Canadian Pacific Railway Limited
Q3 2013 Earnings Call Transcript

Published: 23 Oct 2013

[Operator:]

Good morning. My name is Tracy, and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific's Third Quarter 2013 Conference Call. The slides accompanying today's call are available on our website at www.cpr.ca. [Operator Instructions] I would now like to introduce Nadeem Velani, AVP, Investor Relations to begin the conference.

[Nadeem Velani:]

Thank you, Tracy. Good morning, and thanks for joining us. I'm proud to have with me today Hunter Harrison, our CEO; Keith Creel, President and Chief Operating Officer; Jane O'Hagan, EVP and Chief Marketing Officer; and Brian Grassby, Senior Vice President and Chief Financial Officer. Before we begin, I want to remind you that this presentation contains forward-looking information. Actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described on Slide 2, in the press release and in the MD&A filed with Canadian and U.S. regulators. This presentation also contains non-GAAP measures outlined on Slide 3. The presentation will be followed by Q&A. In fairness and courtesy to all participants, we would appreciate if you limited your questions. It is now my pleasure to introduce our CEO, Mr. Hunter Harrison.

[E. Hunter Harrison:]

Thanks, Nadeem, and good morning, and thanks for joining us. I trust you've seen our press release. Nice quarter. I have to kind of restrain myself and some of my cohorts will add some additional color. But this team did a hell of a job this quarter. This thing is really coming together and hitting on, if not all cylinders, it's awful close and so I was obviously pleased with the results. I'm going to ask in a minute, Keith and Jane to offer some color on the operating and marketing side, and then Brian will convert all that to the bottom line and what it means to the numbers. And then I'll have a few remarks at the end and we're going to try to keep our presentation as short as possible, so we can -- I would imagine there's going to be a lot of questions today in certain areas. And I would like to highlight one thing. I think you probably saw on the press release that Brian Grassby, our CFO, has decided to retire at year end. And it's kind of mixed emotions that I make that announcement, I'm a little jealous and wish I was in a position to do the same. But we -- Brian has been with this organization for 12 years, has offered a lot of loyal service and has been a key the last 16 months since I arrived in this turnaround story. So we -- congratulations, Brian, and thanks for everything you've done for the organization. And I'm sure the rest of the members on the call will join me in that congratulation. So with that let me turn it over to our President, Mr. Keith Creel, and he can give us a little color on the operating side of the business.

[Keith E. Creel:]

Thanks, Hunter. Let me start by saying that, obviously, very proud that we reported another strong quarter by this operating team, which you see in the operating performance measures that these are all key levers that drive our operating efficiency day in and day out, produced double-digit gains in train weight, train length, as well as higher car velocity and lower dwell. These results effectively reflect a lot of our whiteboarding session ideas and opportunities we produced back in June and July which has allowed us to optimize our train plans, reducing train miles by 13% in the quarter versus our first half run rates of about 6%. This is an area with precision railroading that will always be under review. As we execute, we measure the performance and we adjust to the ebbs and flows of our business levels by the operating lanes. Let me move to provide the quarter -- a little color on the quarter highlights. I'd be remiss, above all else, not to commend our collective operating team, that's across the board from the folks here in Calgary, in the field, the RTCs, the engineering teams, mechanical teams and the guys and gals that actually run the trains day in and day out. This disciplined execution of our service plan enabled a car order fulfillment performance in the excess of about 95% of our weekly placement plan across auto, forest products, grain and the bulk commodities. In fact, we moved more export coal in the third quarter than ever on record with a transit time that's 13% faster than third quarter 2012. We've responded to the record Canadian grain demand, moving from a near dead stop through August due to the late harvest to transporting record volumes by the month end. In fact, we moved 12% more loads than in 2012. This obviously sets us up extremely well for the bumper crop ahead of us, riding that momentum. As we move more cars with less, we're identifying asset monetization opportunities. We scrapped about 600 more cars in the quarter with plans to scrap another 1,000 in the fourth quarter. This will get us to about a 2,700 car run rate for the year. You combine this with the leased turnbacks, we're on pace to reduce CP controlled railcars by about 11,000 since we started this turnaround journey. Locomotive productivity up another 18%. With the excess locomotives, this has created an opportunity. This quarter, we're able to lease locomotives to industry partners, which is reducing our equipment cost and maintenance going forward, as well as creating a little bit of a revenue opportunity. Fuel productivity continues to improve using 7% less fuel this quarter versus 2012, while moving 2% more RTMs. This focus on continuing to lower our cost is obviously closing the gap with our competitors, which is key to allowing the company to compete in markets we have not been able to historically. This strategy opening -- is opening revenue opportunities previously not possible by providing Jane and her team with an improved service product at a lower cost to sell in the marketplace. To give you a quick recent example of this, we've now removed an additional 10.5 hours from the Calgary to Vancouver schedule as of the fourth quarter. So I'm confident this will allow us to continue to deliver additional domestic Intermodal growth versus truck. This is a natural next step after taking over 20 hours out of our transit from Toronto to Calgary, which is driving meaningful domestic Intermodal growth that Jane will provide some color to in her comments. As you're all aware, we continue -- safety remains a critical priority for Canadian Pacific. We're driving improvements in this area through our investment in infrastructure, investment in technology, safety process improvements and the most important critical piece to success, our safety culture. In the third quarter, we improved our train accident ratio by 10% versus third quarter of 2012. This performance is even more impressive when you adjust it for the 13% train mile reduction in the quarter, which dilutes the improvement. Year-to-date, in spite of the material train mile reductions and very tough first half derailment results, we've closed the gap to the point where we're close to par with year-to-date 2012 performance which is at or is currently industry best. Finally, as we look into the fourth quarter, I'm sure that you've seen our volumes have picked up considerably since Labor Day. We've recently had our operations team in Calgary to review our game plan. We're focusing on winter preparations, we're confident in the service plan. This team is in a very strong position to meet the traffic in front of us with unprecedented service levels for our customers. We've built a strong foundation for success, we look forward to leveraging this model during the growth period. So with that, I'll pass it over to Jane to provide some color on how she's converting this to the marketplace.

