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Executives

Janet Weiss - Assistant Vice President of Investor Relations

E. Hunter Harrison - Chief Executive Officer, President, Director and Member of Safety, Operations & Environment Committee

Analysts

William J. Greene - Morgan Stanley, Research Division

Christian Wetherbee - Citigroup Inc, Research Division

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Ken Hoexter - BofA Merrill Lynch, Research Division

Walter Spracklin - RBC Capital Markets, LLC, Research Division

Brandon R. Oglenski - Barclays Capital, Research Division

David Tyerman - Canaccord Genuity, Research Division

Fadi Chamoun - BMO Capital Markets Canada

Cherilyn Radbourne - TD Securities Equity Research

Scott H. Group - Wolfe Trahan & Co.

Canadian Pacific Railway Limited (CP) 2012 Investor Conference December 4, 2012 5:00 PM ET

Janet Weiss

My name is Janet Weiss, and I'm the Vice President of Investor Relations for Canadian Pacific. On behalf of CP's executive team, I'd like to welcome you to the first segment of our 2012 Investor Conference.

As you're going to hear, Canadian Pacific is moving forward. We just issued a press release setting out our game plan, and I know our executive team are looking forward to discussing the details of our plan this evening and tomorrow starting at 8:30, sharp.

Before turning the podium over to Mr. Harrison, I'm obliged to advise you that the presentation you're about to hear does contain forward-looking information, including, but not limited to, CP's operations, anticipated financial performance, business prospects, strategies, priorities and plans. Forward-looking information is based on current expectations, estimates and projections, and actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described on the slides and in reports filed by CP from time to time with security regulators in Canada and the U.S.

All dollars quoted in the presentation are Canadian, unless otherwise stated. We may make reference to assumptions used in our guidance, and we'll provide sensitivities to these assumptions in our commentary and presentation materials. Please read carefully as these assumptions could change throughout the year.

This presentation also contains non-GAAP measures set out on Slide 4; and now with my preamble complete, we're going to start with the formal presentation. Thanks, and welcome.

[Presentation]

E. Hunter Harrison

Thank you for that welcoming. I'm sorry we got little -- started a little late. I was back in the makeup room and this is the best they could do at this point in time. But I'm nice -- I'm extremely pleased to welcome all of you. Delighted to see you. I can't imagine why the room is so full today. But I'm back and we're back, and I'm proud to be in that position.

I think it would be good if I could -- my remarks today can talk to you a little bit about the first 160 days I've spent within the organization. And I didn't have a lot of experience with, thankfully, with proxy contest prior to this, but I feel like a seasoned veteran at this point in time, I can tell you that.

But having said that, as most of you know, we -- May 17, at the annual meeting, we had an election where a new slate of directors were elected, 16 directors. Since that point in time, we've had 3 resignations and 1 addition, which happened to be me. And so now we've have a slate of 14 that I think are outstanding directors. And I can proudly report to you that that team is coming together, building some chemistry, some esprit de corps. We have turned the page from the proxy contest and are ready to move this organization forward.

But if I reflect back on what I heard throughout the contest from both shareholders, from employees, from customers was we need change. And it was obvious to me that I agreed with those thoughts.

I've spent a great deal of my career managing change, and change is tough to manage. In a way, I would suggest you manage it best is through inspired leadership. And I've been very pleased to say that I've never seen in my many years in this industry a management team and a group of employees that have embraced change like this team appears to be embracing it.

I have a favorite quote about change, and I think it's very appropriate for the situation we're in and dealing with, and it's a quote from J. Paul Getty, which says, in rapidly changing times, which I would suggest we're going through, "experience may be your worst enemy". And that clearly is what we're facing. We're facing a lot of us that have gone through situations where we've experienced one set of circumstances and we're dealing with a totally different set now. But we're embracing the change and ready to deal with it. Make no mistake, this is clearly initially a cost takeout story, and almost simultaneously, a story of improving our service, what is not -- which is not unlike the model that I have been working with now as CEO for 20 plus years. And I would emphasize to you this is not some experiment in a laboratory. This is a proven, tried and tested model. And we've always said that it all started with service. Service to our customer.

There was a great deal of dialogue about service to the customer from CP's standpoint during the contest. But I think that I'm very pleased after having been able to spend a great deal of time with a lot of our customers. I think they are very open-minded, they are pleased with the changes they've seen and looking forward to even more changes.

