Canadian Pacific Railway Limited
Q3 2015 Earnings Call Transcript

Published: 20 Oct 2015

[Operator:]

Good morning. My name is Aaron and I will be your conference operator today. At this time, I would like to welcome everyone to Canada Pacific’s Third Quarter 2015 Conference Call. The slides accompanying today’s call are available at www.cpr.ca. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Now, I would like you to introduce, Nadeem Velani, AVP, Investor Relations to begin the conference.

[Nadeem Velani:]

Thank you, Aaron. Good morning and thanks for joining us. I am proud to have with me here today Hunter Harrison, Chief Executive Officer; Keith Creel, President and Chief Operating Officer; Mark Erceg, our Executive Vice President and Chief Financial Officer. Before we begin, I want to remind you this presentation contains forward-looking information. Actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described on Slide 2 in the press release and in the MD&A filed with Canadian and U.S. regulators. This presentation also contains non-GAAP measures outlined on Slide 3. The formal remarks will be followed by Q&A. In the interest of time, we would appreciate if you limit your questions to two. It is now my pleasure to introduce our CEO, Hunter Harrison.

[Hunter Harrison:]

Thanks, Nadeem and I am glad to be back. I am glad to be here with you than in Rochester. There are a few things I would like to highlight on the quarter before Keith and Mark go in more level of detail that I think are noteworthy. I guess one was the pretty outstanding performance in less than a robust economy to achieve operating ratio again of breaking through 60%. We completed the transaction and the sale of the D&H, so that’s behind us. As most of you were aware, we upsized the buyback and I should – I would be remiss if I didn’t take a moment here to thank Keith and the team who carried on pretty admirably with my absence. They might have done too good a job, but maybe I can come back and help them a little bit here. But I think most noteworthy and we have been talking about this for some time in each company we have been, but our LR group was successful in signing an hourly agreement with the BLE in the U.S., which I think is quite significant. I think that in my view at least that will only lead to the UTU signing up and that’s kind of the patterns we have followed before. And so effectively then, with a couple of minor tweaks, we will have the total U.S. operation on an hourly comp basis, similar to the ones of you that have been following us for sometime, similar to the Illinois Central agreement. And so that was a big, big breakthrough. And I think that will be a further influence to – at some point in time and this is one that it’s hard to predict, but I think at some point in time, we are going to see a similar type arrangement, I would predict in Canada. Now, we are before arbitration as we speak, I think we are expecting a – and I don’t think this is written in stone, but I think we are expecting fourth quarter, probably end of October, early November, a decision from the arbitrator on the running trades in Canada, which will basically put most of the – most all of the labor issues in Canada to rest. So, I think that’s a big move. So, it’s really in these kind of economic times, I think it’s clear that we have got the best product service out there in the market. I think we are – we have reached a time where we are the most efficient and the boom times are really coming when we can break loose and get Canada out of this recession and see a little direction on what’s going to happen to crude, then we are going to have to buy a bigger safe for the funds. So, with that nicely backed, I will be here for the Q&A. And with that, let me turn it over to Mark or Keith and Mark. I guess Keith will take the ball first.

[Keith Creel:]

Okay, thanks for the comments, Hunter. Welcome back. Certainly, a true measure of a leader is what happens when he is not here, so we never felt like you left us and this team worked extremely hard given the economic headwinds we faced to produce these results, which I am extremely proud of. Very strong operating performance across the board, potentially this is a quarter of control in which you can’t control with this operating model converting it. The metrics provide some pretty powerful proof points across the board, but all key metrics showing improvement year-over-year. Dwell time 19% better, another reflection of our commitment to be focusing on our terminals this year to drive those costs out and improve service. Trains speed up 20% for the year, which effectively for those of you that were at our multiyear planned rollout last year that is our end-of-year plan. With that said, we are obviously not going to be complacent in that regard. I have pulled the teams together back a couple of weeks ago, Hunter of course, as he always has, has challenged us, I challenged the team. We are looking at what’s next, what’s next from additional train speed improvements, so we can continue to turn our assets, not necessarily through significant spend, but more about process and execution, converting what we have already invested in and also it’s opened up a very unique opportunity for us given that we are much further ahead than we had thought to take a very strategic and hard look at our capital spend in the out-years as we go forward. There is quite a bit of discretionary spend in our multiyear plans. So certainly, rest assured, we are going to be taking a look at that for ‘16, ‘17 and ‘18. Throughout the quarter as well, we continue to allow our resources to match the reduced volume environment. Across the board, a couple of comments. Total workforce down 9% from a year ago. Overall, since Hunter started this journey, a little more than three years ago, we are down just in excess of 5,900 employees, so quite a bit of improvement in that regard. That said, the railroad still is very well positioned to handle the growth when it bounces back. A nice proof point of that was September when this company actually moved record amounts of crude and records amount of grain given the asset base that we have. During the quarter as well, we reduced cars online by about 15% and we have got over 400 locomotives stored as we sit today, which obviously is a significant delay to our capital requirements for the years going forward as well as reducing our operating costs during our current times. And another very encouraging point I want to say a few words about is the area of safety. This is an area, it’s critical to CP, it’s critical to our customers and the communities we operate in and through. Our safety record continues to set new levels of performance. Train accidents improved 40% over last year’s Q3 performance and again 8 to 9 years running of CP being the safest railway in the industry. But again, one derailment is too many, it’s an area that we remain seized and focused on. Turning the page to the revenue side, 2% revenue growth year-over-year. Revenue performance was driven by effectively 2% revenue growth and a negative 4% RTM. This was driven by 4% positive per RTM as the currency in our price more than offset the negative mix and the lower fuel surcharges that we face. I am not going to go into details of the segments, but let me highlight a couple of key drivers of the volumes. In the bulk, the grain was down as a whole driven by our U.S. market where our farmers continue to hold their crop given the suppressed commodity prices as well as their strong U.S. dollar. Coal, up 7%, but this is a tale of two stories, obviously some headwinds in the Canadian franchise, which was down about 9% in the quarter with some of the pinpointed reductions of the mine shutdowns that Teck had, but that was more than offset by our strong U.S. coal performance. On the merchandise side, we did see some strength in forest products but faced some pretty difficult compares given the key energy markets and obviously some headwinds there we didn’t expect or could predict last year. Intermodal growth, you see a little bit it’s been muted by the winter, a weaker fall peak, a little bit less than what we expected. Obviously, there is increased trucking capacity in our short-haul lanes, which just give us some headwinds and resistance, and also we are being impacted by a slowdown in the Canadian economy. So obviously, there is a lot of uncertainty in the markets, times like this again, I will close with what I started with. This is an opportunity for us to take this operating model, focus on what we can control, provide the best service we control our costs, operating safe railroad and win market share even in the down environments and put ourselves in a position when the economy bounces back. The base is reduced obviously and you are going to see not just impressive results, but remarkable results from this operating team, this company and this operating model. So with that, let me pass it on to Mark Erceg to provide some color on the financials.

