart has totally changed.

And so, that is some of the things that maybe we see or hear that the market is not as up to date on.

Much appreciated, thanks.

Fadi Chamoun, BMO.

Maybe just a quick clarification first.

Keith, I think you mentioned that you thought the third-quarter RTM would be down mid-single-digit.

And then the second question, you thought that the operating ratio in the third quarter could be in the mid-50s.

Did I get that right?

That is correct.

That is correct.

Yes, so now we are getting less worse every week as this product starts to move.

So we just continue to improve to that 4% in the year.

Okay, and the second question I wanted to ask is sort of you have clearly taken this cost curve down quite a bit in the last few years and you continue to do so.

And you seem like you have a good set up going into the second half.

But you have also been demonstrating a lot of improvement in reliability and service and so on.

And the biggest payouts have always been that you are going to be able to convert some of that improvement in service and reliability into acceleration and some of that top line.

So my question is, how does the conversation with the customer sound like now that you sort of have two of three years under your belt of improvement, how do you feel going about that opportunity to improve revenue growth going into 2017?

And if you have sort of some thought about where to think the opportunities are from a sort of markets point of view?

Yes, I have so to your point, we are there where we are starting to have credible conversations and winning business as a result of the service.

We are getting to a point where our marketing team can go out and, from a dollars and cents standpoint, explain to a customer what service means to them.

How we can help them take money out of their transportation cost, give them reliability, be it ownership, think about equipment, people that own equipment now, they are worried about cost just like everyone else is.

If I can get them service that will cause them to reduce their ownership cost owning a smaller fleet or their maintenance cost owning that smaller fleet it is getting compelling.

So as these contracts -- and these are lumpy, they are not huge, we're not talking about CAD100 million, CAD150 million, CAD200 million contracts, there are not a lot of those out there.

We are talking 50 car shipments every day, 25 car shipments, CAD50 million, CAD30 million, those kind of conversations because we now have service with the strength of this franchise where we do have franchise strength and I am talking about length of haul and reliability, very different conversations today than they were in the past.

So over the next two to three years that is part of the growth.

I say it all the time, probably CAD200 million to CAD300 million on an annual basis of incremental opportunity if we repatriate the business that should naturally be on this railroad be it in truck or be it with our competitors, it's a compelling revenue organic growth opportunity for us.

Now it is muted right now because of the economy.

I look at domestic intermodal, that is a compelling service.

And if you look at the numbers we are down year-over-year, but you have got to keep in mind how much we've grown it previous to that.

And you've also got to keep in mind what the market has given to you.

So, we are not doing great but we are doing a whole but better than a lot of others are doing given the strength of that service offering.

So there is more to come, Fadi, this is really going to pace itself and start producing that earnings growth from that service over 2017 and 2018 and 2019 as opposed to this year in a very muted demand year.

Okay so this CAD200 million CAD300 million of business that you talked about, I guess you see that sort of incremental to whatever the economy gives you whether it is 1% GDP or 2%, this is sort of incremental to that that you should be able to --?

That is a correct assumption.

Obviously we won't get it all overnight but over the next two to three years.

It is my full intent for this team to take this powerful operating team, this marketing team, our staff, our corporate office team and convert this revenue back to this railroad at a very low incremental cost, be it the service we get at the customer through transactions, through interactions and through day to day just moving of their freight from point A to point B. And they have never been able to experience at CP, and it tastes pretty good.

Okay and maybe one follow up on that.

So the domestic intermodal, can you talk a little bit about the progression of that market sequentially in the quarter?

Like how did it look like in April, how did you exit in June?

It is getting stronger.

Obviously what I expect intermodal overall and of course domestic is a piece to this.

I think we will close the gap and inflect a positive year-over-year growth.

I would have said six months ago that it would have been strong single-digit growth, now maybe it is low-single-digit growth, I am not sure, that is the uncertainty that I speak of.

But as truck capacity, as fuel price goes up, which is of late it is going back down so I mean that is the uncertainty in the whole thing.

The service is compelling.

The lanes are shorter out versus our competitor single truck driver competitive and we are doing it faster than we ever have and we are being reliable.

That is what it takes to win market share.

Some of what has underperformed is just the organic growth that we have seen with our existing customers.

That is obviously -- they are facing the same headwinds everybody else is facing.