[Jane A. O’Hagan:]

Good morning, everyone. I'm pleased to announce a record quarterly revenue performance with 6% growth over Q3 2012. This was driven by 2% RTM growth and strong yield and price performance with cents per revenue ton mile up 4%, average revenue per car up 8%. Renewals came in again within our target range of 3% to 4%. Volumes in the beginning of the quarter reflected some short-term shifts in some markets. Volumes picked up towards the end of the quarter and we're seeing that momentum continue. We're improving the quality of our revenue, we're making good progress on delivering on our growth initiatives. So turning to the individual lines of business, I'll report revenues and price on a currency adjusted basis. So starting with grain. Q3 results saw revenues up 5%. While grain was slow in the early part of the quarter due to a later harvest and low on-farm stocks, our operations team did an excellent job as the Canadian harvest volumes came in to deliver very strong volumes in September. With the exceptional Canadian crop, now estimated at 68 million metric tons, or 12% larger than the previous record, our Vancouver expert program was a particular highlight of the quarter as we moved 11% more grain through Vancouver than the 5-year average. In the U.S., we had not seen the ramp-up in September as the wheat production mostly went into the bin and the late bean harvest pushed back the seasonal export program. Average revenue per car was up 9% as pricing gains were achieved in both Canada and the U.S. In terms of our outlook for grain, given the record Canadian crop and the U.S. harvest well underway, we expect that grain volumes will be strong in a number of lanes. The West Coast will be at record levels. I also expect strong Eastern movement through Thunder Bay, as well as the start to what I anticipate to be a strong winter rail program directed to the St. Lawrence Seaway. And finally, we will see robust demand from Canada to the U.S. The U.S. originated exports that have been slow to pick up due to that late harvest will now move at more normal levels. I will note that as we see the recovery in short haul DM&E originated shuttle volumes and the reflection of the 1.8% reduction in the VRCPI for regulated grain revenue entitlement in Canada, revenue per car in Q4 will be down sequentially from Q3. So turning to fertilizers and sulfur. Our Q3 results were up 13% in revenue. We had strong year-over-year Q3 revenue gains, in both potash and sulfur, supported by solid price increases with average revenue per carload up 7%. Domestic potash led volume growth as an unsettled international market resulted in a decline in potash exports. In terms of our outlook, there continues to be strong fundamentals for fertilizer application and both farm incomes and grain prices continue to support this application. However, the delayed harvest will compress the fall season and defer some consumption to the spring. For export, many buyers continue to delay purchases while they assess the Uralkali market impact on international potash pricing. So turning to coal and building on Keith's comments, Q3 results we saw revenue up 9% year-over-year. I'm delighted by the excellent service from our operations teams that led to very good cycle times and a 9% increase in export met coal volumes, matching our previous best quarter. U.S. domestic volumes were down as substitution of lower-cost natural gas continues to displace thermal coal. The revenue per car increase of 7% reflects that decline in short haul thermal traffic and the increase of longer haul export met coal. In terms of our outlook, we expect the shipping patterns of Q3 to continue into Q4, with continued strong movements like export metallurgical coal. However, holidays and seasonal winds in November affecting export loadings could mean we see a small sequential reduction in volume. In terms of Intermodal, our Q3 results saw revenue 7% lower year-over-year. We're very pleased with the improved Intermodal product and the introduction of our new faster service from Toronto to Calgary that's taking a day out of our transit times, resulting in double-digit volume increases in this lane in Q3 and sustained profitable growth in domestic. We continued to make additional improvements in our service and implemented a faster fourth morning Toronto to Vancouver offering that also is providing enhanced service between Calgary and Vancouver. With respect to import-export, Port of Montréal improvements did not fully offset lower Port Metro Vancouver volume. We're growing in the right lanes with the right customers, aligned with our service capabilities and our network's strength. We're taking advantage of our service improvements by growing where we have competitive advantage, pricing for value and improving the operating income of the business. In terms of our outlook, the overall book of business is shifting as the outcome of these changes are being implemented. The book remains strong as we continue to focus on the segments and the customers that drive the greatest value to both parties. I'll remind you that in Q4, we are lapping an international contract we chose not to retain last year. We still expect a muted fall peak with ongoing strength in domestic Intermodal on the basis of the introduction of our new services. Now turning to industrial products and consumer products, Q3 results saw our revenues up 13%. RTMs were up 11% on gains in long-haul crude oil and on frac sand volumes. A moderation of crude oil was experienced through much of Q3 as the spreads were relatively tight. Year-to-date, we've moved 65,000 carloads of crude and we continued to develop our crude by rail model. Over time, we will see increasing volumes of heavy crude moving with different economics and drivers of demand than the lighter Bakken crudes we predominantly move today. Frac sand momentum continued to build in Q3 and we're seeing double-digit volume growth. In terms of our outlook, we're seeing orders pick up in October as spreads have widened recently, although we don't know how long this will persist. Our crude market will always be a combination of the consistent term volumes and the opportunistic volumes that respond to the movement of spreads. We expect to hit 85,000 to 90,000 units this year and continue to be on track to achieve the 140,000 to 210,000 carloads longer-term estimates. We continued to work with customers on facility developments that have commitments to volume with the recent announcements at Hardisty, Alberta and at New Town, North Dakota. Frac sand shipments from new mines will continue to ramp up, but other industrial products will trend with GDP growth. Moving to autos. Q3 results saw revenues down by 11%. About half of the Q3 revenue decline is due to lower volume of onetime machinery movements. Lower volumes of finished vehicles accounts for the remaining reduction where we saw some production shift away from a CP-served plant and we exited some low margin short haul markets to improve the quality of the book of business. In terms of our outlook, we continue to make decisions about what freight earns its way in the automotive book as we price for the value of our service. We've seen improvements in volumes in late Q3 and this trend should continue. So in conclusion, we have strong momentum coming out of Q3 that will continue through Q4. I would expect full year revenues in the 7% to 8% range. I'm excited to have a superior product to sell in the marketplace. And as part of the evolution of CP that started with operations, I'm nearing the completion of creating a new sales-focused organization with less layers, less bureaucracy, centralization of pricing and incentive programs that will reward those who excel at selling. This is with the intention of becoming the industry leader in the selling of service. And with that, I'd like to turn it over to Brian to give the financial picture.

