Canadian Pacific Railway Limited
Q3 2012 Earnings Call Transcript

Published: 24 Oct 2012

[Operator:]

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific's Third Quarter 2012 Conference Call. [Operator Instructions] Thank you. Ms. Weiss, you may begin your conference.

[Janet Weiss:]

Thank you, Michelle. Good morning, and thanks for joining us. Today's presenters will be Hunter Harrison, our President and CEO; Jane O'Hagan, our Executive Vice President and Chief Marketing Officer; and Kathryn McQuade, our Executive Vice President and Chief Financial Officer. Also joining us on the call today is Brian Grassby, our Senior VP of Finance; and Scott MacDonald, Senior VP, Operations for System. The slides accompanying today's call are available on our website. As always, let me remind you that this presentation contains forward-looking information. Actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described on Slide 2 and 3 in the press release and in the MD&A filed with Canadian and U.S. securities regulators. Please read carefully as these assumptions could change throughout the year. All dollars quoted in the presentation are Canadian, unless otherwise stated. This presentation also contains non-GAAP measures, outlined on Slide 4. [Operator Instructions] I'd also like to remind you that we have an Investor Day scheduled for December 4, 5, where we will be providing a significant amount of color on our longer-term plans. So we'll try to keep this call tight and focus on our progress during the quarter. And we'll try to get to everybody's questions today, if we can. So here then is our President and CEO, Mr. Hunter Harrison.

[E. Hunter Harrison:]

Thank you, Janet, and good morning to everyone. Excuse me for my hoarseness. I've been doing, I know you can't imagine, but a lot of talking around here. Before I -- I trust you've seen our press release and the earnings. And before I ask Jane and Kathryn to break that down in more detail, let me just highlight a few areas for you that resulted in the quarter. One, I think probably 2 words are the key here, is that progress and momentum are both building. We have -- effectively you've seen there's been a lot of management changes that have taken place for various reasons. The new team, for lack of a better term, is effectively in place, probably with maybe exception of 1 or possibly 2 other positions. Obviously, this effort is keyed by the efforts toward service. You probably saw the announcement where we have effectively taken a day out of transcontinental markets between Vancouver, Toronto, Montréal and Chicago. We're showing good progress as far as our Intermodal efforts there, as well as having a big impact on asset turns. Significant changes, and I would emphasize significant changes, operationally and in particularly the yards and the terminals. We were streamlining a lot of the headquarters processes. My view was we were a little bit heavy at headquarters, some might say more than a little. We were -- effectively about 28% of our employees were -- of our nonunion employees were headquartered here. And we've gone to work on that area. I would characterize this overall as we're clearly -- and I say this hesitantly, but we're clearly ahead of the schedule. If you're kind of watching overall the 4-year plan, the biggest, I guess, hindrance to us right now is we're going through clearly a learning curve going from, for example, from hump yards of pushing buttons to people having to flat switch cars and use their heads a little more. From a labor front, a little bit of update there before the questions come up. I don't see -- I've spent some time myself with the Teamsters that represent our maintenance of way people. I don't see a work stoppage coming. But having said that, we're prepared in case I'm wrong, and prepared probably better than we've ever been. I was very pleased that we signed a 5-year agreement with the Steelworkers that's subject to ratification. And so there's been some very nice progress taking place on the labor front. I guess the biggest issue is with the running trades. And that, as a result of some scheduling, was rescheduled by the arbitrator. And we're expecting some results there in January, probably late January. So overall, I'm very, very pleased with where we are. We continue to strive in all these areas that I've described, and I will be happy later on to address more specific questions that you might have. And with that little bit of commentary by me, let me turn it over to Jane to look at the revenues in more detail.

[Jane A. O’Hagan:]