[Mark Erceg:]

Thanks, Keith. As I reflect on the third quarter, which is my second quarter here with the company, I have to say the team performed really well, particularly in light of what was a very challenging demand environment. And I am very proud and honored to be part of this team. As Keith mentioned, revenues were up 2% with FX and price gains offsetting the impacts of lower fuel surcharge revenues and weak volumes. And from an OR standpoint, our adjusted operating ratio came in at 59.9%, which represented a 290 basis point improvement versus a year ago. But perhaps even more importantly, it was the second lowest OR in the company’s history. And then from an adjusted earnings standpoint, we earned $427 million, which was up 7% versus a year ago and adjusted EPS came in at $2.69 a share, which was up 16%. Now in order to reconcile back to our GAAP EPS of $2.04 per share, there is a couple of items that we need to cover. First, we did exclude $128 million non-cash loss of $0.70 per share. That was related to the FX translation on our long-term debt. As you know, and as we have talked about in the past, we are excluding from adjusted earnings per share the non-cash revaluation of U.S. dollar-denominated debt on our balance sheet, which results from changes in the CAD-U.S. dollar FX rate during the quarter. And as you recall during the second quarter when this was a gain, we also excluded that from our adjusted EPS. Second, we did complete the sale of D&H South. That resulted in a $68 million one-time gain of $0.26 per share during the quarter, which and also consistent with prior practices, was excluded from our adjusted number. And then finally, you may recall that last quarter, I indicated we were exploring ways to increase our financial flexibility going forward. And consistent with that, we did decide during the third quarter to take out a series of privately held secured notes and that resulted in us paying an early redemption premium of $0.22 per share during the third quarter. So with the adjusted earnings per share to GAAP reconciliation now out of the way, let me provide some additional color on just a couple income statement items and I will do that on an FX adjusted basis in order to trying keep things as simple as possible. So comp and benefits was $351 million this quarter. That represented an increase year-over-year of roughly 4%. Within that, lower stock-based compensation of $18 million and headcount reductions more than offset wage inflation and $24 million of higher pension expense. And then turning to fuel expense, fuel expense was $162 million, which was down 45% year-over-year. Lower volumes did account for $16 million of reduction and fuel productivity accounted for an additional $14 million, but lower fuel prices themselves did account for the lion’s share of the reduction at $106 million. And then finally, fuel lag, which is a $15 million benefit during the quarter, more or less completes the reconciliation. Purchased services came in at $272 million. Now that represented an increase of 8%, that increase was probably higher than some of you might have expected, but that was because we cycled up against some one-time capital credits and accounting adjustments, which were in the base period. And then in addition, our casualty costs were low during the third quarter. They were even lower last year. And finally, we are no longer sub-leasing locomotives to another railroad, which temporarily lowered purchased services last year. The last P&L line item I should probably comment on is interest expense. Interest expense was up 24% in the quarter. You probably noticed that we have issued a series of debt instruments recently. We have done that to take advantage of what we believe is a temporary dislocation between our stock’s current trading price and its long-term intrinsic value. So while we have dramatically lowered our share count, that’s come at an increase of higher interest expense. The last area I should probably comment on is cash. Year-to-date, we have generated $979 million of free cash, that’s a 60% increase versus year ago. The increase is primarily attributable to higher cash flows from operations only partially offset by higher capital spending. And while capital spending through the first nine months of the year is running ahead of last year and we do continue to see pressure from a higher U.S. dollar, we do remain on track to spend the $1.5 billion we did guide to at the beginning of the year. Although as you heard Keith mentioned we are doing a bottoms-up really in looking at all discretionary capital programs going forward and that might be reflective then in our thinking as we move into the outer years. Now I am sure you have noticed we have also been very active in capital markets this quarter. We issued $2.7 billion of U.S. dollar-denominated debt. A small portion of that was used to fund the early redemption of several secured notes, which I spoke to just a moment ago, but the vast majority of that was used to repurchase shares. During the quarter, we have repurchased 7.7 million shares for a little over $1.5 billion. And year-to-date, we bought back 13 million shares at a cost of $2.6 billion. Now the net result of all this activity, we have increased our financial flexibility by removing restrictive covenants of secured debt. We have significantly reduced our weighted average coupon rate, while at the same time dramatically increasing the weighted average duration of our debt portfolio and we have taken advantage what we believe the temporary dislocation in our stock price to aggressively repurchase our shares, all the while being mindful to protect our strong balance sheet and our BBB+ credit rating. So with that, let me turn the call back over to Mr. Harrison or Mr. Creel.

[Hunter Harrison:]

Thanks Mark. Let me just make one comment before we take questions. I would expect that this review of capital – and just to give you one example, when we started this journey, I guess 3.5 years ago now, we talked about, for example, locomotives that we were going to be able to take a hopefully a 3-year to 4-year holiday on locomotive acquisitions. Keith tells me now that 3 years or 4 years is probably going to extend to at least ‘18. So we are looking at instead of 3 years or 4 years, we are looking at 6 years or 7 years. And if you again look at that across the board and if you look at the discretionary spending and the catch-up capital, if you will allow me to use that term, that we put in place, without affecting the condition of the physical plant and no compromise of safety and all discretionary signings that we caught up on, I would expect that we could see our capital spend come down potentially as much as $400 million. So pretty significant of the work that’s been done in the past that we will just now start to begin to reap the benefits from. And with that, Aaron we will be happy to address questions the group might have.

[Operator:]

Certainly, thank you. [Operator Instructions] And your first question comes from the line of Scott Group from Wolfe Research. Your line is now open.

[Scott Group:]

Hi, thanks. Good morning guys. Welcome back Hunter.

[Hunter Harrison:]

Thank you.

[Scott Group:]

So there has been – it’s been a while since we have heard from you, Hunter and there have been some media reports. Can you just give us an update – I don’t know that we need a history of where you were, but kind of where you are now and what – how active you are day to day and how this kind of impacts your view and vision for CP over the next few years?

[Hunter Harrison:]

Well, I hope it’s a non-event, Scott. I am getting back on my feet. Most of the medical issues of any significance are behind me. I am very similar to where I was before. And I don’t see any change in what I had – we have previously talked about that the plan is that contractually, I will be here until the middle of ‘17. And unless God forbid some other issue kicks in, that’s where I want to be.

[Scott Group:]

Okay, good to hear. And then so we are in this period of weaker volume, which may or may not continue. And if we can’t count on the top line as much anymore, how comfortable do you feel about or how low do you feel like you can push the operating ratio lower with things like lower capital, lower headcount, the new labor deals, how good could that get or is it that in a tougher revenue environment there is not much more margin to get?

[Hunter Harrison:]

No, I think that – I think it’s starting to be reflective – this quarter starts to send some signal. If you look at the bottom line performance in spite of the fact of weak top line, with the other things as you mentioned that are additive, I mean, if we just were focusing on OR, clearly, we hadn’t hit the wall. Are there – I don’t know the group is going to get nervous if I say anything more, but I am going to say it anyway, there are probably two or three more points to pull out just where we are now. Now, you let the economy bounce back a little bit and let’s get back to “normal times,” then it really gets pretty exciting. So, I think that we have always said, this model does even better of controlling cost and producing results during soft, might be called bad times than it does – as anybody does well when things are robust with the top line. So, I think that to produce the kind of OR now with that soft a top line and with these other things of the labor agreements and headcount and the capital and so forth, it’s pretty exciting.