[Brian W. Grassby:]

Thanks, Jane, and good morning, everyone. Hunter, thank you for your comments. It's been an honor to work with you, and it's been an honor and privilege to work at this great company. Now let me get into the quarter. Keith and his operating team continued to deliver outstanding results. They recovered quickly from the floods in Alberta. And despite softer volumes, they produced strong savings while continuing to improve service. The results for the quarter show the power of our game plan, with or without volume. Now let me get you into the numbers. Revenues were up 6% on an RTM increase of 2%, with price mix and foreign exchange making up the difference. Expenses were down 6% despite the 2% volume increase and an FX impact of 2%. Operating income was up 39% and its operating ratio came in at 65.9, an impressive improvement of 820 basis points. Our tax rate came in at 28.6%, slightly higher than the range I provided as there was a $7 million deferred tax item related to an increase in British Columbia's corporate tax rate. Absent this increase, our effective tax rate was 27%. Reported net income for the quarter was up 45% and reported EPS was up 42%. Adjusting for the BC tax item, adjusted EPS was up 45%. On the FX front, I have previously given an FX sensitivity of $0.02 to $0.04 EPS impact for every penny change in the Canadian dollar. For modeling purposes, I would use the high end of that range going forward, given our revenue mix and improved [indiscernible]. Please turn to the next slide and I will give you some more details on our expenses. Operating expenses were just over $1 billion, down 6% from last year. This decrease was driven by efficiencies of just over $100 million, broken down as follows

[E. Hunter Harrison:]

Thanks, Brian, and thanks to the team for those enlightening presentations. Let me just kind of wrap up and make one comment. I think clearly this -- our guidance for the year, clearly, I think, we're going to -- I have a great deal of confidence that we will achieve those and broadly, realistically, see all the guidance that we have previously provided. I think Nadeem is considering probably late spring, early fall, maybe having an analyst meeting, and at that point in time, we will address, we've kind of -- this plan is about worn out, we've gone through the numbers. And maybe it's time to put another plan out that reflects the different base that we're working off of. So you can hopefully look forward to that. And with that, we'll be happy to address questions you might have.

[Operator:]

[Operator Instructions] Your first question comes from Chris Wetherbee with Citigroup.

[Christian Wetherbee:]

Maybe just touching on the OR improvement, which is obviously very, very strong in the third quarter. And when you think about the progress that you've made today and sort of the lay up that you have for the fourth quarter from a volume perspective, can you give us a rough sense of how to think about seasonality? You guys have sort of changed the dynamic here a little bit with record performances. Just wanted to get a rough sense, kind of seasonally, how we should be thinking about the fourth quarter from an OR perspective at least relative to the first 3 of the year.

[E. Hunter Harrison:]

Well, let me address that, maybe Keith will want to say a little -- some other comments. But it really depends on what weather we see in the fourth quarter. I mean, obviously, we've got line of sight on continued improvements in the OR. We're to a point that with the exception of maybe a 3- or 4-month period that the seasonality factor's really based on the weather. I think we're in better shape to deal with that. I think if you look at the third quarter results, and we have a "mild" fourth quarter, you'll see continuing movements of positive on the operating ratio side. If not, then whatever impact the weather has will make those achievements a little bit tougher. And then we're really trying to address some of the issues of more import in first quarter from a weather factor to get to the point where we can, as much as possible, smooth out and move away from the seasonality impact. Keith, if there's anything you want to add here?

[Keith E. Creel:]

The only thing I want to add, a little flavor to that is on the weather, certainly it's an outdoor sport, that is the X factor. But I can tell you that this operating team has been seized with that challenge in front of us in prior preparations and certainly, we'll go into this winter better prepared than we were last year, which when you couple that with improved assets with a physical plant that's being improved, we've got 8 sidings that are coming online by the time the ground freezes up, maybe not by the time snow flies, but certainly before it gets too deep in the winter which will help us maintain velocity through the network. So I'm very confident that these preparations are going to pay dividends for us to mitigate that X factor. But it's still to be determined how bad it is.

[Christian Wetherbee:]

Okay. That certainly makes sense. And again my second question, switching gears, a bit on the Intermodal side. Maybe a question for Jane, when you think about the shifting of some business to the competitor and sort of how you think about the overall profitability of the business, I guess, I just wanted to get a rough sense of maybe how we should be thinking about kind of basic modeling perspective for 2014 when we're thinking about probably some carload declines, but arguably some pretty decent yield improvements potentially from mix and otherwise. I just wanted to get a rough sense of maybe how we should be thinking about that piece of the business in '14.

[Jane A. O’Hagan:]

Well, obviously, Chris, one thing we won't be doing is giving you guidance for 2014. But I can tell you that based on the momentum that we've had with an excellent product in the service side, an ability to sell into that, we have seen, certainly, overall in the book double-digit growth in some of the key quarters in which we're selling Intermodal, as well as single -- high single-digit growth on the domestic side. I think that when you look overall in terms of what you should be thinking about is that, obviously, chasing market share is with prices not on our agenda. And while the pricing side really is a journey that we're on, we are improving the quality of revenues. So I think that based on that overall perspective in terms of where we're growing, we're going to see that growth continue. I think that you should be thinking about, obviously, improving our pricing, as well as seeing growth in specific segments.

[E. Hunter Harrison:]

Chris, let me add a little bit to Jane's comment there. I think as I look at where we are today, I'm not looking at quarter-over-quarter, but looking out in the future, effectively what we're seeing is this. We've come to the point as we speak that the loss on the international side has been effectively almost made up totally on the domestic side. And that's a direct reflection of service offering. And most of, in my view, the numbers I've seen and looked at, most of this domestic growth has been off the highway. Those margins domestically are much better than international. I feel much more bullish going forward about domestic markets as I do international. There's some numbers that we can't get to and we've continually said that in the plan that there's some business that we're going to have to walk away from. If that's the market, at those levels, we can't be a player. But I think that Keith has really led this effort and there's just been special emphasis added on service with this domestic Intermodal. And it really boils down to how you value service. I know some people, it's a politically correct thing to say, to talk about service, but they really say, look, it's not anything about service, it's all about price. I don't believe that, and we'll see. And really the factor going forward is going to say, how far can we go? It's going to be how quick and how effective we can be in converting service to the bottom line, given some of Jane's earlier comments with her reorganizations of that marketing sales function.

[Christian Wetherbee:]

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

[E. Hunter Harrison:]

Yes, pretty significant.

[Operator:]

Your next question is from Allison Landry with Credit Suisse.

[Allison M. Landry:]

I wanted to dig into the frac sand business a little bit. You mentioned volumes were up in the double-digits this quarter. So I was wondering if you could give us a sense of what volumes might look like in the mid-term from some of the new production coming online next year and where some of the primary destination markets are for that business? And I guess ultimately, what are your thoughts on the potential to move frac sand down to Mexico, should the energy markets open up down there?

[Jane A. O’Hagan:]

Well, obviously, I'll start with your last question first. When we look at the marketplace, obviously our first intent is to take the breadth of our network and apply it based on our relationships to new markets as they emerge. When I look at the frac sand market and I think about where we need to be as a company, we've aligned ourselves and you would have seen in our announcements, we've aligned ourselves with very strong players that sell a very high quality product. I think at the end of the day, this is an industry that may see some consolidation, may see some shakeout just based on how quickly this is ramped up and how quickly they responded. We've basically aligned ourselves to players that will be in the long term, and we expect that these volumes will ramp up as they reach their production capabilities over the next year.