Okay. Well, thanks, Hunter. And I'd like to build on the themes that Hunter outlined on progress and momentum and marketing and sales. So with that, I'm going to turn it over to my formal remarks. As Hunter has just said, system velocity is up, transit times are faster, and our product delivery is more consistent. The marketing and sales teams have embraced the change and our customer response has been very positive. I'm pleased with the quarter as we came in with a solid 8% revenue growth. Our strategy for sustained profitable growth continues to deliver. Before I get to specific results, let me note a couple of highlights from the quarter. As Hunter said, we've launched a better and a faster Intermodal service in our key Toronto-to-Vancouver and our Vancouver-to-Chicago lanes. The improvements have been well received by our customers and position us for growth. In energy, our strategy has delivered our fifth conservative quarter of double-digit revenue growth as our crude-by-rail program gains wider adoption by producers and marketers who are diversifying their supply chains by investing in a rail model. Change is underway at CP, and our focus on creating a better product for our customers and securing full value for our services. Now I'll give you a high-level review of CP's Q3 revenue performance. CP delivered 8% revenue growth on the quarter. Price and mix accounted for 3% of the revenue gain. Fuel and surcharge was 1%. The FX impact was 1% and volumes were 3%. In Q3 of 2012, we again delivered on our price renewal target of 3% to 4%. I fully expect to deliver in this range for the upcoming quarters as our product offering continues to improve. As I walk through our lines of business, I'll speak to currency-adjusted revenues, so let me start with bulk. Starting with grain, CP's revenues were flat and units were down 6%. Lower carryout stocks versus 2011 were largely responsible for this decline. The Canadian grain crop expectations are above average at 49 million metric tons, though down from Agriculture Canada's estimates of the mid-summer. With the excellent crop and strong commodity prices, we anticipate solid shipments in Q4. As I've noted before, effective August 1, the maximum revenue entitlement for export grain for the 2012, 2013 crop year increased by 9.5%. This increase affects about 1/3 of our grain volumes. We use seasonal pricing throughout the year. And thus, you will see some variation in our reported price by quarter. Building on the successful execution of our scheduled grain service in Canada, we rolled out the program on our U.S. property this August. The response has been positive. Our U.S. volume is expected to be stronger in Q4 based on good production in our draw territory compared to the other regions and reflecting a recovery from last year's flood impacts. For grain overall, we continue to expect mid-single-digit year-over-year growth in Q4. So let me turn to sulphur and fertilizers. In total, the sulphur and fertilizer portfolio was down 20% in revenues and 21% in volumes. A significant reduction in long-haul export potash traffic resulted in a 30% decline in RTMs. In Q2, I cautioned that the second half international potash markets would have some uncertainty. In an about-face from their strong Q2 participation, Chinese and Indian buyers of Canadian potash largely exited the market. The timing of their reentry continues to be uncertain and recent public comments suggest that purchases may be delayed to Q1 of 2013. The long-term fundamentals for fertilizer are strong and we are ready to respond when the demand returns. Third quarter domestic potash and fertilizer demand was somewhat tentative in reaction to the drought. But overall, our volume was up over Q3 2011 levels. We expect strong nutrient replenishment will occur through Q4 and into the 2013 spring season. Strength in domestic volumes will not offset export weakness in Q4. And unless there's an earlier recovery in export volume, sulphur and fertilizers as a whole could be off close to 10% for Q4. So moving to coal. Coal revenues and units were up 9% and 5%, respectively, versus Q3 2011. Recall our coal portfolio has 3 distinct markets. About 80% of our revenue is export metallurgical coal, while the balance is thermal coal sold in domestic and export markets. Our met coal volume has been steady on the strength of our shipments by our predominant coal customer, Teck. Teck is a low-cost producer of high-quality coal with established market relationships, making them highly competitive in the seaborne market. For this reason, Teck has been impacted less by declining markets than other North American coal producers. We remain attentive to developments in the export coal market and we are modeling volumes based on Teck's forecast. We continue to work collaboratively to improve the export met coal supply chain. This quarter, Neptune Terminal completed its expansion, allowing it to accept our 152-car train model. And as we confirmed previously, we will have up to 80% of our trains moving at the length by the end of the year. The result will be a 14% reduction in train starts to move the same volume of coal. The weakness in the North American domestic thermal coal markets continues to provide opportunities to move PRB coal into export markets off the West Coast. We are expecting these shipments to continue through the remainder of the year. Again, these volumes could vary given changing economic conditions, as this is a developing market. Overall, we expect Q4 of 2012 to deliver low single-digit growth over 2011. So before turning to the Intermodal details, I want to say that I'm excited by the renewed focus on service improvement under Hunter's leadership. The new Intermodal service offering we launched in Q3 is taking a day off our advertised transit times between Vancouver and both Toronto and Chicago. This quarter, Intermodal revenue grew 7% on volume growth of 7% versus Q3 2011. Revenue per unit this quarter was flat due to mix. Growth was led by a recovery in the import-export sector with double-digit gains in both revenue and units that reflected strong Vancouver imports. In comparison, European weakness continued to impact our Port of Montréal demand, where we saw a year-over-year decline. The domestic sector was relatively flat, though we saw strength in the cross-border market. The service improvements we are making will drive greater value for our customers. As part of making improvements to our core service, we have made decisions to simplify our Intermodal network and focus on offering a sustainable competitive service in profitable markets where we can grow. We closed our Milwaukee Intermodal ramp, consolidated our Chicago service to Bensenville by closing Schiller Park and exited from some select low-volume lanes during the third quarter. The traffic we exited will impact about 4% of our total Intermodal volume. As you've heard, APL has not renewed a contract with us for its West Coast traffic. I mentioned this change simply to point out that this is a dynamic business sector that can trade volumes back and forth between railway companies. Respecting the balance of Q4, given the economic uncertainty and the impacts I've highlighted, we're expecting Intermodal revenues to be up slightly and volumes to decline slightly year-over-year for Q4. Looking forward, our shippers are enthusiastic about taking advantage of CP's new schedules to enjoy more consistent and faster delivery to key North American markets. We are delivering on our strategic initiatives and making real progress in enhancing our service. We have a competitive product, we have customers who want to grow on CP, and I expect to win my fair share of the business going forward. So moving to merchandise. Merchandise delivered a fifth consecutive quarter of double-digit revenue growth, driven by energy and ongoing automotive recovery. Revenues are up 19% and units are up 9% versus Q3 2011. In the energy and industrial products segment, revenues and units are up 21% and 10%, respectively. I will note that cents per revenue ton mile in industrial consumer is down 8%. But this is due to the fact that crude moves and shipper cars has a longer length of haul and is train load in nature, resulting in lower cents per revenue ton mile than other industrial consumer volumes. We continue to execute our Bakken expansion strategy and gain traction in the implementation of our crude-by-rail model in both Alberta and Saskatchewan. This strategy will create a diversified mix of origination capability covering light, medium and heavy grades of crude. Crude volumes continue to trend upwards and we will hit the annualized 70,000 carload target in early 2013, more than a year sooner than expected. CP customer expansion plans are proceeding, and we expect to sustain our growth momentum. But I will speak to more about this market at our upcoming Investor Day. Turning to the complementary frac sand and pipe markets. We have seen a tempering of volume growth primarily due to the dropoff in drilling activity in response to continued weak natural gas prices. The development of CP's frac sand network mimics a measured approach we have taken in crude. The result is a business with strong customers and sound fundamentals for growth. Our customers have low-cost, high-quality production facilities with efficient rail access at source and multiple market outlets. Similarly, CP's ethanol customers are well positioned in their industry. U.S. ethanol production decreased in Q3 in reaction to drought-induced rise of corn prices. We saw a small decline in Q3, but I will note that our biofuel shippers are low-cost producers situated in areas with local corn feedstock. While there's lots of talk about blend mandates, ethanol is a cost-effective blend for refiners today, so we expect ethanol volumes to be flat year-over-year in Q4. Turning to our auto business. Revenues were up 28% on unit growth of 18% relative to Q3 2011. Increased North American auto purchases and recovery by Japanese producers drove this increase. Our auto results include the movement of dimensional loads. There was a significant several one-time dimensional moves during the summer that account for 1/3 of the RTM increase in autos and contributed to the strong average revenue per car increase. We expect Q4 year-over-year volume growth to better align with auto sales now that the tsunami-related disruptions of 2011 are behind us. In forest products, improvements in lumber driven by housing starts were more than offset by weakness in pulp. So to recap our merchandise, we continue to expect double-digit growth in industrial products, led by the disciplined extension of our crude-by-rail model. Growth is expected in related energy markets such as frac sand and steel pipe, but will likely be more variable in response to North American drilling activity changes. Automotive growth will be consistent with North American auto sales and forest products will be flat. So to summarize, in the third quarter we did deliver sustainable profitable growth. We are feeling very positive about the service improvements underway. We have the right team, we're visible in the marketplace, and we are making our opportunities. We are delivering strong revenue growth both through core business growth and ongoing execution of our strategic initiatives. I look forward to giving you more detail on our commercial activities at our Investor Day discussions in December. And with that, I'll turn it over to Kathryn.