But through our initiative selling and growing cross-border domestic there are initiatives picking up additional wholesale customers for initiatives picking up customers we never enjoy because we got service, we are doing a little bit better than everyone else.

But overall obviously the market is what the market is.

Thank you.

Brandon Oglenski, Barclays.

This is Eric Morgan on for Brandon.

Thanks for taking my question.

I wanted to ask one on CapEx.

It came in a little bit higher than the run rate to get to your guidance for the year.

I was just wondering if you could comment on the uptick sequentially and if 1.1 for the full year is still the right number and maybe any initial thoughts for 2017?

Yes, we are still very confident that to the CapEx will be down significantly from prior years.

We are targeting somewhere in the CAD300 million, CAD400 million range.

We obviously continue to use a dynamic process to make sure that we are investing in the infrastructure and improving service.

And as both Keith and Hunter have alluded, we have identified a number of additional cost take-out opportunities, we want to spend and invest behind those.

So it's halfway through the year, it is hard to pin it down.

But I can assure you that it will be down substantively year-over-year.

Because we have done a lot of work over the years to build the north line and build out the sightings and other things, and because we have done such a great job on locomotive management, I would expect that our spend in 2017 will look very similar probably to our spend in 2016, probably even slightly down.

Okay, that is helpful, thanks.

And just a quick one on interest expense.

Is the [CAD115 million] a good run rate from here or do you think it could come back up to you or I think you had been saying CAD125 million to CAD130 million per quarter?

Yes, I think given where we sit right now we don't have any plans to issue any additional long-term debt, that is a good proxy to use.

I should also clarify, earlier I wasn't as clear as I would have liked to have been on an earlier question.

The actual share count we ended out as of June 30 was 148.4 million, so I do want to make sure I clarify that for folks.

Okay, appreciate it.

Turan Quettawala, Scotiabank.

Keith, just maybe talking a little bit more about the revenue potential here.

I think last quarter you talked about 3,000 coal sales calls and the focus at CP obviously is pacing on selling the new service.

Can you talk maybe a little bit about the conversion rates on that selling activity?

Is it in line with your expectations?

And maybe even just the CAD200 million or CAD300 million you talked about in terms of growth, how much of that is sort of already in the bag?

Well, let's start with the second first.

That CAD200 million to CAD300 million, I would say there is probably CAD50 million that we picked up this year, so there is still more to come over the next two, three years.

As far as the cold call sales, the conversion rate is not great but you don't expect it to be with cold call sales.

We are literally knocking on people's doors talking to people that frankly didn't know who CP is or maybe we have had sentiments that they didn't recognize or think that CP cared about the small shipper.

We are the bulk railroad; if it is not 100 cars we don't want to move it.

Well operational, my philosophy is if it is 10 cars there is more margin in it and that is how you sell service.

And that can become part of their assembly line moving product from point A to point B from one facility to the other and that is what we are going to get better in.

So this is all new to the team.

I would say on an annualized basis it has probably netted us CAD3 million or CAD4 million.

But it is not what we have got, it is what is still to become.

And as we get out and get credibility and our name gets out in the street and they know us as the railroad that will move all your business and we can do it reliably and efficiently.

And you can afford to take your transportation cost down and rely on our network as opposed to paying a premium for a truck, then it is going to give those transportation decision makers the confidence they need to be able to shift share to us off the highways and allow us to haul them on our railroad.

Perfect, thank you very much.

I will just stick to one.

Walter Spracklin, RBC.

So if I heard you correctly, I think what you are saying is that you guys have achieved some pretty impressive operating performance here with lower volumes.

And that even if -- whether the full-year guidance gets met or not, if it is 8% or 10%, the key here is that you have set the groundwork for some tremendous opportunity going into 2017.

So if I am reading that right, I mean at some of the impact really is going to be felt in 2017, particularly with grain where -- I think the first and second quarter of each year is where you get the real upside.

If that is the case and we are coming off a particularly low volume year this year and we have as a result a very easy comp into 2017, I know we are going into some 2017 discussion here now, but at what level of volume lift given that easier comp and given that very substantial potential grain haul could we be looking at in terms of -- in 2017?

I haven't ran that numbers, Walter, but it is compelling.

You took great notes because you just said exactly what is happening.

I mean that is what is going on.