[Allison M. Landry:]

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

[Brian W. Grassby:]

Yes, my comments on the 10 to 12 were made up of 2 comments. One is the share price impact and I've given sensitivity on that, in terms of about 600,000 per dollar. The other part is the long-range incentive plans. And so about half that amount, you would build into sort of a quarterly run rate for next year.

[Operator:]

Your next question comes from Turan Quettawala with Scotiabank.

[Turan Quettawala:]

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

[Jane A. O’Hagan:]

Well, I would say this is a constant process because contracts come up, contracts renew. Obviously, a key part in this journey is taking a look very carefully, because it really is a cost takeout strategy, is to look as we make those improvements, what pieces of business become more attractive as that cost profile changes and how we might upgrade the book accordingly. And I would tell you that we don't have any legacy agreements left. That largely is the contracts that we don't have anything large to break out in 2014. But I would say that, obviously, a key part for us is that service is our strength right now. And this is giving us the opportunity to get into markets that we haven't been able to get into before. And as Hunter indicated, some of these marketplaces have better margin. And so this process that we're going to be going through from an intense part of selling the service and also working at changing and upgrading the book, is really part of this continuous journey we have where we've been making progress and improving the quality of revenue, but there's more for us to do.

[Turan Quettawala:]

Okay. And I guess maybe for Keith, how much of the whiteboarding execution -- I'm sure that's probably at the beginning stage right now considering you were going through the planning here in the summer. Just wondering can you give us a sense of where you are in that whiteboarding execution?

[Keith E. Creel:]

I would say probably about 80% of it's implemented, the balance would be dependent upon capital investments we're going to be making over the next couple of years.

[Turan Quettawala:]

Great. But I guess a lot of the benefits of that will probably start to accrue here right now, right? I mean, it's implemented but. . .

[Keith E. Creel:]

Yes. When I say 80%, I mean you think about 13% train miles in the quarter, that's over 10,000 a day. It's pretty meaningful. So that will continue in the future, but to have those kind of quantum leaps, no. So 80% of the benefit, we're realizing day in and day out. We'll continue to tweak it, balance it against the business levels. And then that additional 20%, we'll see over the next year to 2 years.

[Operator:]

And the next question is from Scott Group with Wolfe Research.

[Scott H. Group:]

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

[E. Hunter Harrison:]

Yes.

[Scott H. Group:]

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

[E. Hunter Harrison:]

Look, I don't know what Pershing is going to do. You all can say better than I if it's an overhang out there. I do think this, I think Brian's comments to the strength in the balance sheet and free cash flow, we're not going to sit on a lot of cash, that will get us closer to some buyback program, I would anticipate, this is a board decision, not my individual decision. I would anticipate that if we continue to have the kind of performance we talked about that we would probably be taking a strong hard look at a buyback within the next 12 months.

[Scott H. Group:]

Okay. And just last thing, Hunter. You made a comment, I think somewhat in jest, you're a little jealous of Brian and his upcoming retirement. To the extent that you're ahead of schedule and based on your comments on an Analyst Day next year, maybe 2 years ahead of schedule, how does that change, in your mind, the timing for how long you're going to be here?

[E. Hunter Harrison:]

Well, if it's totally my decision, I'm not sure it's going to significantly change it. We had kind of pointed that had this 4-year plan, but that's 2.5 years away, a lot of things can happen between now and then. But we're on a pretty nice roll here, I don't want to walk out too soon. Although Keith is, every once in a while, suggesting that. I think that probably if I had to make a guess, I think I'll probably be here 2.5 years and then potentially, maybe I'll continue to have some seat on the board and stay with the organization in that regard and that's why we worked very hard. And really Keith was the key that kind of strengthened us as far as the succession plan. I think whether I'm here or not, you're going to see this organization continue to produce these kinds of results.

[Operator:]

Your next question is from Fadi Chamoun with BMO Capital Markets.

[Fadi Chamoun:]

If we can talk a little bit about maybe framing the revenue picture for next year, I know you're not giving maybe specific guidance. But if you can talk about how do you see things coming together, especially in light of some of the share losses you've had in autos and Intermodal or choosing to move away from a couple of contract. Maybe where do you see the growth coming from? And the areas that you feel that you have a good visibility on at this stage, maybe Jane or Hunter, take a stab at that.

[E. Hunter Harrison:]

Yes, Fadi, let me address that. #1, I would say this, given all of the comments I've read, our guidance for this year, year-over-year, for our revenue growth was high-single digits. We're going to hit high-single digits in not the most robust economic time. To be at high-single digits, I happen to think it's pretty damn good performance. And I can say in my career as CEO, there's a lot of years I would have loved to have had high-single digits growth. Having said that, clearly, you have as much knowledge as we do relative to the commodity. So let's just -- we think our position with grain and with potash and with the bulk commodities is going to be good. The big area that we have, strategically we're attacking is what I would call the merchandise side in domestic Intermodal. Now, are we going to try to gain international? Obviously. But I'm a firm believer that the market gives you the price. We decide whether we're going to play or not, we don't set the price. The marketplace out there and the price is that -- that scenario we don't want to play. So I think our longer-range guidance has been 5% to 7% CAGR over the next 4 years. And I think that's probably going to turn to be a very conservative number because I happen to think that this issue of service is going to play a big part in our growth. And when people see the service, they actually see it, it's not just what we're talking about, they can understand what it does to their fleets as far as asset turns and their inventories and so forth, plus the fact that during this time, if we see interest rates go up and I think we're going to see them go up, we're not going to stay where we are, and the cost of carrying inventory and so forth is going to go up. All of those things create value to service and that's going to be really the kicker that says how strong can our growth be.

[Fadi Chamoun:]

Okay. Only 1 clarification maybe. So given some of the business moving away next year, you still think realistic, we can be in that 5% to 7% in 2014?

[E. Hunter Harrison:]

Yes.

[Jane A. O’Hagan:]

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

[Operator:]

Your next question is from Bill Greene of Morgan Stanley.

[William J. Greene:]

So very impressive results. Hunter, one of the things that you mentioned in your prepared remarks is you will address the guidance some point, long-term guidance, some point next year when you do the Investor Day, if you plan it. But something else you've also gone on the record to say is you think you can get this company to be the most profitable railroad in North America. And the competition sort of stepped it up with a pretty impressive OR yesterday. And I'm wondering if you think there's anything about the CP network that says that comment that you've made in the past maybe you have to kind of reassess.