[Kathryn B. McQuade:]

Thank you, Jane, and good morning, everyone. Let's begin by summarizing the quarter on Slide 18. Revenues grew 8%, primarily driven by solid volumes and core pricing gain. Additionally, we saw our fuel coverage improve on legacy contracts and increases in traffic with longer length of haul offsetting lower fuel prices. Jane provided you a good summary of all the areas of growth. And while there continues to be some global economic uncertainty, the team is prepared to quickly respond and align resources to demand. Operating expenses increased 6%, and I will review each line in detail. Operating income was $376 million, up 16%, and the operating ratio came in at 74.1%, an improvement of 170 basis points. Below the line, interest expense was up $5 million and other charges were a more normal level of $2 million, down from $12 million last year. Last year, this line included charges associated with the early redemption of our 2013 notes, and we also saw volatility from foreign exchange. Income tax expense increased by $22 million due to improved earnings and a higher effective tax rate. For the year, we expect the effective tax rate to be just slightly higher than 26%. In summary, diluted earnings per share was $1.30 in the third quarter, up 18% versus 2011. So let's start with compensation and benefits on Slide 19, which was higher by $35 million or 10% versus third quarter 2011. Incentive and stock-based compensation was up $33 million, principally due to better financial performance this year versus last, where we had a partial bonus reversal in the quarter and stronger stock price performance versus last year, where the price actually declined. The sensitivity for our stock-based compensation have changed. The revised sensitivity is now a $1 change in share price, increases or decreases compensation expense by approximately $700,000. Other variances include an increase of $3 million due to higher volumes, which was more than offset by efficiencies of $6 million from fewer crew starts in both road and yard service and lower overtime. Wage and benefit inflation of $5 million, favorable training costs of $4 million. As planned, most of our training occurred in the first half following our 2011 hiring. Management changes cost $4 million and other items netted a favorable $3 million and FX was unfavorable by $3 million. We ended the third quarter with about 14,500 employees, an increase of 2% over last year but a decrease of 4% sequentially. We expect productivity enhancements and attrition to continue to reduce the total number of employees. However, you will see a slight uptick in reported expense employees with the normal seasonal shift from capital to expense for some. Turning to Slide 20. Fuel expense was down $6 million or 3% versus last year. I'm pleased to say we tied our best fuel efficiency quarter of 1.09 gallons per 1,000 GTMs. Efficiency gave us a favorable $9 million on the quarter and lower fuel price provided a benefit of $8 million as our all-in costs was $3.35 per gallon, down from $3.44 a year ago. Higher volumes increased fuel expenses $6 million and FX was unfavorable by $7 million. Year-to-date, we are tracking a 3% improvement on our fuel efficiency, and we expect this to continue for the full year. Turning now to equipment rents on Slide 21. We saw improved asset utilization in both locomotives and freight cars, reducing both per diem and lease costs by $6 million. Let me update you on our lease turnbacks. Year-to-date, we have provided notification to return more than 5,400 freight cars. This quarter, we have recorded repair costs associated with our lease returns, which you will see in the purchased service line. We have another 3,800 cars on lease coming due in 2013, and we'll continue to look for opportunities to right size the fleet as operational changes are made. Lease rates were higher by $2 million and other items total a net unfavorable of $2 million and foreign exchange was unfavorable by $1 million. Now let's turn to purchased services on Slide 22. Purchased services and other was up $15 million or 7%. As I just mentioned, we accrued repair costs for the return of leased cars this quarter of $7 million. Technology and communication costs were unfavorable by $7 million as we continue our technology improvement programs to upgrade our applications. Locomotive overhauls and servicing of our new units increased this line by $5 million. This upgraded and more reliable fleet provides better locomotive reliability and cost savings in lines such as fuel and maintenance. Volume variable expenses for the Intermodal business were unfavorable by $2 million. However, our Intermodal carloads were up 7%. And other consists of many puts and takes and was a net unfavorable of $6 million. FX was a headwind of $2 million. Also, third quarter land sales were favorable by $12 million versus last year, principally on 1 sale. Year-to-date, land sales totaled $22 million, and we do not expect any significant sales in the fourth quarter. Turning to the remaining operating expenses on Slide 23. Materials were higher by only $1 million, with efficiency gains essentially offsetting inflationary and volume increases. Depreciation was up $14 million on the quarter due to capital additions, and we completed a reserve study on our technology assets, which I mentioned last quarter. With the replacement of our applications and the retirement of legacy systems, we are shortening the lives of these assets. We expect depreciation to remain at approximately $135 million to $140 million in the fourth quarter. Turning to Slide 24. Revenues continue to hold strong as our improved service and train design take hold. Operations focus on service reliability and the relentless drive for improved asset utilization is producing favorable financial results. With good liquidity and cash continuing to build, our balance sheet is strengthening while our capital plans for the year remain on track. And finally, this quarter1, I will report out to the -- this is my final report out for the financial community. I am grateful for my time at CP, and I leave knowing that the management team here is committed to providing a quality service, which will drive value to our customers and our shareholders. Most of you already know Brian. He has a deep financial expertise and his tenure at CP will provide consistency to Hunter and the company. I feel confident that I'm leaving a leadership team in place that will serve him, CP and the shareholders very well. So I also appreciate the time I've spent the most of you on the telephone. It's been fun and I look forward to talking with you sometime in the future. And now I'll pass it on back to Hunter.

[E. Hunter Harrison:]

Thanks, Kathryn. And Michelle, we'd be happy to take questions from the participants.

[Operator:]

[Operator Instructions] Your first question comes from William Greene from Morgan Stanley.

[William J. Greene:]

Hunter, I'm sure as you're aware there's a lot of talk about structural differences and whatnot between networks. But one of the things that kind of strikes me about CP is the large bulk franchise, at least relative to the network. And I guess I often think about bulk as being a pretty good business for a rail to have. Now I know CP has some contracts in place that perhaps limit kind of what the upside could be from that. But I'm curious if you think those impressions are right as it relates to the bulk business. Is it as good a business on all railroads as you've looked over the years? Can it really drive significant improvement above, let's say, what a merchandiser intermodal networker do? How do you think about that structural angle to CP?

[E. Hunter Harrison:]

Well, Bill, it's several comments. Number one, we have a situation with bulk in Canada where it's regulated. So that puts it in a little different ballpark. Bulk is governed more by outside agencies, the weather, the regulatory issues than, for example, our merchandise business. There's not a book of business that I've seen here at CP that I'm disappointed with. We have some long-term contracts in bulk. I think those are good for both of us. I think there's opportunities to drive more efficiencies on the bulk side. I think our overall franchise, if you look at it and put -- if you take Intermodal and put it in the unit train category, no, that's not bulk. But 71% or 72% about of our business is handled in unit train. So you adjust your franchise to the business book you have. And that's one of the reasons that we are doing a lot of things to downsize the terminal operations.

[William J. Greene:]

Yes. And now just to be clear, if you keep efficiencies in the bulk business, there's nothing in your contracts that you'd have to sort of share that back, right? That's something that CP retains?

[E. Hunter Harrison:]

No, that's something that we retain. I mean, with the customer base, I mean, you can argue about the regulators. But we have as much opportunity there as we do otherwise. It's more -- you have more opportunity on the cost take outside, and that's where the real opportunity with bulk is and that's the whole story.

[Operator:]

Your next question comes from Ken Hoexter from Bank of America Merrill Lynch.