We are going to see tailwinds from grain next year, we are going to see tailwinds potentially from potash next year.

I see an opportunity for intermodal growth.

I see an opportunity for merchandise growth.

2017 to me is pretty exciting.

Now where the pin is going to fall I don't know exactly where to put it yet, I have got to see what the economy does second half.

But all I can say is it is exciting.

That is great.

And I guess my second question is on the kind of volume growth, given the base you have set with the lower volume in the first half of the year and the operating conditions that you have created at CP, I mean isn't the operating leverage therefore quite compelling off that higher volume growth?

And again, I am asking a 2017 question, but could we see mid-50s through the year in 2017?

Well, I would aspire and I think the potential is there to be best in class is what I would say.

You got it, Walter.

Okay.

All right those are my two.

Thanks very much.

Chris Wetherbee, Citi.

I wanted to touch on the resources as we move into the back half of the year.

So I think you kind of outlined the story in terms of the volumes coming back here.

Can you talk a little bit about headcount?

Can you talk a little bit about sort of locomotives?

What do you need as you go back and kind of bring some of this business back online?

Well right now we are down about, I think we reported 900 after June, we are around 1,000 heads less versus last year.

Looking at our efficiencies, looking at our initiatives that I talked about, the grain piece is 20% pickup per train, that is pretty compelling.

We expect with this reset base to be able to absorb most of this growth and we will finish the year pretty much the number we are at now which is around 11,900 plus or minus.

Now if we had a banner year and if the supply chain handles more grain than I think it will, because we haven't yet tested it yet.

To that point we have got resources on the sideline.

I have got almost 700 locomotives that are parked.

I have got 4,000 grain hoppers that are parked.

So if the supply chain can demonstrate that it will sustain more volume and do it fluidly then the resources are there.

So I mean it is compelling and in that case would I have to add a few more running trace employees, yes.

But I'll tell you there is a lot of room for productivity on our existing trains to absorb this, which is exactly what we are getting after the second half.

Okay, okay, that is very helpful.

And then when you think in that context, Hunter, I think you called out a CAD100 million opportunity in the back half of the year.

I am guessing it is probably a little bit more fourth-quarter weighted because that is when I think the majority of some of this volume pickup begins to happen in a bigger way.

But just any way we can kind of slide out how that might be playing out progressing over the back half of the year would be helpful.

Yes, we have a little debate, but typically in the fourth quarter you get into holidays and supply-chain issues with not unloading more than you do third.

So if the grain comes in and starts pretty soon now as we have been led that it is going to, then third quarter is going to have a big jump.

And it will be better than -- should be better than fourth.

If it flip-flops the other way with the supply chain then it could turn the other way, but it is going to move third or fourth quarter or be a carryover into a big start for next year.

So I think the leverage is there, I think the resources, as Keith has described, are there to handle the business.

And the one thing we need to continue to press on is to be sure the rest of the supply chain reacts as we are reacting.

And so we -- in the past the real sector has taken some criticism if you go back to 2013/2014 about number of resources and so forth.

So if need be we are going to put a scorecard of who is doing what where.

Here is what rail is doing, here is what the unloaders are doing, here is what the loaders are doing.

And we are going to call a spade a spade.

And I think to Keith's point earlier you are going to see the supply-chain pickup.

They have made an investment, we have produced results and they have confidence in us, we have developed confidence in them.

And effectively have no service issue there that I am aware of and usually I am aware of them if they are significant.

So, yes, it is -- to Keith's point, it's pretty exciting going into next year.

Okay.

And it sounds like grain is kind of the trigger?

Grain is king, grain is king right now.

We are happy about it.

Thanks very much for the time, guys.

Appreciate it.

We also (multiple speakers), I mean everything is turning for grain.

If you look first of all we have got the rate actions, which the increase is I think 4% --.

4.6%.

4.6% or 8%.

Okay, that is number one.

Number two I think I am -- I read that it's more acres planted than in the past.

The yield is better with new technology and so forth.

So if you believe what you read the only thing that is holding grain back is the supply chain coordination.

And we want to be a player and a leader to help Canada, and we have the same issues in the US just on a smaller scale, become a world leader in the movement of grain.

And I would say this, listen, we all learned a lot in the supply-chain, be it the grain companies or be it the railroads in 2013/2014.