And the one thing we talk to them about is trying to define service, which is very difficult when you're dealing with as many customers as we're dealing with. And this model likes to define service as simply doing what you say you're going to do. The second thing we try to do in this model is very simply control cost, and I would suggest to you that control is the operative word there. This model has done very well there. The third issue is to try to place a great deal of emphasis on asset utilization in turning your assets and making them sweat and all the positives they have for you. The fourth, which is a place that CP has excelled, is in, simply said, not getting anybody hurt. Whether you want to call it risk management, loss control, safety, whatever the word is, this organization has done well there, and we expect that to continue and hopefully even be able to improve on it to some degree. And the fifth, and probably the most important, the one I'm going to probably spend the most time on today is people, the team. Those are the people that accomplish these things that we've talked about.

And I would hasten to add that there's 2 little things I would like to add to that, and I think what you need to do is to take those values, those 4 important values, add the fifth, the people, and then season that with 2 things: the high degree of integrity and passion. And that's what we've tried to do, instill those values in this organization.

So the first thing I felt like I had to do was to, number one, evaluate this team and see where we were to really truly look in the mirror and do a self-evaluation. And we've made a lot of changes as a result. We have -- we've seen 7 vice presidents and above leave the organization for various reasons. We have not felt necessary to fill in behind those positions. That has allowed us to take layers out, to take bureaucracy out of the organization.

And if you will, let me just use for a moment, because I think it applies to us, a degree of baseball analogy. Those of you who played baseball or followed it, have been fans or even betters on the sport where it is legal, you hear the term in a baseball team that you want to be strong up the middle. And that refers to, number one, the catcher who's kind of quarterback on the field; and the short stop and second baseman who are so important with the double-play combination and the chances, they had many more chances than the first or third base; and then the center fielder who covers the outfield and gets anything he can get. Now we have a very, very strong nucleus up the middle.

If you're evaluating us and looking back, the only place you might take a little exception is in our pitching staff. And the pitching staff might be related to our transportation group. Have we had some weaknesses there? Yes. We spent a lot of time in the last 4, 5 months on strengthening the pitching staff that you can relate as your transportation department. And if you've ever, I know most of you haven't, but if you ever wagered on baseball, you would -- and it's been 50 years since I placed a bet, I think. At one time before my railroad career, I was -- I thought that was going to been an easy way to make a living, but somebody taught me he always gets his man and he did, and so quickly I learned that railroad career was better for me. But one of the things you'd be amazed to find was the odds from night to night on the same teams playing against each other was governed by the pitching staff. It wasn't so much if -- who was the home team or who was the visitor or the rest of the nucleus of the team, it was the pitching staff which really made the difference. And that's why we're spending so much time and attention in trying to strengthen our pitching staff so we can be a much stronger team.

Now we have clearly already started down the road of making some appropriate reductions in the organization. I know there's been a great deal of discussion about this, but at this point in time, I can tell you that the plan is not to get a little ahead of myself in the organization as tomorrow, but the plan calls it over the 4 years we'll probably take in the neighborhood of 4,500 people plus out of the organization.

Now one of my evaluations initially was that we were clearly, in my view, top-heavy. We had too many nonunion officer, managers, supervisors, leaders, up to the range of 28% to 30%. That's far too much. And right now people that are skeptical about their ability to achieve that number, I'm proud to say that some of the teams that you're going to see tomorrow and really I'm just kind of the opening act, the stars of the show will be up here tomorrow with more detail than I'm going to share with you tonight. But that group has already taken about 1,800 people as we speak out of the organization in the first 5 months. And I would expect, and I think our forecast out of our first quarter, that number will be up to 2,300.

Now that's not a number that we brag about a lot. But we are proud of, except I would point out this to you. We are fortunate with the demographics of this organization. We have an older workforce that -- our natural attrition is pretty high. It runs in the 9% -- 8%, 9% area. So if you look over the life of this plan, the 4 years, you will see that just through natural attrition we will take out a potential for about 5,700 people to leave the organization.

Now one of the things we said is this: we do not want to lose good people. When you got talent, you protect it. So we said to people this, "If you're willing to be cross-trained in another discipline, if you’re mobile as far as being able to move, we've got work for you." And hopefully they will be able to take advantage of it.

A couple of other things on the people side of the ledger is we also, in the engineering group, are creating what I would call a stable workforce throughout the 12 months rather than have peaks and valleys with our maintenance season. A lot of railroads typically, which we have done the same, feel like they cannot be productive with capital during the winter months. So we typically 5, 6, 7 months out of the year would lay off a substantial portion of the workforce. And I never have thought it was the right motivator or driver or inspiration to people that we call them back in the spring and we say, "Look, we want you to go out there and work real hard and real safe and very productive because as soon as you get rid this capital work, we get to lay you off again." That's not really a driver that you want to look for.