[Ken Hoexter:]

Hunter, but when you look at -- you started of your call with the -- talking about no strike from the maintenance of way operators and how you're in discussions with them. I thought that was an interesting way to start off. Because as you think about long term and what you hope to achieve, can you kind of talk about what are you hoping to get out of some of these next agreements? Are you looking to switch things to your kind of per mile away from -- or per hour moves in terms of negotiations? I'm not asking specific negotiations with one union. But kind of you've made some quick moves on fuel efficiencies, on locomotives, you've achieved some things quicker than you anticipated. So I'm just trying to think of how quickly you can achieve some of these incremental opportunities to get that operating ratio down even further.

[E. Hunter Harrison:]

Well, again, it's a difficult question. Number one, I think it's important that we do all we can to have an appropriate relationship with our various collective bargaining units. And there's opportunities there for both of us. For example with that group, we have a substantial amount of work. It might be described as contracted out [ph]. I've had some dialogue with them, with other representatives here on the team about looking at the opportunities of giving them more work if they will turn around and if there's something in it for us. I think it was very encouraging. And as I mentioned earlier, that I mean, 5-year agreements in collective bargaining is pretty well unheard of. So if we can sign those type of agreements which shows a better alliance with our people, I think that's opportunities. I think we have some opportunities that are before us now in the U.S., then we’re going to explore some opportunities at roads that we've been down before. We'll see if those things come together. So I'm pretty pleased overall from a labor standpoint that we had opened the dialogue. A little advantage I have is I understand that side of the business. I've been down that road before. I think I understand and recognize the position of those people, what they want, what their needs are and desires. And I just think it's an opportunity to pull those together, and if [ph] they work overall is a plus for us.

[Ken Hoexter:]

And just to follow up, did you find it -- I guess, do you think they're moving ahead and willing to make some of the changes that you said, some of them just won't make some of the changes because that's the way they've been doing for 100 years? Or do you think they start to see where you're heading that quickly?

[E. Hunter Harrison:]

No, look. I think one of the pleasant surprises here, and shame on me for looking at it maybe negatively, is I think the response of the people here. People, I'm talking employees, I'm talking about the people on the ground doing the work, want to be a part of a winning organization. And they're tired of hearing about slippage at CP and so forth. And they want an opportunity to -- they're very much -- want to be a part of any success we have. They're willing and recognize that there's places that we need to change. I think their attitude is very favorable, it's contagious. And I think that's another plus that I didn't have in my model.

[Operator:]

Your next question comes from Walter Spracklin, RBC Capital Markets.

[Walter Spracklin:]

So when I look at some of the things you're talking about, Hunter, you've talked about for some time, they are quite substantive in nature, given your operating ratio down as much as it is. And when I think of something as large scale as that, I kind of think that there has to be -- someone has to feel it somewhere, be it -- you touched on labor, capital spending, customer service or something else. Now you seem confident that capital spending wouldn't go higher, that labor can be -- that you can achieve what you can achieve without much labor disruption, presumably customer service. Can you walk me through how you can do what you say that -- what you want to do without affecting any of those major categories? Or maybe there's a category I'm missing that will be impacted by that quite a bit.

[E. Hunter Harrison:]

I haven't found any skeletons in the closets yet. I know a lot of you don't believe it. But if you had to pick out one area and say, "Where could there be some adverse impact?" And we're very fortunate there. Well, the adverse impact is clearly at these type of business levels, there's not going to be as many employees as we have. But at the same time, and I've talked about earlier, the high rate of attrition here, the natural attrition, will take care of most of that. So the plan is, the model is, the service gets better, so the customer is not hurt. I don't see any bubble in capital spend. I'm relatively new here. But I see the capital spend kind of staying in the $1 billion, $1.1 billion range. This thing fits. When you provide better service, you turn assets, you lower your cost, you treat your people right. It's a good story. So I don't know where -- if I had to look for a negative, the only place I can find any negative is the pension fund. And I think there's some positive things that are going to happen there. I mean, if you look across Canada, a lot of people got problems with pensions. So I think some things are going to happen there. But I know one thing, if you operate more effectively and better, that's the right thing to do. Now there's a lot of financial engineering. There's a lot of things that the people are much smarter than I am at finance are looking at as far as opportunities with the pension fund. But with that exception, I mean, this is all good.

[Walter Spracklin:]

If I might just follow up on that service, the improvements that you're talking about would typically lead to, as you mentioned, improvement in efficiency but could also be an argument for higher pricing as well. Are you seeing yourself as being able to drive higher pricing that we've seen out of CP recently because of some of the service improvements that you're putting through?

[E. Hunter Harrison:]

Well, the marketplace will tell us that. The marketplace gives you the price. You decide whether you want to play. If we put a good service out there, a good service offering that's competitive, we're going to get rewarded there. So I know that Jane has talked about inflation plus, and there's -- this is a big diverse portfolio. But yes, where we provide the service and are better than competition, I expect to be rewarded for it. And I don't apologize for that.

[Operator:]

Your next question comes from Chris Wetherbee from Citigroup.

[Christian Wetherbee:]

Maybe thinking about a question on the Intermodal side. Obviously, you mentioned simplifying the network. How should we think about that relative to kind of the ability to price within those remaining -- what would be the mix impact that would have to the pricing dynamic or the revenue dynamic within Intermodal? And then kind of a follow-on to that, maybe as, Hunter, you've taken a look at the network, any other areas we should be thinking about, whether it could be some near-term opportunities to maybe simplify business lines maybe outside of Intermodal?

[E. Hunter Harrison:]

Well, let me catch my breath and let Jane address that, and then maybe I can add some color.

[Jane A. O’Hagan:]

Well, I think first off, what I would say is that this new intermodal service is bringing new value to CP and our customers. And we fully expect that the improvement will give us gains in both volume and price. But because each customer is different, the mix of traffic, the segments that we're focusing on which we'll tell you more about at our Investor Day, they're going to vary on a customer-by-customer basis. But I think that if you had to look at this in aggregate, what I would say is that obviously, we're going to be pushing for both, for market share and for price. And so far, as Hunter indicated, if we look at the new intermodal service, this has really been a positive platform to position us with a faster train service for customers to get to a broader North American market and that we are starting to secure some new business. So I think that the other side of this is, is that customers are also seeing value in it. So that's something that is top of mind for us. So Hunter, I'll turn it back to you to talk a little bit more about the network.