We work closely with our grain customers which are the grain companies.

And I can tell you now that our leadership understands this, we all have to execute, they understand they are a part of the team.

We are out collaborating on the ground, this week we are out meeting with elevators in Vancouver.

So, if we work together there is a lot of potential here for something that this country has never been able to produce in the past, which is going to help it short-term and long-term from a reliability and a world respect standpoint for being a supplier of wheat.

That is great color.

Thanks for the time, guys, appreciate it.

Ken Hoexter, Merrill Lynch.

Keith, I guess your peer has talked a little bit about doing what needs to be done to retain market share.

What are your thoughts on the state of price competition on the rail side?

You talked about going in and winning some business from truck.

Can you talk a little bit about your thoughts on the pricing side?

Yes, my thoughts, Ken, are sell the strength of this franchise, take a disciplined approach, we are not going to be to commoditized.

If I can get out again with a customer and explain to them how moving freight on my railroad saves them money and helps them make more money, it is not about cutting rates, it is about selling service.

So doing what it takes is making sure we control the low cost so I can go out in the marketplace.

The market sets the rate, I can still earn cost to capital, we are going to make good business decisions.

But I am not going to go out and slice and cut and destroy and give leverage away and create a bad business decision for this Company that we have got to live with for the next five years or three years.

That is why we don't believe in (multiple speakers).

No, no, I understand from your perspective.

I am wondering -- they have been talking maybe a bit about being more proactive.

I just want to know if you have seen that in the market in their attempt to retain share.

It's not affecting us.

I mean my volumes are what they are.

You would have to talk to them.

And I tend to believe that they are smarter railroaders than that in all honesty, I really do.

They have got a good network, they have got a good product as well, there is enough space for both railroads to do a great job and I think they are going to be fine.

I respect their leadership.

I can't criticize too much, we have got a lot of sweat equity over there.

You have got two of the best railroads in North America right here in Canada.

There is enough space for us all to operate in a disciplined fashion and make money and provide great service for our customers.

Okay.

And just following up on the leverage questions before.

I just want to understand when you were talking kind of -- I get the mid-50s target in the back half of the year as volumes return.

But when do you need to start bringing back some of the costs?

I guess when you talk about having plenty of capacity but yet you are seeing volumes or expect volumes to ramp up.

Can you kind of help us think about when that leverage peaks and you need to start bringing the cost back online?

Well, that's going to be minimal number one because we are absorbing more than half of it through existing network.

I don't see it until the peak and it is going to be again incremental and it is going to be minimal.

And I am not bringing it back until I see the white of their eyes.

We have got enough capacity with our existing network now to absorb, which is what we are doing.

Again, I keep talking about it, but it is pretty darn exciting to me.

In the past we have resisted running big grain trains.

What we look at, I have got three locomotives in every one of those 112 car trains and there is enough horsepower to pull 134 cars.

I am just -- the incremental cost is fuel.

The crew costs me the same, the (inaudible) costs me the same, I am going to pick up capacity by doing it, I can run fewer trains.

So there is a lot we can do with what we are doing now.

We are developing a plan with Robert and his team to move some grain also on manifest trains.

So again it is more to that incremental cars to a fixed cost, it is pretty much margins going right to the bottom line.

So that is taking the existing network and making it more robust, adding more cars to existing trains, which is what we are going to be doing until we get into the peak of this thing.

And then we will be adding incremental cost, but we will be making a lot more revenue and a lot more money when we do it.

Thanks, Keith.

And just a quick numbers question.

Mark, did you mention a CAD17 million gain in the quarter, I just want to make sure I heard that right.

Correct.

And that was on car sales?

Yes.

And through purchased services.

Purchased -- thank you very much for the time.

Appreciate the thoughts and insight.

Tom Wadewitz, UBS

So Hunter, you had a brief comment on the consulting arrangement looking to July of 2017.

I am wondering if that precludes you from interacting with other railroads.

So if you are doing consulting with CP does that mean you can't consult with other North American railroads?

I think I have a non-compete in that arrangement.

And the reason why I don't know is because I hadn't focused a lot on the agreement, I've been trying to focus on running the railroad.

But I think it is typical kind of boilerplate language that would -- subject to other arrangements, that would be I am restricted for two or three years or whatever the restrictions might be that is what -- that is the issue.