[E. Hunter Harrison:]

Well, I'm always reassessing. Look, the competition had a hell of a quarter. They did a great job, outstanding performance. But I would also -- let's take a look back a little bit. And by the way, I congratulated them for that performance. Where we started this journey 15 months ago, they were somewhere around 17 points ahead of us. Now they're 6 or so. So we've made some gains. They see us in the rear view mirror, but really, look. It's not about who's the lowest. When I made those comments, I didn't think they were going to be going to those kind of levels. So maybe I underestimated their abilities. But I think the market will be pleased if they're at 59 and we get to 60, everybody would love it, I think. So if somebody is going to in 18 months, somebody says, hey, you missed it. Well, so I missed it. But I still think we're going to go down, we're going to go down further. If we're at 65 now with all the things we got the blender, that sure is not the end. Okay, so and there isn't a lot of space in between and so we're going to stay after them. Just -- it's not a driving force here, I said early on in this game when I got here. There's plenty of business for both these railroads to do well and take business off the highways and put it on the rail and both of us to be very successful.

[William J. Greene:]

Yes, that makes a lot of sense. Great. Second question just on, Hunter, something you said recently as well was that you think that there's probably in the range of $2 billion or so in assets that could be monetized. Can you offer some color about how we should think about that kind of flowing into the cash flows? What sort of timing of monetizing some of that? That would be helpful.

[E. Hunter Harrison:]

Yes. That's a hard one to answer. We are now reviewing that further. We're trying to get the right model to optimize those assets. And there's several alternatives that we're considering exploring. But it's not going to come all in, obviously, in '14. And it might be '15 before you start to see the full value, depending on which way we go. But it's nice to know that we've got something that's convertible, that's got value, that's in that $2 billion range, that's kind of gravy to this whole plain.

[Operator:]

Your next question is from Tom Wadewitz with JPMorgan.

[Thomas R. Wadewitz:]

Congratulations on your really impressive results, impressive all around. Wanted to see if you could help me think about 2014 and it's just when the pace of improvement in the margin is so strong as you've had this quarter and in second quarter as well, it's hard to know how much can you keep delivering in 2014. There's an assumption that it would slow down. How do you think about maybe the absolute margin level you might be -- or OR level you might be able to achieve in 2014 or the factors that would affect what kind of a pace is realistic for margin improvement in 2014.

[E. Hunter Harrison:]

Well, let me make some comments and then Keith can fill in the gaps. Clearly, we're, nonseasonal factor, we're at the 65 level now, 65 whatever the fraction was. We've got line of sight on a lot of areas that we've had improvement, but it's not over there. So I think every initiative we've undertaken, there's some more to wring out. We've talked about, for example, headcount. I think we're right now at the 42 range. I would expect by year end, we will be 45 on the way to potentially a number of 6, and you can do the math there. So clearly, Tom, we ought to have the opportunity to move with, particularly second and third quarter, to move in the range of lower than 65 and you got to get to the low 60s or shame on us. Can we go below that? We'll see. And that is probably going to be dependent upon how well we convert on the revenue side the service conversions. And so would I rule out the possibility that we could get to low 60s and have a little more aggressive growth, absolutely.

[Thomas R. Wadewitz:]

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

[E. Hunter Harrison:]

Yes.

[Thomas R. Wadewitz:]

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

[Jane A. O’Hagan:]

Well, I think as we think about the profile of the book, I'm not going to speculate on where we think the volume is going to go except to say that we're feeling very comfortable about the guidance that we've provided regarding our plans over 2016. I think that what we can safely say though is that as we see these new facilities rolling out, they're largely on the heavy side. And so as we think about those markets and we think about that business, we certainly expect that the production and the construction of the facilities are going as planned. But we also expect that these growing shipments of heavy from the West Coast will also -- from the western part of Canada, will also help us in making sure that we're not as susceptible to the spreads. So I think that we feel confident that the people that we're working with we have line of sight to the expansion. And again we'll give you more detail in Q1 as we see that roll out in terms of where we think we'll be with our crude rates.

[Operator:]

Your next question is from Walter Spracklin with RBC Capital Markets.

[Walter Spracklin:]

Just following up on the market share question. I know that there has been some shifts here and, Jane, you mentioned that there's no significant contracts coming up in 2014. Let's flip it around a bit and, Hunter, you mentioned that as your service improves there's opportunity to gain market share. Is there any areas that you do have your sights on in terms of specific, let's say, groups of areas or even specific companies that you see the contract coming up that you might be able to leverage that improved service to gain market share back in 2014?

[E. Hunter Harrison:]

Yes, I mean the list is extensive. I mean, if we start to really produce the service door-to-door effectively where there's value to the customer. And one of the issues that Jane and her staff is addressing right now is training, coaching, mentoring our people on how to sell service. They've been price sellers. They didn't have a service to sell. They sold price. And so this is not something that happens overnight. #1, the market doesn't like change to begin with, people are resistant to change. But if they start to see value in it, as we've seen with the domestic, I think we will see, on the domestic Intermodal and this merchandise book, excluding crude, that's where we're going to, in every one of those areas as far as products, metals, minerals, you name it, I think we're going to see some growth. And that's without any boost in the economy. If we get a little bit of boost with the economy and convert this service, could we exceed the 7% CAGR? Yes. Are there -- are we going to have some losses? Yes. It's a competitive world out there. And there's some places we can't play. But I would point out this, there's more places we can play when we're at 65 that we were when we were 80. The margin, obviously, is -- the marketplace has opened up to us as we make these improvements. So in spite of the fact -- I mean and we said this in the plan that we weren't going to chase price, we weren't going to chase market share, we were going to go after it and we were going to provide a valued service and try to make a buck, but that's all in the plan. So I think that, obviously, the revenue stream is going to trail the operations, the operating performance and the expense control. But that's going to have a leveling factor. We're not going to see these kind of improvements ongoing. But I think when that tails out, the revenue will pick up. And I feel very bullish going forward.