[E. Hunter Harrison:]

No, I guess, the only other comment I had is, you really have to be careful in defining what is "good service" and what is service. And there's been a lot of press recently about the [indiscernible] report and about the service improvement. But I know this, I know little bit about the other side, our competitors on the other side of Canada. I've read some of their statistics, and they're doing a hell of a job. We're doing a much better job than we've ever done. I don't see where the problems are with service. But having said that, let's just take an example of an intermodal train. I mean, you've got intermodal train, you got one customer on there that's concerned about speed overnight, the next day. And then you've got another customer on there that doesn't pick up at the intermodal facility for 3 or 4 days. So to some degree, we're more of a warehouse there and we've got all of these various customer types on the same vehicle, which is a train which, to some degree, causes some of the difficulty in trying to "design service". But if you talk about service in its truest sense, then I think of it in terms of velocity and consistency of delivering to the customer, I just think that Canada is blessed with a pretty good system and I would be careful with playing and messing with a winning combination.

[Christian Wetherbee:]

Okay, that's very helpful. I appreciate it. Maybe one quick follow-up, just on the crude by rail kind of opportunity as you see about accelerating some of that growth there. Could you give us a sense of kind of maybe an update on how things look from an East Coast perspective. That seems like that's an opportunity going forward for 2013. Just wanted to get a sense of how you think about penetration into that market as it stands right now given your franchise kind of hit that area?

[E. Hunter Harrison:]

Well, let me just make one comment, and I'll let Jane do it. It's -- I hear so many stories about the opportunities, it scares me, okay? So I don't want to comment about it too much. It's -- if you put it all together, it'll make people forget the gold rush in '49. But let me -- having said that, let me talk -- let Jane address this.

[Jane A. O’Hagan:]

Yes, I think what I would say here is that we've seen this volume in our crude by rail portfolio ramp up rather quickly. I mean, we've been talking before around 13,000 carloads last year, and we've moved ahead our target, the 70,000 carloads, by just about a year. Clearly, we do have franchise capabilities, and we look at that, certainly, marketplace in the Eastern part of the United States, it's a very, very positive market. We started with, certainly with ethanol moving it into that market. We basically filtered our crude by rail model starting -- looking at select locations on the light sweet crude side out of the Bakken. And now we're seeing volumes of this traffic starting to make it [indiscernible] in the East Coast, south of Saskatchewan, and possibly I know we have plans targeted for Alberta as well. So clearly this is a place where you take your franchise opportunities. You basically focus on running the best network and supply chain that you possibly can because that's how you run that play. So we look at that market as one of the areas for growth but again, we also look at the Gulf, we look at the West Coast, and we look at other locations as well because we think there's an opportunity to make our markets. And we feel confident that the product that we're putting there is putting value in the market. And I think the real test that we're seeing is, not only are we providing it to Hunter's point where you're seeing this volume increase, but we're seeing real investments by the customers in crude by rail, in cars and in facilities and in terminals. And that's where we really see the upside in this market.

[Operator:]

The next question comes from Brandon Oglenski from Barclays Capital.

[Brandon R. Oglenski:]

Hunter, I wanted to see if we could ask you about headcount levels because it sounds like you're discussing attrition taking some folks out of the network here over time. Do you feel like you're comfortable with where employee levels are today and you can handle growth from there incrementally?

[E. Hunter Harrison:]

Yes. But I mean, it's not going to be this many handling it. There's going to be -- there has been change in the headcount. You heard some of Kathryn's numbers she was talking about this morning. There's a lag that follows with headcount, and there will be -- and we're going to talk about this more in December, but there'll be a significant number of, I think, you would characterize employees that will come out of the network at all levels from bottom to top. Now on a relative basis, more at the top than the bottom, but we at the same time are going to be very cognizant that we have to have enough people to hold the business. This is not just all about headcount and cutting costs. There's a delicate balance here that you've got to address. And there's -- you could call it a premium. There's a premium you pay for what if, what if business is better than we thought, what if we have bad weather. And there's a fine line there of where you choose that premium of having x number of employees plus. But we've got plenty of people now to take care of the business we have and more. So this will kind of be a moving target because as we are continuing to right size, we'll at the same time get a feel for how successful some of the marketing and sales efforts will be, and this is not a decision that's got to be made overnight. But we are headed in the right direction certainly.

[Operator:]

The next question comes from Chris Ceraso from Credit Suisse.

[Christopher J. Ceraso:]

I wanted to come back to the service discussion for a minute. You mentioned a couple of times that that's important. You didn't spend too much time on it in the prepared remarks. I'm guessing there will be more of that in December. But can you give us just some metrics that you're watching and managing and maybe give us a feel for what the progress has been just within the last quarter and where you see these metrics going over the next couple of years?

[E. Hunter Harrison:]

Well, one of the things I was alluding to in my opening remarks is that progress has been made and we're building momentum. If you look at -- if you happened to -- if you could see them, I know you can't, but if you could see September numbers, September numbers were much better than July and August numbers. I expect October is going to be better than September's. So if you look at locomotives, they're going to be down considerably, and there'll be significant productivity made there. The car fleet is down and prior to my role, they had made a lot of headway in miles per day with cars. That's going better. We've talked about the intermodal service offering. We've been setting close, if not new, records at Vancouver for the amount of grain being delivered. We're doing everything the coal market is asking. We're doing everything the potash market is asking -- they're not asking for much right now, but whatever they're asking for we're doing. We just don't have, to my knowledge, and I consider myself hopefully pretty knowledgeable about this business, we don't have service issues. One of the things that we needed to determine is, once again, what the people mean by good service, what is the market willing to pay for and where is the sweet spots we can hit. But if you want to look at some of the service metrics, all of those continue to improve, and we're going to move to a system where we have a better reflection of each individual car of what we're doing. But I can tell you that the thing that people miss to some degree is, I believe sincerely there is the compatibility between low cost and good service. If you give the customer good service, and not got anything to do with velocity and you're turning assets and it takes fewer people, I mean it's all good. If you look at just the intermodal efforts, with what Jane described there and what we've taken out of those markets, besides offering a better service to the customer of a day less than the market, it reduced about 40, 45 locomotives, if I remember correctly. So those things work together. And so that's a little anecdotal evidence of my comments about service.

[Operator:]

The next question comes from Jason Seidl from Dahlman Rose.

[Jason H. Seidl:]

Sticking on service for a minute. Hunter, when you look at the network, where are the areas where you guys think you can pick up the most business? Is it mainly in intermodal and merchandise if service improves?