Right, right.

Okay, all right, thanks.

I can't do multiple consultings, okay.

Right.

Well I figured that would be the case but thought it was worth asking.

What -- I think, Keith, you have talked about some of the impact of running better service and the opportunity in intermodal.

So what you control.

But what about -- what do you think might drive an improvement in intermodal market, the piece that you don't control?

Do you think -- is there an inventory issue which is kind of come in and so that could support improvement in domestic intermodal, international intermodal?

Just what kind of visibility do you have to the market?

And is it appropriate to be optimistic on international intermodal in fourth quarter that you could see it flatter?

Or do you think it will still stay down in intermodal if you look after kind of third-quarter/fourth-quarter?

Well, I mean at the end of the day consumer consumption drives intermodal, I am not going to suggest that it doesn't, Tom.

So I see the same things that you see.

I see what is different and unique for this franchise is an ability to compete with trucks, the strength of our network.

Again, we have got to get that reliability there which we have, so that helps us.

But as far as incremental large growth coming back, again, it has got to be driven by consumption.

And I do think obviously inventory levels are up.

Again, I can't ignore that.

But at the same time I still see a lot of trucks out on the highway that I can make (inaudible) value proposition should be on the rail and that is exactly what we are going after.

I think there is an opportunity to convert that.

And I think as fuel prices go up, and they will, they are not going to stay here forever.

At some point they have to.

Supply is going to be shorter than what the demand is and you are going to see an inflection and you are going to see truck rates go up and you are going to see some additional capacity be consumed and you are going to see more share come back to the railroad.

So we are poised for that growth.

In the meantime we are going to do better than what the economy is doing, for what they would otherwise give us on the strength of our service as demonstrated in, although weak, not as weak as some other's numbers.

I think that is a pretty compelling proposition.

That is really all I can do in this place until the demand comes back.

Let me just add one thing and I have said this before.

The service issue is also driven by interest rates in the inventory.

If interest rates are zero then you have got one issue with carrying costs and inventory.

And if interest rates go to, I remember them where prime was knocking on 20%, the value of service goes to something else.

So, we have to be sensitive to -- it is hard to put a bunch of customers on an intermodal train when one wants overnight service, one likes to store on your lot and they want all different products.

And I am going to talk about that in a minute in my closing remarks.

So stay tuned.

Okay.

So, but I guess going back to Keith's comment though, it sounds like look at the macro numbers and you might need improvement in consumption and economic activity to get the intermodal volumes -- at least international volumes picking up from where they are.

Well, the only other story in international obviously is the contract we are competing for, that is not a secret.

I think we have got a very -- much improved network than we had, our cost base is much lower, service is compelling.

To me you put those two together it is a pretty compelling value proposition.

So we are going to compete for the business.

At the end of the day if it is a good business decision on the strength of this network there is no reason to believe that we shouldn't enjoy that business.

So more to come on that, that is a next year decision, not this year.

Right, right.

Okay.

Thank you for the perspective on that.

I appreciate it.

David Vernon, Bernstein.

I guess, Keith, you had mentioned moving from 112 to 134 length grain car trains.

How much of that improvement is ahead of us?

Is it a full 20% or are you guys kind of already on your way toward moving in that direction?

No, it is ahead of us.

We picked up some on empties, we have been running 160 some odd car empty trains to save some train starts.

We put some grain so far on manifest trains, but the real benefit of this is going to be when we start running.

You're talking order of magnitude during the harvest you are running in Canada for export grain between Thunder Bay and Vancouver about 45 trains a week at previous run rates.

So, you can do the math, 18% improvement on per train.

If you've got 18% fewer trains out there, which is going to drive margin improvement, or I am moving 18% more business and creating 18% more revenue with the same fixed costs.

Yes, I mean, that was going to be kind of my follow-up question.

As you think about that 20% slot improvement in availability, is that going to be something that you guys are going to look to market aggressively?

Or is that something that you are going to be looking more to put in the pocket or is there going to be a mix depending on the market?

Well, it's given us the ability to market dedicated trains.

So obviously the faster we turn cars, if they are moving on a train they are not sitting waiting for the next 100 cars to add to it.

I am going to get velocity improvements to my existing fleet, which means from a margin standpoint I can control costs by reducing the fleet or I can add cars and keep them turning to make more revenue.