[Keith E. Creel:]

If I could, Hunter, let me add a couple of comments. Walter, I can tell you this, unanecdotally but factually. Customers that in the past that value service, be they rail, be they road that historically would have never given CP an opportunity because we didn't provide that compelling service offering, they're calling. Conversations I've had, conversations Jane has had. We've got to earn our street credibility by our -- what we produce, which we're doing. The service we're offering between Calgary and Toronto is unparalleled. It's not just rail competitive, it's truck, single driver truck competitive. So we're exercising, we're sweating and we're leveraging the franchise strength that a lot of people, before even internally, didn't recognize. We've got the shortest route period from Toronto to Calgary. If you leverage that and you actually convert that, how do you compete with that? Be it truck, be it rail. We've got the shortest route, Vancouver to Chicago. If you leverage that and you compete with that, it's compelling. So if you're into asset turns, if you own your own equipment, if you care about service, if you got to get the product on the shelves, who are you going to give your business to? It just takes a little bit of time for us to earn our keep, earn our reputation. And once we establish that, the business is going to come. I'm not nervous about it at all. And we're going to earn a return, and through this reduced cost, we're going to leverage it right to the bottom line.

[Walter Spracklin:]

No, I appreciate that. One area that I think is a good test on that would be grain. I guess, you've got a big crop coming up, we know it's not price sensitive, there's revenue caps in place. So pricing doesn't really come into play. Typically, it's a market you shared roughly 50/50 with CN, but it has varied by as much as 10 points. How do you see your market share capture in what's shaping up to be one of the best crop years ever? When you leverage that service that you're now enjoying, can we see more than 50% market share for this year's grain crop given that pricing is not going to be a factor?

[Keith E. Creel:]

Yes, I'll let Jane provide some color, but short answer is, yes, you can expect it. There's certain elevators that are in place for CP, they're in place for CN. That's jump-off business. If we've got the assets, the cars available and we're making the turns to the West Coast where most of this grain is going, then we're going to be in play. That opportunity is there and we expect to try to convert some of that. I mean, as we said, we ramped up fast. Numbers that are staggering compared to what's happened in the past and it's not just what we have unloaded at the port, it's what you loaded in the prairies, so to speak. You convert those 2, you provide the customer in a nonregulated environment now with a weak board gone, some of these customers want to get that product to market. You keep their export elevators full, you're going to be rewarded with business, that's what we're seeing.

[Jane A. O’Hagan:]

And I would just add to that, Walter, that when we look at our franchise, we're really, I would say, arguably have one of the best franchises in North America when it comes to origination. And certainly, the range of destinations that we provide, in the last year we've shown that when as the markets have changed or as they're dynamic, we've gone to the market with pricing, we've gone to the market with opportunities where we've been moving Canadian grain to U.S. ports and U.S. grain into Canadian ports. So I think that when you look overall and you think about what we can do, not only on the regulated side, in terms of working with our customers, working with our operations team, finding ways to improve asset utilization and velocity, that's step 1. But when we add into that the opportunity that we have to take advantage of the destination reach and origin capabilities we have, this is what really gives us the opportunity to really focus on moving the record volumes of grain that we're at today.

[Operator:]

Your next question is from Ken Hoexter with Bank of America.

[Ken Hoexter:]

A clarification, Hunter, maybe just we've heard a lot about how customers were upset at, I don't know whether it was your pace of change or what have you. Was it what -- back at in the CN days and that was Claude's big thing when he stepped up to do a smoothing of service. What -- when you step back and you look at the lost Intermodal business, do you feel was it just on price? Was it on service? Was it the pace of change? When you kind of do a post mortem look at it, what was that?

[E. Hunter Harrison:]

The recent losses in international.

[Ken Hoexter:]

Yes, I guess on the international.

[E. Hunter Harrison:]

In my view, strictly a price decision. And look, they're going -- look, some of them are saying to me that they're cutting back the speed on the high seas to save fuel. If you go to some of these Intermodal facilities, there is containers stacked 20 high. They're dwelling -- and so service is not a factor there at this point, more globally. So when service is not a factor and it's just who gives the lowest price, that's when you win the business and we decided not to go that low.

[Ken Hoexter:]

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

[Jane A. O’Hagan:]

I would say that, basically, Ken, if you can look at it this way, I think that we obviously want to grow the business in a sustainable profitable way. We set out and looked at how we want to look at revenue growth, obviously, our pricing is a journey. We're out there selling value, we're going to get that much better and command better value for the price that we put out there. So when we look at overall and the mix and we think about the book of business, it's our job to continuously adjust and improve that quality of revenue. And I think to Keith's point and to what Hunter said, we're -- our service is really our strength right now. Getting into the market, being able to sell that service and focusing on how we bring that to the bottom line, that's what we're doing with the emphasis being on improving that quality of revenue and commanding the price for the value that we put in the marketplace.

[E. Hunter Harrison:]

Ken, it's really a timing issue. We started off, first goal was we had to get our costs under control and get our act cleaned up and build a foundation to build service on. So that took us -- that's taken us 9 or 10 months to make the first big breakthroughs there. So now we're starting to see a really better product out there. But the market's not going to change overnight based on the fact that you go ahead and blow your horn about your service, they got to see it. And so there's going to be some lag, a year or so and it will dribble out over time until people convert and make this change. So I think you'll see the revenue growth start in '14, but it's not -- but probably '15, we'll really see a big jump on the service side if we're right in what we're saying.

[Operator:]

Your next question is from Thomas Kim with Goldman Sachs.

[Thomas Kim:]

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

[E. Hunter Harrison:]

Right now, I don't see any need that where we talk about these issues, it's going to be -- affect the capital spend. If it does, it'll be modest. But I think one of the things that we will concentrate on to some degree is, rail is typically, said if you ask somebody 6 or 8 years ago with Intermodal, you had to have a 800- or 900-mile haul before you can make a buck. Well, I don't think that exists anymore. So I think in some of the domestic markets in Canada that aren't huge markets, but hopefully will grow like the Edmonton, Calgary, Regina, those type markets we're going to really go after from the highway perspective. So there's going to be creating better as to Keith's example of improving Toronto to Calgary and those big lanes that we have domestically. But at the same time, offering new services to the short-haul Intermodal.

[Thomas Kim:]

And if I could just switch topics, with regard to financial leverage and capital structure, can you give us a sense of what sort of target you're looking at in terms of your overall financial leverage, whether it's net debt-to-equity or net debt-to-EBITDA number? And how should we think about that in terms of the capital return?

[Brian W. Grassby:]

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

[Operator:]

Your next question is from Brandon Oglenski with Barclays.

[Brandon R. Oglenski:]

I know it's a long call here, so I'll just keep it to 1. But Hunter or Keith, I think it's good to benchmark yourself against the best-in-class here. And your peers out east are running with labor expense at about 20% of revenue. And the way I see it for your network right now, closer to maybe 23%, but that's improved by about 300 basis points this year. Should we be assuming a similar progress in labor productivity for '14 and '15, to maybe match that benchmark?