[E. Hunter Harrison:]

Well, I mean, that's obviously one. I mean, that's clearly the most competitive business we have. With our competition here, we effectively serve the same markets. There's certain lanes that we have advantages in. There's certain lanes they have advantages in, but intermodal is certainly an area. I think that some of the investments the company has made in the U.S., on the ICE territory of the DM&E, the Kansas City corridor, I think offers a lot of opportunity that has not been fully taken advantage of, and there's individuals. I mean, we don't right now handle a lot of forest products business, but I would hope that would change, and I hope if we see positive moves in the housing markets in the U.S., we'll have some opportunities there. I mean clearly, the big one, as Jane just talked about, is the energy side, energy-related. We've got some clear advantages there, both at origin and destinations, and we expect to take care of those. And there's a lot of operating initiatives as we speak that are going to be continuing improvements. I mean this is not the deck we're going to be playing with. If you look at next year and next year the next year, we're going to be in a more, much more competitive position than we are today. I mean if our cost continues to come down, and I'm convinced it will, I think we're ahead of schedule on the 4-year plan. If you bring your costs down, you pick the number 10% or 15%, wherever you figure the starting point, it just opens up opportunities for Jane and her staff to say, "Look, we couldn't afford to go after that business at that level, but at this cost level, we can." So I think this will eventually and hopefully this will turn into a growth story.

[Operator:]

Your next question comes from Turan Quettawala from Scotiabank.

[Turan Quettawala:]

I actually just had a question on the modeling front. Kathryn, you talked about the leased car returns. Just wondering how -- I know you said some 2,800 for next year. Just wondering how much of that will come through in Q4 of this year. It seems like you guys were a little bit less than that and less than what we were expecting on Q3, so I'm just wondering how much of that will move into Q4 of 2012?

[Kathryn B. McQuade:]

Well, it will be a moving target. On the cars next year, we haven't made a determination whether to return them yet or not. Of course, that will be a function of business level and asset velocity that the ops team is realizing. So what I would do is kind of wait for Investor Day as we get a little bit more information out in terms of where we're seeing the volume level and look at kind of an average cost that you see in terms of the vision of the $7 million and what we've done presently, and that will give you some good guidance for modeling.

[E. Hunter Harrison:]

Let me add to that. Let me add this, I hope going forward maybe, what you see there -- maybe you see -- if you see it, it will be in a different line item because I think we're going to review about whether we should be fixing those cars ourselves before we return them. Because when you return it, in that case effectively what you're doing is sending a blank check with the car. So I think we're looking once again this is another opportunity rather than us "downsizing" further to take an opportunity to take our people, fix the cars, put them in the condition they're supposed to be and we can do it more effectively hopefully. And so you won't see this item, will it be in other expense? Yes, it'll be in another expense line item, but hopefully with better returns. So that's a lot of the dynamic that you have to understand that are going to be shaking out here.

[Operator:]

Your next question comes from Scott Group from Wolfe Trahan.

[Scott H. Group:]

So Hunter, at a high level, you talked last quarter that after -- your initial thought was you felt even more confident about the OR targets you've set out during the proxy fight. It's been another 3 months, you've been able to close some terminals. But on the other hand, you lost a large intermodal customer, maybe the economy doesn't feel as good. I'm wondering 3 months later how you feel about those OR targets you set out. I'm sure you want to give more color on December, but just some thoughts now would be helpful. And then if we could just get a bit more specific if you feel comfortable on the headcount side. Are you -- I mean is there a chance that there is 10% too much capacity on the headcount side and we could be a thing about material headcount reductions here, or is there a better way to think about it, and we should -- headcount should grow x percent less than volume growth? What's a good way to think about the headcount going forward?

[E. Hunter Harrison:]

Well, I feel good about the OR, number one. In spite of the fact that a lot of people don't believe me and they keep saying I don't see it, I don't understand it, I feel good about it. I felt good about it last quarter. I feel good about it this quarter. Every time I get more knowledgeable about the organization, I feel better about the OR. And if you feel better about the OR, you've got to relate to some degree to headcount. You can't -- if you look at an organization, a sector that has a high percentage of its costs is labor, it's damn hard to keep saying that in labor and reduce the cost that much. Now, is the headcount going to be material? You got to define material. It's going to be pretty significant. Once again, I mean, it's -- let me just put it this way. Our attrition is running, round numbers, about 10%, let's just say that, okay? It's not quite at that rate, okay? So it will be under that level, but it's more than 5%, okay? And that's and I'll maybe give you some -- and if you -- if that is enough to entice you, maybe you'll see us in December.

[Operator:]

Your next question comes from David Newman from Cormark Securities.

[David F. Newman:]

Just recognizing -- you can leave your longer-term game plan in December, just trying to get a sense once again, and like all the other analysts on the call, some granularity around, I guess, the OR deltas where you might be -- so far on the transcon service through intermodal yard is gone. 5,400 cars laid out, maybe 3,000 next year, as locomotives ultimately, headcount reductions, some in the head office, any sense of where your run rate might be based on what you've given us today and certainly what you've sort of announced so far absent the December initiatives that you announced?

[E. Hunter Harrison:]

Well, there's a lot of moving parts there, David, as you well know. Let me put it this way. I've told you I'm comfortable with the numbers that we've talked about in the full year time frame. You saw where we are today. I know there's some seasonality and there can be some bumps along the way in the 4 years. I don't see that as a -- as just some simple stair-step of 2 points each year, whatever the number is. I think you'll see maybe a big step on an annual basis, then you'll see a little leveling and then you'll see another larger step, and then some of the dynamics of what's happening in the market and what's happening in the economy and a lot of those things start to dictate. And look, I think I'm a pretty bright guy when it comes to railroading, but there's a lot of things I just can't see on what's going to happen out here in the future. But look, bottom line, the first order of business here, this is the cost takeout story to get our cost in line and it's good for all of us to do that, okay? And then we build the business on that base. And I'll just tell you this. We're at 74.1, whatever it was this quarter. We're going to mid-60s. The stair-step between, in the 4 years, you picked it...

[David F. Newman:]

Do you think, Hunter, that the time line, given that you read all the blocks here, you've been able to improve the operations and take out some costs, does your time line in your head, does it change in terms of the 4 years? Has it become 3 years? What's your view on the timeline now to achieve it?

[E. Hunter Harrison:]

It's a moving target. Look, if the economy hits and comes back and is strong, will this speed the game up? Yes. If the economy gets softer and we have some dip, is it going to make it a little tougher? Yes. We will still get there, but I mean, I think I've almost -- I've written the book. You obviously got to get to the right chapter here. We've Said before we're going to 64, 5 6 [ph]. It's a 3-, 4-year deal. We got a pretty good running start. You look at how the stars align and you can probably do it as well as I can.

[Kathryn B. McQuade:]

David, this is Kathryn. I just want to remind everybody out there that when we start talking about the sequential and the improvements, is to please look at our guidance around pension expense. Hunter mentioned that even earlier in his opening remarks. And so we still have some pretty big stair-steps associated with the pension expense line items. So I'm not putting anything aside in terms of the improvements that we're seeing, but that should be factored in to your models.

[Operator:]

Your next question comes from Cherilyn Radbourne from TD Securities.