I can work it either way, it is pretty compelling.

Okay.

And then maybe just as a quick follow-up.

I think, Hunter, you had mentioned some efforts you guys were making to change how you guys were doing crewing that was going to lead to some additional savings.

Is there any more color you can provide on that initiative?

Yes, look I might as well give it to you now and then we will have time for maybe a couple more questions.

What really pulls all this together is a pretty exciting initiative that we have been working on for some time here that's taken the whole team from our -- from the operating group to everyone.

And in third quarter we will be rolling out what those of you that have maybe followed this team in the past had been referred to as trip lanes.

So we are going to have the ability shortly, just a couple of little kinks are being worked out.

That every car non-bulk will have a trip plan that some of you are familiar with before each individual car from door to door.

Not training service, not car service for that individual car, every one, which is going to pull a lot of intelligence together that will allow these operating initiatives to go forward.

It will do a lot for the customer in seeing the reliability of our service and the value of it hopefully they will have a better understanding and appreciation.

We will have a very quick, dynamic analytical tool that within eight or nine hours of if there is a problem and somebody doesn't do what they are supposed to do we'll recognize and know it.

And somebody wrote a book about this, I don't think others are spending a lot of time here.

But that is for them to decide what they want to do, this is our addition to the plan and it is probably the final major initiative that I will be working on as CEO.

And if we get that going that's going to pull all these opportunities that Keith talked about with train starts, the size of trains, the leverage, the controlling cost, the value of the service to the customer, which will help us across the Board and we think set us apart from others.

And will really keep the door open for further initiatives.

Now I have learned the hard way every time you think you have figured it all out there is more.

Then you think we can't get any better than that train size and there is more.

So I don't know what more is coming out of this team, but it is not going to be over (inaudible) initiatives.

So just don't miss this train.

So, Chris, we have got time for a couple questions if they're --.

Allison Landry, Credit Suisse.

I just wanted to ask a question on price and how we should be thinking about it for the back half of the year considering the step up in the Canadian regulated grain cap and maybe just see the potential for some stronger pricing on some of the other bulk businesses.

Yes, I still think you should model, we said 3% to 4% in this environment, given what we don't know about crude, given what we don't know -- some of the other markets I would still say we around 3% is what I would say.

Okay.

I will stick with one, thanks.

Justin Long, Stephens.

I wanted to follow up on the headcount question and ask about headcount beyond this year.

If we want to assume that volume growth returns in 2017 and beyond, do you think headcount grows at a rate that is half of volume growth or is there more leverage than that?

I just want to get a general sense for the ramp in headcount you would expect in a normal volume environment?

Well, it is not going to be one for one, there is going to be some productivity in it.

I don't know if it is 50% or 30% or 20%.

But we are obviously going to do better with less resources.

I don't know -- I am not going to guess the number.

It is going to be double-digit improvement, it is going to be compelling.

But I am not going to suggest 50%.

If I have it right now I have got it real wrong if I give you 50% next year, that is for sure.

But I need a little bit of time to digest these new initiatives we have got in the second half before I could even get a little more color on it myself.

Okay, that is fair enough.

I will leave it at that.

Thanks for the time.

Jason Seidl, Cowen and Company.

A couple quick ones here.

Number one, Keith, you mentioned obviously the fires caught everyone by surprise and it was a pretty big tragedy for Western Canada.

Is there going to be any rebuilding benefit in terms of stuff being shipped back out there?

Not anything that is material.

I mean I am sure there is going to be some stuff that moves, but we don't -- with our network not reaching there we don't see any material impact to us at all.

Okay.

And the other one, you talked a little bit about international intermodal.

On the domestic side it has obviously been a tough year to compete with the trucks given where diesel prices went to and where some of the truck pricing went.

Do you guys see that market tightening up and being a more level playing field for the rails to compete?

I guess a lot of it has to do with fuel price, so if you see fuel price going up I do see that market tightening up.

And then the other is going to be driven by demand to the consumer.

So if you see increased demand in consumption then you are going to see increased demand to bring more product to the rail.

And the third variable is how well we do selling our service and marketing these new lanes.

That cross domestic intermodal product is growing great for us.

It is gaining traction all the time.

John and his team are doing a great job with it.