[E. Hunter Harrison:]

Well, I hadn't looked at those numbers specifically as compared to the competition. But if you look at the headcount numbers, for example, and some of the other initiatives we had, clearly, our comp and benefits line is going to go down relative to revenue. Now as comparing it to the competition, I don't know there's a different mix and potentially different operating agreements that will be signed. But I think that we will continue to make improvements in those areas. And I kind said to them jokingly yesterday, they've become a moving target. So congratulations to them and I think we understand what we need to do and we're going to drive to get that done.

[Operator:]

Our next question is from David Newman with Cormark Securities.

[David F. Newman:]

So you had $2 billion in potential asset sales here overall, is that inclusive of the DM&E? And where does that stand at this current juncture?

[Brian W. Grassby:]

David, that's not -- the $2 billion is not the DM&E.

[David F. Newman:]

Land sales, right? Mostly.

[Brian W. Grassby:]

That's right. But we're on track for the DM&E West, the process has gone well, the parties have done due diligence. And we'll update you when final decisions are made.

[David F. Newman:]

So $2 billion in cash and then you sell the DM&E, besides buyback, dividends, any strategic uses of the assets -- or the money, Hunter, that you could anticipate, either other rails or supply chain, like how would you like to augment the franchise, I guess, in the future?

[E. Hunter Harrison:]

Well, I mean, one thing we're looking at right now, for example, we're looking at our position with short line. And we've got some agreements out there that I really don't like that have been signed and we're looking at should we reacquire some of the smaller short lines, should we terminate the lease, should we not extend it when it comes up. So we'll be look at the short line network. I think we'll move to the point and, hopefully, I can lay a foundation for the rest of this team. That anything that's in the -- we hear this term so much, "supply chain" the more we can control, the more effective we can be. So we would look at anything in that supply chain that's up for sale that we think that at a reasonable price, we can get a return on, we'll take a look at it. Now as far as any major big acquisitions or anything strategic, I don't know of anything that's on that I don't think we're in that position right now. We do have an Eastern property that we talked about initially that there's a potential opportunity to do something with it. And but that's about what's in the bucket right now.

[David F. Newman:]

Okay. And now you've got a 65 OR potentially for next year. As a result of your whiteboarding exercise or brainstorming, have you identified anything sort of chunky or beyond what you've already anticipated in your first plan? I'm sure we'll get an update at the Analyst Day. But any thoughts as to how you might get this down to where your competitor is today?

[E. Hunter Harrison:]

Well, I'll let Keith add to this. But I just mention a couple of things. We're going to what I call a stable workforce with our maintenance, the way people that maintain the track. We're not going to have a case where we're hiring in the season and laying off and -- we're going to have a stable -- and that's to provide savings. We got a big effort that we've talked about before, that Mike Redeker is setting up with IT. So we think that at the end of '14, it's kind of a bubble. And we'll take a significant amount of people, mostly outside contractors out of -- so that's kind of all gravy, plus there's a lot of initiatives right now. The game's not over with increasing train size which lowers train starts. And so it's just doing, in addition to that, it's just doing all the things we're doing, trying to do now, do them a little bit better. Our managers out in the field are going through a big learning curve. This has been a hell of a change. It is a hell of a change for them. So they're going to get better every day. They're going to get smarter. We've come a long way from optimizing this. The competition shows us where the numbers can be and we've experienced before numbers that started with 5. So that's -- I feel pretty confident that we're going to be able to produce those kinds of results.

[Keith E. Creel:]

The only thing I would add to that, this isn't about grand slams on a go-forward basis, it's singles and doubles. But there's some key opportunity levers in there. And I can tell you now that the safety culture in this company is nowhere near where it's going to be. This is a journey, it's an evolution. As we evolve and as we create a culture where more and more employees comply day in and day out, as we increase the robustness of our infrastructure, some of these derailments which we've experienced, and certainly can draw concern for the company and has drawn some naysayers to the company. We'll reverse those trends and you'll start to see an improvement in that area and that goes straight to the bottom line, both in the revenue and asset turns, goes way beyond just the tangible direct costs that are associated with these incidents. So that's another area that to me is going to be a significant performance enhancer as we go forward.

[David F. Newman:]

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

[Keith E. Creel:]

I think it's a case-by-case basis. And, quite frankly, I think it was an excuse. You can look at any franchise, any network, I can look at theirs. And there's some benefits to theirs, and I look at mine, there's some benefits to mine. So all that offsets, it's how you execute with what you've got. I can say the more meaningful opportunity if you want to compare apples-to-apples, we're on this journey at CP, are these extended sidings. We're putting 8 in this year, that allows us to run longer trains to make effective train meets. We're not done. That's a 2, 3-year journey. There's a meaningful part of this railroad that doesn't have CPC, that gives you incremental impact as far as velocity and productivity. That's something that's we're on the journey. That's a 2 to 3, 4-year plan for us. So all those things are in the blender and that's how you get to that number that we are talking about as we go forward.

[Operator:]

Your next question is from Cherilyn Radbourne with TD Securities.

[Cherilyn Radbourne:]

One thing I noticed in the quarter was that your average revenue per RTM took quite a jump in Q3 versus first half of the year, that kind of $4.31 versus the low 4s. And it looks like maybe there was some mix impact in sulfur and fertilizers, industrial products and grain, in particular. Could you just address that issue a little bit and help us think about whether we should assume the mix prevailing in Q3 continues?

[Jane A. O’Hagan:]

Well, I think, Cherilyn, you really hit the nail on the head. I mean, obviously, we did have some impacts that were there from mix, largely with the long haul industrial products. Some of the -- certainly the domestic potash and the overall impact on the grain side. I think that what you should do on a go-forward basis is, obviously, our grain remains strong. We're going to see some as the spreads widen, we're going to see some of that return on the oil side. And as you know, a lot of our RTMs and our average revenue per car is impacted by those volumes, as well. So I think that overall, I think that the mix should be pretty much in line with what you're seeing this quarter and to Q4 so that's how I would model it.

[Operator:]

Your next question is from Jason Seidl with Cowen and Company.

[Jason H. Seidl:]

First off, Brian, congratulations and best of luck to you. I'll keep it brief since it has been a long call. Going back to the crude to rail, you guys are talking about your sort of mix between some of your more contractual business and the "opportunistic business." What is that mix currently between the 2?

[Jane A. O’Hagan:]

What I would say is that about 50% of our crude contracts have volume commitments. And this is pretty much consistent where we started in the business. And as I said, there's also a percentage that's going to move with the spreads. But as we expect greater volumes of heavy crude to be developed, obviously given some of the investments that people are making up in the north, we expect that as the heavy crudes will form a larger part of the book on a go-forward basis, that we'll have a greater portion of those term commitments that are locked in as well.