[Cherilyn Radbourne:]

It's interesting that you bring up pension there, Kathryn, because that's what I wanted to ask about. You've guided to -- you've been guiding through a pretty big step up, and so I guess it's a bit of a 2-part question. So the first part of it is, what's your thinking around potentially making another special contribution this fall to sort of moderate that step up? And b, is there anything in the arbitration decision that you're expecting early next year that could have an immediate impact on pension expense? Or would those concessions be something that sort of feeds in on a long-term basis in terms of how fast it grows?

[Kathryn B. McQuade:]

Yes, so the first question on prepayments, we, of course, always look at whether if something makes sense or not. Right now, we feel pretty good about the contributions that have been made and the amount of prepayment that will still remain over the time period that we believe interest rates will remain low and be affecting the volatility on our pension plan payments. So we don't see any kind of prepayments that makes sense right now, but the economy keeps changing. And as I keep reminding everybody, it doesn't really matter what's happening at all during the year. It's what happens on December 31 that will mark to market what our requirements are. So Brian and the team, we've got a great team on the pension side, and they have their arms all around that, and we will constantly look at what's the best balance for us in terms of that. But the last thing you want is trapped capital in your pension plans. So interest rates are low, they're not going to stay like this forever, I don't think, but they definitely stayed longer than we ever thought. So it's one of those things that we'll constantly monitor. In terms of the negotiations and the arbitration, yes, as everyone knows, pension is on the table associated with those negotiations. I don't know where the arbitrator will come out. I think we have a compelling argument in terms of there has to be pension changes for not just CP, but as Hunter pointed out, for the whole world out there. I mean, people cannot keep retiring at 55 years old, even though I'm planning on doing it, and living till 95. So those just don't work. So I think we've got some very reasonable competitive negotiations on the table and something that we have to move forward. And it would have an immediate impact on our pension expense if we are successful with it.

[Operator:]

The next question comes from Tom Wadewitz from JPMorgan.

[Thomas R. Wadewitz:]

Hunter, the -- you've mentioned that you think things are progressing a bit more quickly than expected. I think you've also mentioned that the rail yard rationalization, there's a lot of opportunity there. And so I was wondering if you could maybe take a look at, is it cost side primarily when you say things are happening quicker than expected that we'd really see maybe in -- even in 2013, that there will be a cost impact? And how big of a component of cost side is rail yard rationalization? So I guess on a broader topic, I appreciate some insights.

[E. Hunter Harrison:]

Well, Tom, I have spent most of my efforts on the cost control side. Jane keeps updating me and teaching me about the revenues here. Although I can say relative to the other carriers, I'm very pleasantly surprised of our results. But I think the area that you start to hone in on with the terminals, particularly as it relates to future improvements and opportunities, is big. We've closed, I have to count here while I'm talking, but -- 4 hump yards effectively this quarter. I mean, that's unheard of. Number one, to have that many hump yards, but to close them within a quarter and make that transition. But I think you have to kind of visualize -- maybe my vision or dream. We took a place like Montréal where we have an intermodal facility, we have an expressway operation, we have a freight operation and we have 2 auto compounds that are all separate entities operationally. Well, I wish you could see Montréal today, some of the changes have been made by the operating team. The yard is 60% or 70% clear, and what that affords us opportunity-wise, just as an example of what you can do with the footprint, is to give us enough space to consolidate all of those operations together. And at the same time, one of those areas that we would vacate real estate-wise has a tremendous value associated with it of millions of dollars. And then we've got the operating expenses that are lowered annually by having everything in one locale and not having to transfer cars back and forth from the other locations. Now, that's one place. And just talk about order of magnitude, and we're talking about potentially doing that at 5 -- 4 or 5 places . We've already, and I'm talking from memory here, but we've already gotten out of one facility in Toronto. We got out of Schiller Park in Chicago. And there's others. I'm overlooking as we speak regarding that. So this opportunity to streamline terminals to create more value there, an opportunity from a real estate side and at the same time lower operating costs and improve service, is a big underlying key to this that some people have really missed in their analysis.

[Thomas R. Wadewitz:]

And it sounds like the pace of activity that you're realizing here, you could have a pretty big impact in 2013 from that vision for a rationalized system of rail yards. Is that a fair way to look at it, or is that too aggressive?

[E. Hunter Harrison:]

No, I think that's fair. I think given this, we can't do -- some of this requires construction for an example to redo the -- reconfigure the existing freight yard to fit the others in. So there's some time constraints there, and all of these has kind of a trickle-down effect. Depending on the labor agreement, depending on the contract with the employees, you eliminate someone or some function today till you get the full value of it. It might be 2, 3, 4, 5 months. But I certainly think that, that some of these things will kick in, in '13 more so than they are today, which is one of the reasons for me talking about the -- being a little ahead of schedule. Now look, sometimes you get behind schedule. Now we're ahead of it. We've gotten some breaks, we've been blessed. It looks like I'm not going to -- to say this, we might have a decent winter from what I've read in the farmers' almanac, I've been doing [ph] a lot of research. And so yes, I think you'll see that in '13, and that's why we're ahead of the game here.

[Thomas R. Wadewitz:]

Okay. And a real short follow-up for Jane. What's the split of that 70,000 crude oil cars in early 2013 between Bakken and Canadian crude?

[Jane A. O’Hagan:]

At this point, I really don't want to comment on the specific breakdown. I think what we'll do is we're going to spend a lot more time talking about the markets, talking about the marketplace when we get together in December. And I think that's the place for us to do it.

[Operator:]

Next question comes from Matt Troy from Susquehanna.

[Matthew Troy:]

A question for you, Hunter, given the recent seat change or vacation at the COO level. Obviously that is an incremental, pivotal role at a railroad. Just curious, your appointment of 3 kind of co-COOs. They're certainly a legacy there. Their resumes warrant their position. But I'm just wondering if you could walk us through the thought processes to not having a dedicated or point person on COO. I think your answers today show that you obviously have a command of the railroad and what can be done. So is it just that you like to almost have a co-CEO/COO role in the near-term and envision filling it later or what are the benefits of having 3 more locally focused people? If you could just walk me through the thought in that, that will be helpful.

[E. Hunter Harrison:]

From the starting point, let me say this. I'm wearing 2 hats now, and that's obvious, CEO and COO. And I think that it's good for me for a while, because I get -- contrary to maybe just many or some of the operating people, that gives me a little better feel and hands-on for learning the operation, what the opportunities are and quickly cut and get to the chase of what needs to be done. So that's one advantage there. The CEO -- the COO position, as we've talked about it in the past, I don't think anything has changed, is a huge decision. It's not something that I or the board is going to rush into. I think we'd recognized the 3 individuals' capabilities by the promotion they received, which -- and also we'll talk about more in December, but it's a little bit of an indication of our overall reorganization and a little bit of a move towards decentralization. But I think that we still, when the right person appears, whether it's internal or external, whether it's next week or whether it's next year third quarter, then we'll be ready to make that move and not before. I think we can carry on. If my energy level can stay up, we can carry on like this, and we're doing fine. I do think at a point we've got to recognize that, as I said, this is not a long journey for me. This is a 3- to 5-year story. Obviously, the selection of the COO would be to some indication that here's the next successor if they don't blow it. And it's not going to be part of the contract, obviously. So -- but I think that we're blessed to be in a position that we don't have to rush into that, that we can take time, that we can sort things out, that I can learn even more about these 3 from the operating side of the house, the 3 operating chiefs. And then at the appropriate time, we'll be ready to make the decision, and we don't -- we're not pressured into doing something we're not ready to do.