How much more potential we have on that one train, obviously I have got to be careful, I don't want to get to a point where I had a second train start, we are not there yet.

But that is something that we have got to pay attention to.

But again overall whatever the economy gives us we are going to be doing a little bit better, that is probably the best way to say it.

All right, Keith.

Guys, appreciate the time as always.

Jeff Kauffman, Buckingham Research.

A lot of my questions have been answered, so let me come back to this train length question.

Keith, if you can take the grain franchise to the 134 car trains on average, that is about 25% of your RTMs.

You have done a tremendous job growing train length over the last three to four years, we are about 7,200 feet I guess.

Where do you think this can go in one to two years?

It is going to get better.

I mean obviously there is always going to be some longer ones, but ideally I get this network I would love to have all 10,000 foot trains.

Now that is a perfect world, but that sort of tells you where the potential is and what the franchise footprint would be able to handle.

The key is when we are receiving and originating we have got a lot of grain trains.

So what we are doing now to work with customers is they build these new facilities and you read about the bricks and mortar that is being put out in the [prairie] and they're matching the size of those facilities to match the capacity of the railroads.

That is another compelling opportunity from an incremental change.

Something else we haven't benefited from yet with investment from Canpotex and in partnership with EUP, some of this potash we send to Portland, if you remember, Canpotex just announced they pulled out of Rupert.

That means they have invested in Portland, they have invested in Vancouver, which are both markets we serve.

And in the Portland market a lot of people don't understand those trains are 130 car trains versus the ones going to Vancouver are 172.

If they are going to grow the capacity out of Portland, which is where it is going to have to go, then there is incremental opportunity to grow those train sizes.

So I mean I get pretty excited and you can sense my passion about this.

But there is a lot of fruit left out on the vine to be harvested by this Company as we go forward the next two to three years.

That is awesome.

Just one follow-up detail question.

Capital spending is down, but you are still spending between CAD1.1 billion and CAD1.2 billion this year.

I was a little surprised depreciation expense was flat sequentially because it has been growing over the last two or three years.

Is that a decent run rate or was there something that caused that to be flat and we shouldn't necessarily model it flat as we look out over the rest of the year next year.

No, I think the numbers that we are posting now should be fairly stable.

Obviously it is a very large depreciating pool.

We do do studies from time to time where we look at large asset classes and sometimes that will make adjustments to the depreciation curve as it relates to the loco classes as an example.

But generally the best proxy and predictor of next quarter's depreciation rate is the one that was just posted.

Okay, fair enough, congratulations.

Thank you.

Benoit Poirier, Desjardins Capital.

Just on the automotive side very quickly, when we look at the carload it is barely -- it's up slightly year to date.

I was just wondering when we look at the current trend whether we should see kind of an acceleration in the coming quarters.

No, I would expect sort of flattish to what you are seeing, maybe slightly down.

Okay.

And what about 2017, Keith?

You know what, there is some upside but, Benoit, I don't even -- I don't know what to believe anymore in that marketplace.

Every time I read the paper they say it has peaked, they say it hasn't peaked.

I just don't know.

So we are not assuming any incremental strong growth, we are going to take minus projections based on normal run rates, 2% or 3% growth next year I guess.

There is no big contract that are coming in play next year that I could speak to.

So it is more about selling service, growing with the people that we aligned with in partnership more so with Toyota and Honda as two key accounts for us.

Okay, thank you very much for the time.

Brian Ossenbeck, JPMorgan.

Just a real quick one, Mark, on the tax benefits.

You mentioned 50 to 100 basis points.

If you could just give us a little more detail on what is driving that assuming it will be permanent reduction and what we should expect on the timing?

That would be helpful, thanks.

Yes, great question.

With Q2 you did see us lower the rate from 27.5 to 27.25, that was largely the result of some work we did on an internal corporate restructuring project.

As we think about what opportunities are in front of us, there is really a couple of things driving our thinking.

One is just mix of income between US and Canada, that is a piece of it.

But then there is also optimization work that we are doing in our affiliate lending and our transfer pricing strategy.

So I am pretty confident that this should be a sustained reduction in our tax rate going forward.

Whether or not the full amount will roll into 2017 and beyond, again there's a little bit of mixed income at play here.

But we are definitely getting a lot sharper on our tax planning strategy.