[Scott Group:]

Okay, alright. Thank you, guys.

[Hunter Harrison:]

Yes.

[Operator:]

Your next question comes from the line of Fadi Chamoun from BMO Capital Markets. Please go ahead.

[Fadi Chamoun:]

Okay, good morning.

[Hunter Harrison:]

Good morning, Fadi.

[Fadi Chamoun:]

Welcome back, Hunter. So, you mentioned in the press release the ability to generate bottom line double-digit EPS growth in varied economic conditions. Should we understand that extended to 2016 even without sort of a change in the underlying volume environment we are seeing?

[Mark Erceg:]

Yes, I think the simple answer is yes. We have demonstrated an ability even with revenue ton miles down, the ability to increase train weight, train length, network speed. We have driven fuel efficiency lower by 5% this quarter. So, there is still a lot of cost takeout that can be affected. And so we are very confident that next year will be at least another year of double-digit EPS growth.

[Fadi Chamoun:]

Okay, great. And if we can look at the volume a little bit as we – looking into 2016, like where do you see the opportunities to maybe grow the volume? And where do we see some of the challenges? I am just trying to see – if you feel that 2016 is potentially flat or slightly up volume or down volume, I am not sure at this point if you are able to make any comment about that.

[Keith Creel:]

Fadi, let me just say this. The only answer I feel comfortable giving you is I don’t know. I mean, I don’t know what’s going to happen in ‘16. I do see continued strength in some of the areas that we are seeing strength in now. Automotive, I believe can be a strength for us. Intermodal, I think, can continue to drive some growth for us. Canadian Grain, first part of the year strong; latter part of the year, I don’t know. I don’t know what’s going to happen with the harvest. And I certainly don’t know what the U.S. farmers going to do relative to when they are finally going to move their product. So, a lot of uncertainty, and again, I will take you back to what we said before. Regardless of what the macroeconomic environment is, we are going to focus on what we can control. We are going to right-size our assets. We are going to continue to convert, control the bottom line. The investment, even if I scale off and we will for next year our capital investment, we still have to pay for what we have spent this year. I look at the speed this morning we hit 23.2 on the network. That may be an all-time record for us, but rest assured, I have still got six or seven sightings that I haven’t the benefit of coming online yet that will come online in 2015 then I am going to be paying for in 2016. What I went through last week, we are leaving a lot of money on the table and a lot of opportunity and a lot of productivity on the table just from executing day in and day out what I call noise in the network. So take away the excuses, focus on locomotive reliability, focus on using the speeds you have got, focus on maybe an age-old mentality in this company where the engineering department may have been more than a silo not tied to speed just effectively seasoning and making everyone very sensitive to what speed does for assets across the board from the guy that’s pounding spikes to the guy that’s pulling pins to the dispatcher that’s lining the switches and there is incremental opportunity for us with that additional capital spend to drive that bottom line. So, long answer to your question, but again, I am not too seized with what the economy is going to give me, because strictly I am very focused on what I can control relative to the bottom line running this railway better day-in and day-out.

[Fadi Chamoun:]

Okay, that’s helpful. Thanks.

[Operator:]

Your next question comes from the line of Brandon Oglenski from Barclays. Please go ahead.

[Brandon Oglenski:]

Yes, good morning everyone and Hunter, welcome back. Best wishes on the future out there. Keith, I hate to come back to the same question. It feels like the first two folks were asking here, but I mean, can we talk about recent trends, because it does feel like the quarter started on an even softer note. Is there currently deceleration in demand across Canada and across some of your major markets or should we not read too much in the negativity that we have seen the last few weeks?

[Keith Creel:]

Yes, I would say that maybe the last few weeks is a little bit overstated, because you have got Canadian Thanksgiving in there, you have got some supply chain challenges on the coal side that we have dealt with, but overall, yes, there is a little bit of weakness, certainly a little bit less from what our expectations are. But as far as looking at it out at the balance of the quarter and the year end, I mean, we have said second half 3% to 4% less RTMs. Are we closer to the three versus closer to the four? I would say, yes, probably, but beyond that, I would just be guessing.

[Brandon Oglenski:]

Okay. Well, then my follow-up, I want to focus on, because you guys have driven a lot of EBIT growth here just via FX and we understand how that impacts the P&L, but you start to lap the significant change in FX next year. So, you lose a little bit of that EBIT tailwind. I guess are these cost initiatives that you are talking about going to be enough to deliver double-digit earnings expansion? And I guess, can you talk about the buyback as well, because you have spent a lot of the buyback here. So, how do we think about earnings growth in an environment where volumes could still be flat, maybe even negative and without the FX like we have seen this year?

[Keith Creel:]

Think about significant operational improvement, to Hunter’s point, given the same or a little bit less, if you improve the operating margins, 2 to 3 points, that’s driving significant EPS, and I will let Mark address the question on the buybacks.

[Mark Erceg:]

Yes, the share buybacks, I mean, look we have initial program out there this year for 6%. This authorization is yet to be completed. We are going to buy an additional 2% and we have been buying our shares fairly aggressively in the marketplace, because as we have looked out and we have done our own intrinsic value modeling work, we are very confident we are creating shareholder value over the mid and long-term horizon, which is how you have to think about these things. We are not fairly concerned with weekly movements in the stock price, but over the mid and long-term horizon, we are very confident that we are creating shareholder value through the actions we are taking. We are also going to make sure we balance that with our desire to maintain a strong balance sheet and we are committed to maintaining our BBB+ credit rating at this time as well.

[Brandon Oglenski:]

Appreciate it. Thank you.

[Mark Erceg:]

Yes.

[Operator:]

Your next question comes from the line of Walter Spracklin from RBC. Please go ahead.

[Walter Spracklin:]

Thanks very much and glad to have you back there, Hunter.

[Hunter Harrison:]

Thanks, Walter.

[Walter Spracklin:]

My question I guess is on pricing and Hunter, you have mentioned dynamic pricing at the last Investor Day in terms of encouraging volume and you kind of assured us that, that was more with an effort to gain share from truck. I would like to ask you a bit about two particular areas that is domestic intermodal and crude. The feedback we are getting is that you are being a little bit more aggressive on pricing aligning it a little bit more with the dynamic pricing that you had indicated on the – at the Investor Day and it is being a little bit more competitive with your rail competitor as opposed to truck. Can you help us understand what the pricing approach is there and specifically where it applies to the domestic intermodal and crude?