[Operator:]

Your next question comes from Keith Schoonmaker from MorningStar.

[Keith Schoonmaker:]

Hunter, it sounds like you've already made significant changes in terminals and yards, I hear you called out in your first call. Other than the mentioned rationalization of intermodal terminals, are there still major improvements to be made on yards, like rolling out smart yard type software or other IT tools or some sort of stepwise change in operations?

[E. Hunter Harrison:]

Yes. I wouldn't necessarily put it in the category of smart yard. I mean some of the things that we're doing like that were just not that necessary to have a name. I do think there's some places that we haven't talked about that happened, just to tell you how things happen around here, that propped up last night in the terminal network that could be big opportunities. And in fact, as soon as I get off this call, I'm excited about getting that bit and looking at it. This is not all been figured out yet. There's still rocks to look under, there's still opportunities to put together, and it's exciting to be a part of it. A lot of this, I would characterize more rather than smart yard, I'd characterize more as training and development of people. What we're asking people to do is to go from an environment, for an example, in all these hump yards, where they effectively have relied on the computer and push buttons and became just kind of almost robots, which is not really a lot of fun to do. If you've ever walked up and sat down a cut for 8 hours a day and just look pins on cars to separate them, it's not the most rewarding position in the world. So what we're doing is moving into a world of giving them a list and asking them to flat switch as I characterize the cars in a smart effective way. And some of them are enjoying that challenge. So I think that at the same time this is going on, I've talked about that we've made some significant changes in our IT staffing, and there's a big review going on there. But I'm not ready to roll anything out. I think what we want to do is be sure that we've got a good foundation and platform to build upon. And this is not something we're going to roll out something from IT that's going to be 2 or 3 points on the operating ratio, I can tell you that. If it is, it'll be a learning curve for me because I just -- I haven't found it there before. But there -- we haven't found all the opportunities yet.

[Keith Schoonmaker:]

Understood. With the incomplete information at this point, I recognize you're still looking under every rock, as you say. Is there a couple of obvious or are there a couple of obvious powerful levers that the firm can pull on the velocity front?

[E. Hunter Harrison:]

Yes. The big emphasis next year from my standpoint on capital will be on further improving the length of our sidings, which will allow us the ability to run even larger trains. What some people miss here is this. If you improve the length of your trains 10%, it saves you 0. Until you move to a point depending on that line segment and the density on that segment and the number of train starts, until you move to x percent, let's just pick a number and say 17 or 18, when you do that, it's big. Now you've eliminated 2 starts all the way across maybe from Calgary all the way to Montreal, and that's huge, so it comes in big steps. So that's why I look at people when they print that and they say, "Well, we're going to improve the training by 5%. Well, who cares? What does it save you? Doesn't save you any fuel, doesn't save you any labor. But when we hit that point, and we're developing at the point, the susceptivity point on every line segment, then it becomes big. Boom! And when you eliminate a train start, a pair of train starts because we do it in balance across the country, you're talking real money. So that will come quick next year in steps, with the completion of the additional -- and look, this is not -- this is within the envelope of the $1 billion, $1.1 billion I've talked about because we're doing some things a little bit differently, in that we were taking out obsolete sidings and using those to extend other sidings rather than going after with a greenfield approach, and buy an all new rail and all new tires to put a siding in which might cost you $3 million, maybe we can do it for $1 million.

[Janet Weiss:]

So it's Janet. I'm going to jump in. We've got time for one more question, and then we will wrap it all up and certainly look forward to speaking with you at Investor Day.

[Operator:]

Your final question comes from Benoit Poirier from Desjardins Capital Markets.

[Benoit Poirier:]

So just related to my question, it's more related to Jane. When you talked about the intermodal volume to be down in Q4, could you provide more color about how much is driven by APL and how much is related to the softness of the Port of Montreal?

[Jane A. O’Hagan:]

Well, I really don't want to get into kind of the breakdown, but I would like to say about APL first of all is that, that's the kind of volume and that's the type of business that does trade kind of back-and-forth. And so in our particular case, while we didn't renew the APL business this year or last year, we saw a similar shift with a line that was in our favor. So I think that, that's an important thing to put out there. This volume does move back-and-forth. I think that what we need to do is, as we think about our intermodal volume and as we think about the message that I delivered to you, our key focus here is on, number one, intermodal renewal, looking at the sustainability and the profitability of the lanes we need to serve and to really tighten up those areas where we were doing things that from an operations perspective, were just costing us a lot of money and there wasn't a lot of upside. So I think that we're going to see a lot of moving pieces over the next several months, but I think that the good news is, is that if we think about volume and as we think about how volume trades, is that we're looking at making this a much more profitable business, and we're also looking at using this new service to improve our market share. And as we get out to you at Investor Day, we're going to give you a more in-depth review of where we are with the intermodal business, what we're doing to renew that and what our area of focus is going to be on a go-forward basis. So I think I'll leave it at that and turn it back over to Janet.

[E. Hunter Harrison:]

Well, thanks all of you for joining us. If you will, let me do 2 things and we'll wrap things up here. First of all, I want to personally congratulate Kathryn. Much to my dismay, I tried to entice her to stay, and I was -- that's my biggest failure so far at CP. But Kathryn, as most of you know, when you've seen the various press releases, spent I think about 25 or 26 years at Norfolk Southern prior to her arrival here at CP in 2005 or so.

[Kathryn B. McQuade:]

'07.

[E. Hunter Harrison:]

2007 as Chief Operating Officer, and she has had a distinguished career and has made a great deal of contribution to both organizations as well as the industry. So I want to personally congratulate her for that and wish her the best going forward and wish Brian the best in doing without her. And one other thing, let me do this, I learned, I guess yesterday or the day before, that one of my former colleagues and a good friend at the competition back in Montreal, Bob Noorigian, who I know most of you know, who's [indiscernible] in the field of Investor Relations. He's retiring from CN after a real distinguished career, and myself and all of the team here at CP would like to wish Bob the best in his future after a well-deserved retirement. So good luck, Bob, and good luck, Kathryn, and thanks for everything. Thank you for joining us.

[Operator:]

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