[Operator:]

Your next question is from Matt Troy with Susquehanna.

[Matthew Troy:]

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

[Keith E. Creel:]

You answered your own question, that's exactly what it is. It is combination of all those things.

[Operator:]

Your next question is from Keith Schoonmaker with Morningstar.

[Keith Schoonmaker:]

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

[Keith E. Creel:]

Well, we won't make those kind of quantum leaps quarter after quarter after quarter. But certainly there's still more upside. You will see incremental percentages on a go-forward basis. Those sidings are key to this, as I said, there's 8 sidings that come on, they allow you to effectively -- you're limited by how many double saws you have to make if you're going to run long trains in a territory that doesn't have appropriately spaced long sidings. So as we go forward, that will allow us as we convert them to increase. So it's a combination of all those things. We'll continue to invest strategically in sidings in some of those pinch points we've got, you will see some improvements between Edmonton and Calgary which will allow us to take some train starts out, you'll see some improvements from some siding investments next year, west of Calgary to the West Coast. Again, that will allow us to increase train size and take out train starts and will be incremental to our progress.

[Keith Schoonmaker:]

Is the long-run goal, Keith, to get to 0 double saw-by?

[Keith E. Creel:]

Well, I don't know if you ever get to 0 because there's some territories. You got to have traffic density to justify the expense. We're not going to make foolish investment decisions. So I don't think we'll ever get to 0. We're going to be operating the railway efficiently. If there's of an opportunity to do a double saw, increase train length and take out train starts, we're going to convert it.

[Operator:]

Your next question is from David Tyerman with Canaccord Genuity.

[David Tyerman:]

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

[Jane A. O’Hagan:]

Well, I think that the one thing you should keep in mind that I gave you guidance on is obviously we're pricing for value in the market. But we do seasonally price. And I've asked you to keep a careful watch on the sequential price on the grain side given what the VRCPI is. I would love to see us come in above our 7% to 8%. I think that when we look at the carload volumes that we need to achieve to set those targets, I feel that we're in a pretty aggressive place. But our operations team continues to do astonishing things for us each and every day. So as long as they're capable and able to move it and we're in the marketplace out there selling it, we're obviously going to do our level best to challenge that target.

[David Tyerman:]

Okay, thank you. And Hunter, on the $2 billion of assets, that's quite a lot since you only have $16 billion total. I was wondering if you could just shed some light on what you're talking about, where you would get all that? And if there's much EBITDA or EBIT or whatever attached to that $2 billion.

[E. Hunter Harrison:]

No. It's basically what I would describe as surplus assets. A lot of it has been the result of closing hump yards and movement in consolidation of yards and terminals and it's opened up, for example, in Chicago, we put all our Intermodal business into Bensenville and closed the other facility. And it's just a lot of that. And then the company had not focused a lot on what we owned. In fact, I don't think there'd been a very extensive look at all those properties for probably 25 years. So we found properties in Northern Ontario that I didn't even know we owned. So as we took all of these structures, all of the land that has been made available, which that makes up a high percentage of it. That's at this point our best estimate of what the "appraised value" might be today, and I don't think appraised value gives you a lot. But I think that we got to figure out how the best way is. And I'll tell you this, I don't think we will do it in some traditional way of just selling all properties at a discount rate, like a typical railroad. We're going to look and optimize this to the best of our ability to reward the shareholder.

[Operator:]

Your next question is from Jeff Kauffman with Buckingham Research.

[Jeffrey Asher Kauffman:]

I got to be honest, my questions have been answered. I'll just ask a quick one to Jane and that will be it. Jane, when we look at the yield and I think you've done a very good job explaining this, basically, either we can charge more to carry the same car to the same place, maybe because it's better service, maybe because it's just price increase. We can carry more high-value stuff versus low-value stuff or we can move stuff further distances. If I had to break out how you think the yield growth plays out going forward, how would you throw it into those 3 buckets?

[Jane A. O’Hagan:]

That's a tough question because of the fact that it's always a combination. I mean, I think that what you're doing on a regular basis is when you're looking at your marketing and sales and your portfolio and your book of business, you're trying to capture and align opportunities as they appear with the best combination. I think the one thing that we've learned from Hunter overall is that you really have to start thinking about getting focused, you have to start to simplify the service and to sell to that. And I think the other thing you have to do is that when you move away from being a price taker as he said and we're selling service, we got to get really focused on not just the customer's whole book of business, but where can we largely be successful without trying to dilute that down to just one combination or package. So I think I'd love to give you a combination, but I think that you really kind of hit the nub of what it is we have to be at every day.

[Operator:]

Your next question is from Steve Hansen with Raymond James.

[Steven P. Hansen:]

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

[Jane A. O’Hagan:]

Well, I think that back to Hunter's point that he made, that speed is a different element that when you think about the international business and the extent to which containers move across the sea at a certain pace and the extent to which they move into terminals, et cetera. But when you get into domestic business where we have really achieved our growth, speed is one of the core components that we're selling to. I think that when we look at customers that are in the domestic market that are looking at stocking distribution centers, replenishing inventory, thinking about inventory turns, all those things. These are the key core components that when I look at my team and the enthusiasm they have selling this Toronto to Calgary service is that ability to sell into what a customer's proposition is for how they want to manage and knowing that this is going to create real value to them in terms of managing inventories and getting a product out on customer shelves. So it's very important and I think there's a bit of a distinction between which market you're talking about.

[E. Hunter Harrison:]

Steve, the other thing I would add there is maybe you would debate what speed's worth, and once again, if interest rates are at 0 as opposed to 20%, there's a lot of difference in what speed makes in inventory. But I think it's a bigger factor maybe than others. But I would also say that one of the issues that sometimes we overlook is it's also the low-cost way because when we did the first -- took the first 20 hours or whatever it was out of the transcontinental schedules from east to west, that saved us about 40 locomotives by turning the assets quicker. So it's -- I'm a strong believer that good service and low cost are compatible, they're not opposing forces.

[Operator:]

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

[E. Hunter Harrison:]

Well, hopefully we've covered all the ground and we're very pleased and we're -- but at the same time, hopefully there's a little humility in this shop and this journey is far from over. And I think you're going to continue to see the type of results that this group has produced. And thanks for joining us. And Brian, once again congratulations and good luck in the future.

[Brian W. Grassby:]

Thanks.

[Operator:]

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