[Hunter Harrison:]

Yes. I mean, I’d start out with there is little supply and demand in there, number one. Number two, we have talked about – there is a point in time that when you get assets parked, when you get human resources sitting at home, when you get a physical plant that’s underutilized, your cost structure is such that it would say, the smart thing to do is to move something. Now there is a point you are not going to get there. But if – as our cost base comes down and so if we are at 57 or 58 instead of 68, nobody thought about what we were doing when we were priced at 68. And you can damn sure afford to do it when you are down. Now look, I have always said that I think the market gives you the price. The market gives you the price and you decide if you want to be a player or not. Now if the competition doesn’t like what we are doing, they got a choice. They can jump in the fray and play or they can stay home. It’s up to them. So that’s I think just one example. Now I would further say this. As we come out of these economic times and as we talked about the 4-year plan, clearly there is some leverage there, where if you can look at your business like other people non-rail look at it, like the automobile industry, and if you can afford to make the car cheaper and a higher quality for it, okay but still charge the same thing and gain market share, you would jump all over and people think it’s the smart thing to do. With rails sometimes, they kind of question that strategy. And we clearly I think articulated at the last analyst meeting that if we get our costs down and we are pretty well there to the pretty consistently, in starting with the 5, that we can convert some of that to be more competitive in the marketplace to pick up top line. Now if this just comes back and we come out of recessionary times and there is higher demand, we are not going to give it away to give it away. If there is a demand out there, we are going to strike demand. I think you will see over time where we effectively pretty well move away from contracts and get into tariff and are more supply and demand and more flexibility and move rather than just sign some 3-year contract, put it to bed and go on to something else. And I think those have some opportunities also.

[Walter Spracklin:]

So, is this to suggest that if the continued weakness persists, we might see year-over-year same store core pricing less than the 3% to 4% that you have been historically guiding or are you still comfortable with 3% to 4% for going forward?

[Keith Creel:]

Yes, 3% to 4%. It doesn’t change it, Walter. And the only thing I would add to Hunter’s comment, I would remind everyone that I don’t see rail as my competitor when it comes to crude. So our primary competitor is the pipeline. It’s not rail. So if I am going to be doing things to leverage this great service and operating costs to win business for this railroad that otherwise it would be in the pipe, I would say it’s the right thing to do.

[Walter Spracklin:]

Okay, it makes sense. Okay, thank you very much.

[Hunter Harrison:]

Thanks.

[Operator:]

Your next question comes from the line of Alex Vecchio from Morgan Stanley. Please go ahead.

[Alex Vecchio:]

Good morning. Thanks for taking my questions and welcome back Hunter. So with respect to the labor deal in the U.S., great progress there, I was wondering Hunter, if you could just remind us of the – if you were to win the same terms or similar terms with the other U.S. unions, how much margin expansion potential could result from that. And taking it a step further, I know there is still a lot of uncertainty about the Canadian side, but just remind us and if you will in a bull case scenario, if you were to win the – all the agreements on the Canadian side, how much margin expansion potential would come from that?

[Hunter Harrison:]

Well, let me oversimplify at this point. Effectively and there is a little bit difference between – maybe some would suggest a lot of difference between Canada and the U.S. here, but it focuses around fringe. Our fringe benefits in the U.S. are somewhere in the 43%, 44% range. I would say Canada, they are probably 15%, 17%. So there is a significant difference in fringe. And so effectively – and look, there is no secret strategy here. We have been very honest with the collective bargaining units going back 6 years or 8 years when we started this. We can take fewer people and pay them more if they can produce. So bottom line, what this does is it takes – you can look at headcount. I look at it more of the full cost. It takes about 35% of the cost of the train and the engine and U.S. out of the equation, lowers it 35% to 40%, now, in Canada much, much bigger base to deal with, but not quite as much synergies there because the fringe benefits are somewhat slower and that basically – that’s basically healthcare. So – but it’s a significant difference in move. And I think what we have experienced in the past was that – is that the 35% is kind of a floor. And then the smarter you get using that type of operation, that rate is up ceiling of how effective you can be there with it, but it’s a mark on the OR.

[Alex Vecchio:]

Okay, alright. That’s great color. That’s helpful.

[Keith Creel:]

Let me add one more comment to that if I could, Hunter. This isn’t just about the cost. In today’s labor environment, when this economy comes back, we all understand that labor can be a challenge, attracting and retaining labor. So this is all about employee retention as well. If you take an environment where the employees, although they may give up work rules, when they get predictability to their schedules, which is non-traditional in the railroad environment, they know they are going to get a couple of days off a week, they know they are going to be making a lot more money, they got better quality of life, they got more money in their checking account, that’s a powerful combination. In turn what the railroad gets is lower cost, the most importantly improved service. So yes, it drives the margins on the cost standpoint. When the economy comes back and you are competing for service and you have got predictable work force both in quantum as well as the service you provide day in and day out, that’s how you truly win in the market share and drive the bottom line operating ratio improvement and margin improvement in the company. So it’s a tale of two stories that’s powerful on both sides.

[Hunter Harrison:]

Plus and one other thing I would add in today’s kind of market, I mean it’s really significant. It provides job protection for the employee. Now, how many employees today, if you look at the oil patch, we would like to have a guaranteed job. Now we have to be very, very careful how we manage that and that’s why I am sometimes accused of choking the horse a little bit by not turning them loose with hiring, just freelance. But it really, to Keith’s point, it’s just a total different quality of life than a typical rail employee has been used to.

[Alex Vecchio:]

Yes. No, that makes sense and that’s great color, guys. And my follow-up, Keith I just wanted to clarify something you mentioned earlier. Was the 3% to 4% year-over-year decline in your comment that you will probably be closer to a 3% decline, was that in reference to the second half RTMs as a whole or the fourth quarter specifically?

[Keith Creel:]

Second half overall.

[Alex Vecchio:]

Okay, great. Thanks very much.

[Operator:]

Your next question comes from the line of Chris Wetherbee from Citi. Please go ahead.

[Chris Wetherbee:]

Hi, thanks. Good morning and welcome back Hunter.

[Hunter Harrison:]

Thanks, Chris.

[Chris Wetherbee:]

Wanted to touch back on sort of the CapEx comments and some of your thoughts there, you gave us some sense as sort of maybe the magnitude of some of the savings that you could incur over the course of the next couple of years, how do we think about the duration of that? So, is that sort of a one year or maybe two-year type of dynamic for ‘16 or ‘17? Is it something that maybe you could see stretching out a little bit longer? And then when you think about sort of priority and use of cash, where you stand now with the buyback and the leverage, how do you think about sort of extra capital and the budget for 2016?

[Hunter Harrison:]

Well, look we can have a rule internally that says you don’t ever spend precious capital until you have explored every operating opportunity you potentially can, number one. So, I think that there is a lot this depends on. We are in a position today where we have effectively from a basic physical plant, safety rail ties and ballasts are awful close to catching up. Now, we are not disturbing those dollars going forward. Basically, what we are looking at is the discretionary spend that we have been doing with the sidings and so forth, and Keith I think you mentioned earlier still they have 6 or 7 to put in service now. So, that’s kind of – now, if we were looking at a run-rate of the business at the same level we are talking about today, the percent of how do you like to look at capital as a percent of revenue or what the most effective way, you could say that run-rate would be pretty well the same. But once again if we see and we will, the economy bounce back and things come back then there will be times that says maybe we got to spend a little discretionary capital to be able to handle this or get rid of this pinch point or whatever the case might be. But I think the order of magnitude is – and the message is this, the company at a point in time got way behind and we paid our bills and caught up. And so now we are kind of managing this year-to-year. So, it will be lower, but not anything that I can say to you it’s always going to be as a percent of revenue less that x.