And I think you are starting to see some of the benefits of that.

I would expect (multiple speakers) specifics on Q3-Q4, we obviously have some additional work to do, but I would think that the rate that would be applied would be pretty equitable between those two quarters.

Okay, and the reduction is off of what base, full year 2015?

Off the 27.25 I think there is the opportunity for another 50 to 100 basis points.

Okay.

All right, thanks a lot.

David Tyerman, Cormark Securities.

I just wanted to get a better sense of this OR reduction you are talking about for the second half.

You are looking at 5% roughly from last year.

If I've done my math right your volumes are going to be roughly flat in the second half on RTM.

So what I am wondering what is driving the big improvement that you see?

Is it labor, is it purchased services or what is it?

Headcount is down 1,000 people versus last year, it is all operational improvement, it is all productivity.

So, would the headcount go down further in the second half from where we are now?

No, not if we are going to take this volume that we are saying is going to drive the top line.

We are going to absorb a tremendous amount of the volume through productivity, through increased train length, through using what we have more.

So no, don't expect a big inflection, but at the same time if I am going to have that many more RTMs, and we are talking about sequentially over two quarters, about 17%-18% more than I am handling now, I am going to absorb it through productivity.

The one thing I would add is we do think that obviously OR in the second half is going to be quite strong.

I made the comment earlier that we do expect it to improve sequentially.

And you guys probably note that stock-based comp should be a fairly big headwind in Q3 as you are working your model.

So we are very bullish on the second half.

Obviously it progresses through the second half.

Right, I guess I am struggling with this though because you are going to have roughly similar RTMs to the second half of last year, yet you are saying you are going to be 5% better on OR and you are not changing your --.

Our cost base is a lot lower than it was same time, same [volume] last year.

I don't -- maybe I am missing something.

I am just looking at things like running employees through at current levels and it is not going to get you a 5% improvement.

I am not going to debate the numbers with you.

At the end of the day we have got fewer employees moving the same amount of tonnage.

Hunter, I don't know --.

Yes, well, look, let me give you a couple of examples we started with, CAD40 million in crew hauling which is contractual, that is contractors.

That is CAD40 million on an annualized basis.

In the second half you can argue, okay, that you only pick up X, half that or 60% of that, whatever the number is.

The train starts will be down on the same tonnage with fewer people and less fuel and you add those numbers up, put them in your model and that is what you get.

We have got 300 less locomotives running today than we had last year, which means less mechanics, which means less parts.

And it is all those moving parts.

There is no one single silver bullet item.

It is just the power of this operating model and the way it creates the leverage to drop -- to move a ton of freight at a much lower cost this year versus last year because all those fixed costs are less.

David, it's Nadeem, I will follow up with you after the call does that work for you?

Okay, that is fine.

And just one last question.

The other pricing change, revenue for revenue ton that you had in the quarter, the negative 2% from the D&H sale to [demurrage], etc., is that likely to recur in future quarters?

No, it will be some in the third quarter, David, but we will lap it in the fourth quarter, which is the D&H sale occurred in the third, so it disappears fourth quarter completely.

Okay, great.

Except for the accessorial -- I hadn't looked at the accessorial charges in the fourth quarter, you have to see if there is any impact.

It won't be as pronounced in that' it won't be 2%, it might be maybe 1%, David, (inaudible).

Okay, that is helpful.

One example for an example here, okay.

The grain this year, the margin is going to be much better, the price is going to be higher, there is going to be more of it and there is more margin there.

So there is not one big glob, it is kind of across the board that we have -- I shouldn't and still say we a little bit, but the operating group has just really produced some outstanding results and Nadeem will be happy to go through details.

Okay, that is helpful.

Thank you.

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

Please continue.

I don't know what else to say except I think that what we have tried to present to you today is this: tough first half of the year, it is behind us.

There is good news the second half with these various initiatives that we have spent most of the time with your Q&A.

And I guess the most important thing we are not dwelling on the number of whether we make the guidance exactly, whether we are 0.1% under or over.

What we are focusing mostly on, and I really think you are focusing mostly on, is the future in 2017 and it looks brighter and brighter.

And I think we can all say that here with a great deal of confidence and we appreciate your participation, appreciate the confidence that you have shown in this team and we look forward to impressing you even further in the future.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.