[Chris Wetherbee:]

Okay, that makes sense. And sort of priorities for capital when you think about 2016 leverage buyback those types of things?

[Mark Erceg:]

I think what I would simply say is the first use of our discretionary cash is to support the business growth itself. We are hopeful that as the economy comes back, we’ll need a little bit more working capital to finance the day-to-day receivable balances. Secondarily, we put our CapEx to work for rate of return investment projects like the sidings that Keith has alluded to that increases the overall network speed and improves our services and our reliabilities to our customer base. And then beyond that, we have talked openly about the fact that our preferred rate of return excess cash to our shareholders is through share buybacks, because we believe in the long-term intrinsic value of the company. We think we are creating value for our shareholders through those actions.

[Chris Wetherbee:]

Okay, that’s helpful. If I could squeeze one little follow-up here, just what you think about sort of resource levels, I know what the volumes look like right now and it’s very uncertain how it might play out in 2016. But given that sort of uncertainty, how do you think about headcount and other resources as you are positioning for 2016 given that uncertainty relative to where we finished the third quarter?

[Mark Erceg:]

Well, it’s very hard to manage this business quarter to quarter. That’s why we try to keep – we are maybe a little more aggressive of saying we are going to have a lower headcount, but we are willing to pay if we get caught and we need to. We can pay some premiums to take care of the business rather than have somebody brought on for the longer term. I think from a rolling stock perspective and so forth, we are taking advantage of putting – we have got, as Keith said, the 400 or so high horsepower locomotives put up now. That represents about 40% of the fleet. That is something that’s significant enough that we know will last long enough, but that directly affects the headcount material, and so they are a little bit different, but I think that maybe gives you a little flavor of how we look at it. I mean, we are not a company that says, look, freeze all spending. We didn’t go through that. We proved, I think one day – and we always said look, we have never been opposed to our thought, lobby it against the pipelines. I think there is appropriate places for the pipelines. There is appropriate places for us hopefully. And so we are going to keep ourselves in a position where if crude bounces back, if our bulk commodities handles back that we can handle that, but to kind of do that on a quarterly type basis, some organizations get pretty immature.

[Chris Wetherbee:]

That makes sense. Thanks for the color guys. I appreciate it.

[Mark Erceg:]

Sure.

[Operator:]

Your next question comes from the line of Tom Kim from Goldman Sachs. Please go ahead.

[Tom Kim:]

Good morning. Thanks very much for your time here. Keith, I just wanted to follow up on your comments regarding crude pricing, obviously, versus the pipelines. I am wondering to what extent have you had to adjust pricing already in the third quarter as it was reflected there and maybe if you want to give us some guidance as to what your latest thoughts might be for crude volumes in the fourth quarter and perhaps some of the pricing, how you are thinking about pricing around that? Thanks.

[Keith Creel:]

I would say this. There has been some second quarter, third quarter, fourth quarter, they will see some strategic pricing relative to pipeline capacity and an ability to put that freight on the rail versus the pipeline. So yes, there has been some of that obviously in a more robust environment. We would be attracting a greater rate of return on the business, but I can tell you rest assured we are covering our cost of capital. We are making money. We are not doing this for practice. But again as revenue, we otherwise wouldn’t see on the rail. So, I think it’s the right thing to do. And relative to demand for the fourth quarter, obviously, the strength we saw in September, October, I don’t think in the spreads would suggest it’s not going to be replicated in November, December and certainly not as bad as it was this summer, but certainly not as robust as it was in September.

[Tom Kim:]

Okay, that’s very helpful. And can I just ask on the domestic intermodal side, the second quarter was a little soft and the third quarter showed a little bit more weakness. Can you give us a sense of when you would anticipate some of the domestic volumes sort of turning around or giving a little bit of guidance as to how we should be thinking about the near-term outlook for that?

[Keith Creel:]

Yes, I think short-term you are seeing a reflection of primarily Canadian economy and excess truck capacity. I think so, what I am saying we pretty much hit the trough. I think you have seen a little bit of stabilizing into this month, into the middle of next month as we go through this muted peak. And I think in ‘16 as the economy bounces back a little bit, you are going to see a little bit strengthening on the domestic side. But short-term, I think it stays pretty close. I don’t think it gets a lot worse and maybe a little bit of upside to the balance of the quarter.

[Tom Kim:]

Thanks very much.

[Keith Creel:]

Thank you.

[Operator:]

Your next question comes from the line of Ken Hoexter from Bank of America. Please go ahead.

[Ken Hoexter:]

Great. Welcome back, Hunter. Good morning, Keith, Mark and Nadeem, just Keith maybe you can expand on your last comment there. Are you seeing it past that bottom and you are already bouncing, because I am just wondering into your 2016 comment. Is that something where you see the economy bouncing? I guess maybe just going back to your original thought on the double-digit EPS outlook is does that include volumes being flat or down next year or is that only on the cost side and you are kind of just looking at, I guess, just on the cost side?

[Keith Creel:]

Again, I can’t predict on the volume side. My strength in comments and my confidence is based on, I am sorry, the revenue side. My strength and confidence is based on the cost side and our ability to drive operating margin improvement regardless of what the macro environment gives us. What I am saying specifically a moment ago though I think we have gotten close to the bottom relative to domestic intermodal demand, I think we will see a little bit of uptick through November versus where we are today. I don’t think it’s going to be significant, but I don’t think likewise we are going to see a lot of deterioration either. And year-over-year, even in this down economic environment that we are in, people forget the fact that we have actually grown domestic intermodal over very strong compares from 2014 and 2013. So again, from a service standpoint, even in the face of macro economic headwinds, I think that speaks well of our operating model and the service we provide. So, I think that same model is going to again to drive the margins in ‘16 regardless of the macroeconomic. And I would say regardless I am not going to – we have some huge economic downturn I can’t predict and we will have another discussion, but given what I am seeing today, unless something gets drastically worse, I am still very confident in the cost side driving margins to that double-digit EPS.

[Ken Hoexter:]

Great. And if I could just follow-up on the coal side, you threw out there that obviously given Teck shutdown and the rolling shutdowns, it was down in Canada but up in the U.S., maybe you can expand on that a bit just given everybody else on the U.S. side is seeing a downtick, where was the growth from and then maybe a little bit of an outlook on Teck, what is expected from there. Are we going to continue to see maybe double digit declines from Teck or post the shutdown you think it’s back to slight growth going forward?

[Keith Creel:]

Well, let’s start with Teck. I can’t predict. I mean obviously I don’t think I am going to have tremendous amount of growth given understanding the environment they are working against relative to a depressed coal price on the world market. So I can’t say there I think that we are going to do, we can to do – we can help them stay competitive, driving their cost down so they that continue to be a low-cost producer and they can deal with these economic headwinds they are dealing with and with the reduced commodity price. So that when it does, bottom out and come back, it they are standing in a position of strength, which is going to benefit this railway. What has given us an offset to the reduction in tech on the U.S. side is not increased demand overall, but it’s relative to our book of business. Last year, a lot of our coal effectively was covered under legacy contracts. We have got a couple of contracts there that we have got re-priced as well as we have shifted the interchange locations with the gateway this coal is moving over. So we are benefiting from a stronger price. We are actually making money not losing money and at the same time a longer length of haul, which is what’s driving the increased revenues year-over-year to more than offset what we have lost on the Canadian side.

[Ken Hoexter:]

So was that new business or did you change the business to get the longer haul or is it just how you are running it?

[Keith Creel:]

No, it’s not new business. It’s actually a shift contract. Some of that business is handed about one carrier that shifted to a different carrier. So same business, it’s just handed over different gateways longer length of haul and improved profitability, all the things we do on the operating side as well. So actually increase those train sets, the size of those sets by making that shift in interchange location.

[Ken Hoexter:]

Got it. Thank you very much. I appreciate it.

[Keith Creel:]

Thank you.

[Operator:]

Your next question comes from the line of Allison Landry from Credit Suisse. Please go ahead.

[Allison Landry:]

Thanks. First, Hunter I am glad to hear you are back on your feet. My first question is more strategic in nature. First, can you comment on the cross-border intermodal conversion opportunity in terms of what you think the size of the addressable market is. And then secondly, how are you thinking about CN’s partnership with J.B. Hunt. And would you consider partnering with an asset base carrier at some point in the future in order to increase market share and build density?

[Keith Creel:]

I would say on the J.B. Hunt piece, I believe CN’s had a relationship with J.B. Hunt that predates their announcement. So with that said cross-border, I think if our competitor has an opportunity with their service to compete, then we obviously have that same opportunity. I don’t know the exact size of the price. I would recognize that some of the currency headwinds that we have got may hurt as far as help, but it’s something that we are looking at relative to the opportunity. So again, we would consider anything that makes sense relative to a partnership with an asset based company. But at the same time, knowing what I know about that business, I don’t significantly think that’s going to move the needle.

[Allison Landry:]

Okay, great. And then my second question is on potash, so I think you guys are fairly positive on second half volumes, but with some of the recent production cuts that we have being hearing, what’s your outlook for the fourth quarter and maybe into early next year?

[Keith Creel:]

I still think we are going to have a strong fourth quarter, maybe a little bit less than what I expected, maybe a little bit down but still very strong. Going into next year, there is a lot of uncertainty, but I still think Canpotex is going to be positioned well for a strong year. I mean we had a phenomenal 2015 shipping experience with Canpotex, shipping record volumes. I am not going to suggest that they will exceed that, I can’t predict that, but I will say that I think it’s going to be strong. More to come on that, a lot of that’s driven obviously by when they settle the price with China and how the world commodity prices respond to that, which we won’t really know about until sometime in the first quarter.

[Allison Landry:]

Okay, excellent. Thank you.

[Operator:]

Your next question comes from the line of Tom Wadewitz from UBS. Please go ahead.

[Tom Wadewitz:]

Yes. Good morning and welcome back Hunter. Good to hear your voice again also congratulations on the hourly agreement. I know that’s a big deal. Let’s see. So you made some comments earlier in the Q&A session about still room for OR improvement, I think you said there might be another 2 points to 3 points. Is that including the U.S. agreement and what could be I think in the past you said maybe 75 basis points from U.S. hourly agreement or would that be further upside to the 2 point or 3 point?

[Hunter Harrison:]

I think it’s further upside.

[Tom Wadewitz:]

Okay. And what kind of timeframe do you – when you say that is that possible you capture that next year or you say well, that’s over a couple of years?

[Hunter Harrison:]

No. I think we start to just kick in overnight, but it’s we pretty well control how quick we are able to adjust and get our people acclimated to managing a railroad in a different manner. So I would think that within a year, we will be 80% there. And then as you go further, there is going to be continued opportunities, but you will be chasing after those opportunities for a long period of time as you fine tune the operation with other opportunities.

[Tom Wadewitz:]

Right, okay. And then just as a second one, a follow-up. Also, there is a discussion on the CapEx and you provided a pretty optimistic comment about maybe $400 million reduction in CapEx that was potential. It was unclear to me from the comments, is that something you would apply to the next year or that’s just kind of a broader comment. So I am – is that like $1 billion in CapEx next year or you don’t want to be that specific yet?

[Hunter Harrison:]

No, no. I think it’s – I think Keith and the company are rerunning some of the numbers right now as we speak. So I would hope and expect that most of that – most, if not all, of that $400 million would be captured in 2016.

[Tom Wadewitz:]

Right. Okay, great. Thanks for the time.

[Operator:]

Your next question comes from the line of Benoit Poirier from Desjardins Securities. Please go ahead.

[Benoit Poirier:]

Yes. Good morning and welcome back Hunter. Mark, maybe if you can go back to the – your flexibility on the balance sheet, you end up with a net debt to EBITDA [ph] close to 2.7, you previously targeted a range of 2, 2.5 debt equities stands to 67%. So if you could provide more color about the flexibility and whether you could still – how aggressive can you be in your share buyback next year, given the significant amount you have made this year and also the asset sales that impact your latest 2 years’ free cash flow?

[Mark Erceg:]

Yes. It’s a great question. We talk on a regular basis with all the principal rating agencies. We went to them very proactively a number of months back and said we think we have an opportunity to step forward and take advantage of what we think is a temporary disconnect between our underlying intrinsic value and the stock’s current trading price and we would like to access that by temporarily increasing our leverage ratios. They were very amenable to that. They understood the value we are creating through that transaction. They also understand our ability to delever if we need to because of the cash generative abilities of the railroad. So we are working in consultation with them as it relates to that. Clearly, if we recast our 2016 and going forward CapEx budgets, that will provide us with additional funds to continue share repurchase as well, but we are going to take that as it comes. We are balancing the desire to create shareholder value through those repurchases but also want to maintain a strong balance sheet as we have been doing over the course – over the last several years.

[Benoit Poirier:]

Okay. And the second question, the follow-up question with respect to the potential CapEx reduction that could take place next year, is it something very temporary because of the volume decline or it’s something that could sustain and we could see a $400 million reduction of CapEx a year in 2017 and 2018?

[Hunter Harrison:]

I mean, Benoit, it’s not related necessarily to the business issues now, just taking a cut. So I think it’s something that’s sustainable. But as other opportunities come up and business bounced back and so forth, then we might have to reach in and increase and take away some of the $450 million or whatever it might be. I don’t think it would return up to the levels it was before when we were in the kind of catch-up mode from previous administrations.

[Benoit Poirier:]

Okay, perfect. Thanks for the time guys.

[Hunter Harrison:]

Thank you.

[Operator:]

Your next question comes from the line of Matt Troy from Nomura. Your line is open.

[Matt Troy:]

Yes, thanks. Just a quick one. Positive train control, just wondering if you could just give us a status update on where you stand in terms of the rollout, obviously, the OpEx of a deadline in just over 2 months something being excessively covered in the press, but just wondering if you could just provide an update in terms of where you are, in terms of what you are required to implement across your network and then perhaps what you see as the path forward and what some of the contingency planning might be around the path that Congress can’t get an extension past there would be repercussions? Thanks.

[Keith Creel:]

Okay. I would just say that there is a lot of uncertainty there except for the fact where we are certain is there is no way this industry is going to meet that mandate. So, it’s something we are all seized with obviously. We have done our job or trying to do our job day in and day out to make sure that Congress understands. And in spite of the mandate that we can’t meet, we have got a responsibility to run the railway safely. And if they force that date upon us, then we have no choice, but to seriously consider not hauling those products that require us to have PTC in the first place, which is what we are positioning. We have certainly communicated that with Congress. We have communicated that with our customers obviously. That draws a lot of concern. A lot of people – maybe some of the Congress members don’t clearly understand the products that we carry that enable them to drink clean drinking water. They produce the products that we consume day in and day out that should we not haul it that those kind of items could be in jeopardy. But with that said, this company has spent probably rough numbers, two-thirds of our total spend. We are well positioned – we have got to get the technology tested. It hasn’t been for lack of effort. The territory effectively from the border down to Chicago down to Kansas City has to be covered. We have got some testing that’s in place now that we are going to do throughout the end of the year and we will continue to progress through that to 2016 and ‘17 with a view and an expectation that we can get this thing implemented and that doesn’t mean tested and reliable, that’s a whole another discussion, but certainly implemented by 2018.

[Matt Troy:]

Okay, it makes sense. Thanks for the detail.

[Keith Creel:]

Thank you.

[Operator:]

And your next question comes from the line of Jason Seidl from Cowen. Your line is open.

[Jason Seidl:]

Thank you and echoing everyone’s comments, welcome back, Hunter, and hello to everyone else. Hunter, if I could just go back to your commentary sort of about the ability to bring on more revenue, maybe pushing the OR up a bit. I think I can do the math like everybody else. I would rather have $1.8 billion in revenues at a 65 OR as opposed to $1.5 billion at 59. However, every time I think you say that people think about the old days of railroading, where two railroads would fight over 0.5% market share and that would force pricing down in the long-term. Is there anything you can tell us that look, that’s not going to happen again? And my second question of that is, is this related more around the move away from the contracts? And this is going to be more on the spot basis that you could be aggressive for extra business.

[Hunter Harrison:]

No, I think it’s our view of what’s smart to do and look at. I can tell you this. I was not part of that old regime. I remember the day, but I didn’t have any control then. As long as I am around, we are going to maintain a certain discipline and never get back into that type of environment again. And I just think it’s to your point, I sit down and I talked about that of would you rather be this size company with this and that, nobody agrees until they think we might do and they say, oh my god, you wouldn’t do that, would you? And then if you don’t do it, they say, oh my god, you are going to do that. So, it’s kind of damned if you do and damned if you don’t. I think that as I have said before, many times, number one, we are going to be the most efficient carrier out there with the best service and the best product. And as long as we do that, that’s going to put us in a good position. And then how we react to the marketplace given demand in the market and given what the market is and I am not going to spend a lot of money to go out and try to get business that’s very cheap margins, I think that you can rest assured that this company is going to be very disciplined with how we do pricing and we have never been accused of being price cutters at a low cost later or what. If anything, we have been on the other side of the ledger. And I just think that you have to think about something. I get very nervous when I pick up the headlines and it says some rail is raising rates 17%, okay. And at the same time, the next week, they are announcing a record quarter and the next week somebody is writing their Congressman, okay. Now, we have the certain amount of discipline more so in Canada than we do in and rails all of the time get the questions in the U.S., why don’t you raise rates? Well, one of the reasons that we don’t is this. We have kind of an internal rule that says this. If you abuse the authority, you lose it. So, there is some responsibility we have to manage that in a very disciplined manner and I hope you can trust that we will do that.

[Jason Seidl:]

No, I think that’s the answer most people wanted to hear. And a quick follow-up you sort of mentioned the government, you guys have had your clashes in the past over a few issues, you have a new government there in Canada. Do you think this is going to be a positive, negative, neutral or sort of a wait-and-see?

[Hunter Harrison:]

If I had to guess right now, I think it’s neutral, okay? With due respect of my conservative friends in Canada, they might not call me a friend, they have done much for us. The liberals didn’t do much for us before the conservatism when they were in and now the liberals are back in, they are going to do a whole lot for railroads and they don’t need to do for it. Just leave us alone, give us a level playing field and that will run our business. Okay, I do wish they would take a look at their policies as far as grain and while all of a sudden, they think they have to regulate Western grain and all that, but I don’t – I think they have got larger issues than to worry about the rails in Canada. Canada right now, as I said, is an American citizen. Canada has the finest rail system in the world, the two best carriers in the world and they ought to be proud of it up there and taken care of. Now, I will leave it there.

[Jason Seidl:]

Well, thanks for your time as always, Hunter.

[Hunter Harrison:]

Sure.

[Operator:]

Your next question comes from the line of Bascome Majors from Susquehanna. Your line is open.

[Bascome Majors:]

Thanks for taking my question here. I just want to follow-up from the balance sheet, Mark, where do you see leverage landing for 2015 here on a debt-to-EBITDA basis? And how comfortable are you with maintaining that profile at or above the high end of your targets against the uncertain macro backdrop we are seeing in 2016?

[Mark Erceg:]

Right now, we finished the quarter at 2.75 times. I would expect, if anything to see that maybe moving slightly, but was only three months ago, I wouldn’t expect it to move materially from that point. I think the key is that we have worked very closely with the rating agencies. They understand what is it that we are doing, why we are doing that. They also understand that we are making sure we maintain a very flexible financial structure going forward. So, for example, you would have seen that we issued 100-year paper during the quarter. In effect, what we did through that transaction was we have traded out cost of equity, which is maybe, call it, roughly 10% for an after-tax cost of debt, which is maybe 4.5% and effectively locked any over 500 basis points of value for our shareholder base over a long duration. We have also been able to, as we said move out the duration of our weighted average portfolio very significantly. It was about 13 years, not that long ago, now it’s more 10 years to 26 years. We also did benefit from our weighted average coupon rate down from call it, 6.25 to 5.58. So a lot of things that we are doing we think are very prudent balance sheet management. Exactly where we will end the year, I can’t predict that, but I can’t tell you that we are committed to our BBB+ credit rating agencies dialogue and we are comfortable, we will manage against that.

[Bascome Majors:]

I appreciate all that detail here. Just one housekeeping item related, where do you see interest expense landing for 4Q after all debt you raised in the third quarter and given the higher debt balance and reduced weighted average coupon that you talked about?

[Mark Erceg:]

I think maybe just see a straight mathematical calculation given all the paper we have already issued, the coupon rates are outstanding, I think it is probably 1.25, something to that effect but that’s just a straight calculation.

[Bascome Majors:]

Alright. Thank you for the time.

[Mark Erceg:]

Thank you.

[Operator:]

And your next question comes from the line of David Vernon from Bernstein. Your line is open.

[David Vernon:]

Hi good morning and thanks for fitting me in here. Question for you, Keith on the fluidity you guys have seen in Chicago as we are heading into winter, do you think that the rail service levels through there are holding up at a decent level and we are going to avoid any risk assuming a normal winter of another sort of network seizure as kind of look to the end of the year?

[Keith Creel:]

Well, it’s a normal winter relative to a reduced business demand. I would say the likelihood you are going to see happened in 2014 happened is minimal. That said, it doesn’t just take a weather event in Chicago. It’s a very tenuous sensitive place as it is, a major service interruption by any of the carriers. It can cause traffic bunching dump into belt carriers. It has a ripple effect across the industry. So I would say, I look at it every day with cautious optimism, but I am a realist and understand it doesn’t take a lot to create some fragility there in Chicago. But again normal winter, reduce traffic volumes, I don’t see a great likelihood, a chance of a repeat to 2014 for sure.

[David Vernon:]

And has there been any structural improvement through some of the work that’s been put through there or is it just the better service levels as a result of this just less volume, less crude flowing through the city?

[Keith Creel:]

There has been some. I mean obviously, some of the dollars, the capital dollars that have been continued to be spent since 2014 is going to increase options to a degree. Does it move the needle, I would say, no. But between that, between the reduced traffic volume level and between some coordination with the railroads are working better together in the play box, so to speak when things do get a little bit hairy, I do think you get a better outcome given the same circumstances.

[David Vernon:]

Great. Thanks for the time and congratulations on getting the cost – the profits up while the volume is down. It’s a good result. Thanks.

[Keith Creel:]

Thank you.

[Operator:]

And your next question comes from the line of Jeff Kauffman from Buckingham Research. Your line is open.

[Jeff Kauffman:]

Thank you very much. Thanks for squeezing me on and welcome back Hunter. Thank you. A lot of my questions have been asked. Let me just follow-up, one for Keith, one for Mark. Mark, you mentioned the interest expense calculation for 4Q, if you bought no more shares, what would shares outstanding look like in 4Q?

[Mark Erceg:]

I think if I got it correctly here, at quarter-end we should maintain it around 158.7 million shares [indiscernible] effect.

[Jeff Kauffman:]

Alright. I thought that was the weighted average for the quarter, not the quarter end?

[Mark Erceg:]

I may be sliding that, that’s what’s sticking in my head as far as the actual share count data. We have to dig it out of the file. Yes. Follow-up with you it’s in.

[Jeff Kauffman:]

Okay. We will do that offline. Last question for Keith, Keith I don’t think anyone’s asked about the expiration of the softwood lumber agreement and I was just kind of wondering what your thoughts were on that?

[Keith Creel:]

Well, it just has expired about a couple of weeks ago. It was a year-long process. I don’t know what’s going to happen, I would say that hopefully that presents an opportunity for us to move more softwood lumber across the border in the absence of the tariff, but I am not exactly sure.

[Jeff Kauffman:]

Okay. Guys congratulations and thank you.

[Keith Creel:]

Thank you.

[Operator:]

And your next question comes from the line of David Tyerman from Canaccord Genuity. Your line is open.

[David Tyerman:]

Yes. Just wanted to follow-up on Hunter’s comment about the 2 point to 3 point OR improvement, so I was wondering what areas we should expect to see the biggest improvement, is it labor, or is it other areas that you would expect to see improvements like go into that?

[Keith Creel:]

Essentially, it’s all the above. It’s effectively converting the operations, the synergies we create through the investment to running fewer train starts, fewer people, fewer locomotives, fewer cars, fewer mechanics need to work on locomotives, fewer mechanics need to work on cars. So across the board lower headcount and headquarters obviously, it’s just – there is no silver bullet there, its singles and doubles. It’s working across the board. It’s rightsizing your assets relative to the business levels with a much more productive physical plant doing more with less effectively.

[David Tyerman:]

Okay. So it sounds like if we were modeling this pretty much every category could be improved somewhat?

[Keith Creel:]

So you can – I mean you would see the same, you would see headcount down. To a degree you would see train linked up. You would see train speed up. You would see – if you looked at our daily numbers we look at, you would see train hours down and crew starts down. Those are the drivers that drive the bottom line and that actually drive the cost synergies in the company. You would see fuel improvement, less fuel consumed, fuel productivity up. I mean I could give you about 15 or 20 things. But external, if you pay attention to train speed, you see [indiscernible] improving, you see train length improving, you see train weight improvement, you see fuel and productivity improvement and all those other things are going to happen as a result.

[David Tyerman:]

Okay, very good. Thank you.

[Keith Creel:]

Thank you.

[Operator:]

Your next question comes from the line of Steven Paget from FirstEnergy. Your line is open.

[Steven Paget:]

Thank you. Good morning. Welcome back, Hunter. One ping only for me. Anecdotal feedback is that there are only two railroads in North America that do what they say they will do, yourselves in the railroad in Montreal and U.S. railroads aren’t providing the same service, customers are getting frustrated. And could this frustration with other railroads lead to some form of negative intervention by the U.S. government?

[Hunter Harrison:]

That’s a question.

[Steven Paget:]

Yes.

[Hunter Harrison:]

I hope not, but I guess it could. I am not aware of so much of the sensitivity of some of those issues. I think the Service Transportation Board and not this last administration, but – has not been very aggressive. In fact, if you look at what they have done or accomplished over the last – I don’t care what period of time you want to look at, 10 or 15 years, with the exception of handling a couple of mergers, it’s been a nonevent. So, at this point in time, I would doubt that they are equipped or we want to get into a fray like that. But I mean I wouldn’t rule that out. I mean, certainly, we tend to forget I guess a couple of years ago what we were going through in Chicago with grain and other things. And if, God forbid, we would go back into those times, then you would have people raising many issues again about those types of things that we should be sensitive to.

[Steven Paget:]

Okay, thank you. That’s my one question.

[Hunter Harrison:]

Thank you, Steve.

[Operator:]

And the final question comes from the line of Turan Quettawala from Scotiabank. Your line is open.

[Turan Quettawala:]

Yes, good afternoon. I guess most of my questions have been answered as well. Welcome back, Hunter.

[Hunter Harrison:]

Thank you.

[Turan Quettawala:]

One question only I guess on asset sales, maybe you can give us a bit of an update on that, I guess that’s the only part of the capital equation there that we haven’t touched on today?

[Keith Creel:]

Okay, go ahead, Mark. Mark Wallace is here with us. I will let Mark given that’s his portfolio.

[Mark Wallace:]

Sure. Hey, Turan, it’s Mark. So, we are still working with our partners at Dream pretty aggressively. We have got about 12 or 13 projects underway. We are fast tracking two of them each in Toronto that we are pretty excited about. We are going to start seeing some cash from those probably in ‘17. I mean, these are development opportunities that we are working on. We do have a couple of properties that have been – have flowed back to CP, because they are not developable. So, we expect probably sometime in ‘16, ‘17, to see some higher land sales. How much right now? I am not going to quantify that, but year-over-year you should probably start seeing an increase in ‘16, ‘17 in our land sale numbers.

[Turan Quettawala:]

That’s helpful. Thank you very much.

[Operator:]

There are no further questions. Mr. Harrison, please continue.

[Hunter Harrison:]

Well, thanks so much for joining us. Once again, it’s nice to be back and I look forward to visiting with you in January after we hopefully have experienced a very successful fourth quarter. Thanks.

[Operator:]

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