And if you look and kind of evaluate and you say, well, why can we not be productive in those winter months, well, the weather comes up, and we have snow and we have floods and we have a lot of the things that this organization went through prior to my arrival in 2011, which nobody should go through, but typically we would contract in people to take care of those issues. So now we're trying to create a stable workforce where we don't have the peaks and valleys, and we'll be able to deal with that more effectively.

A couple of other things before I get in some details on people. I think that we have gotten a real head start from where I thought we would be at this point in time. I'm proud to report to you that under the leadership of Peter Edwards, our Vice President of Human Resource and Labor Relations, we have been the last 6, 8 weeks signed 3 collective bargaining agreements that are 5-year agreements, which are effectively unprecedented in the rail industry and they have some very positive features of them, one of them being that we have agreed with those collective bargaining units that the pension issues will not be dealt at the collective bargaining table. They will be dealt with through the pension committee, which is a real breakthrough there.

So the last area in the people side of this ledger besides fine-tuning was as we're right now going through and Jane O'Hagan has taken her team, and they're going through a potential reorganization, be sure that we're equipped to deal with the markets as they are today.

So the first thing we set out to do was, and the first thing that came to my attention that I thought was an opportunity was to, and you've read about it, was to move our headquarters, operating headquarters. Now, it's not a big move. It's about 5 or 6 miles as the crow flies. And people have asked, "Why would you move?" Well, I'm not sure I believe in buying into the old business district issue anymore. I'm not sure that I've always agreed that railroaders should be downtown in glass towers. And so I think it has a cultural impact on the organization to move out to what was or is a kind of a supplemental industry yard, put nice headquarters, first-class nice headquarters for our people. They can look out the window and see a railroad, which I think is good that we don't forget what this business is about, and at the same time it's going to save us about $18 million a year in operating expense. And we're able to control our own destiny.

Now on the service side, we've made some breakthroughs within, I don't know, 4, 5 days after my arrival. One of the things you learn about this organization, it didn't take us long to make decisions. I think it was in 4, 5 days, we had -- we collectively have decided that we could take one day out of our very important competitive Intermodal markets between Toronto and Vancouver and between Chicago and Vancouver. And so we've put that schedule in effect, those schedules. They have been well-received by the marketplace even though we've taken effectively about 19 hours out the schedule. Our on-time performance operation with the trains is significantly better before we took the 19 hours out.

We are setting records at Vancouver as far as grain deliveries and cycle times. Our merchandise business is much improved. The feedback from our customers has been very positive. And so I'm very, very pleased on that front that we seem to be getting a good grasp on our service.

Now you're going to hear some announcements, and you probably hear it talked about tomorrow in more detail, but we are changing our views and our efforts as far as customer service. We have and have had as other transportation companies do sometime, have large customer service groups. I've always been of the view of this. You show me an organization that's got a big customer service group, and I'll show you somebody with bad service.

What we're trying to do is to shove the passion for service, the commitment to the customer down to the lowest level of the organization to the individual that provides that service and rather than go through some of the bureaucratic red tape that we go through trying to keep files and all, is just simply do what we say we're going to do and provide the level of service that we promised our customer.

Now let me move to an area that people ask me all the time a lot. What's different about this model? What's going to be different about CP moving forward from other railroads? One of the most significant things that we're undertaking, we have undertook through the guidance of this operating team, which has been doing a wonderful job, is we have already closed 4 hump yards in our system in the first 5 months. Now think about, those of you who followed railroads for a while, think about the last time you heard of a hump yard being closed. You haven't heard of many. Think about the last time you heard of 4 being closed within a 5-month period of time. It just doesn't happen. And I get a lot of questions, probably more questions about this than anything else, why close the humps and what does it do for you? Well, number one, humps are effectively assembly lines. And those of you that don't understand or appreciate rail operations in a certain level of detail when you hear about a hump yard, a hump yard is simply an assembly line where we shove cars over a hill or let them go down a hump where they're uncoupled, flow freely through gravity and they're retarded by electric or pneumatic retarders and go through automatic switches in the classification tracks.

And to justify that you haven't a lot of volume. The best analogy I can give you maybe is that if Henry Ford was going to build 10 or 15 Model Ts a day, he would have never had an assembly line. But when you get up to 300 or 400 cars a day, an assembly line was necessary. These yards are -- were, and by the way they are at Alyth, which is our Calgary yard, which is really kind of boxed in where we have very little opportunity for growth there, with Calgary, Winnipeg, Toronto and Bensenville, which are our hump yard in the states, there in Chicago, are the 4 that have been closed.

And there's a number that people will debate a little bit, but somewhere in the neighborhood of you have volume of 1,400 to 1,500 cars a day to justify a hump. And we were down with all our humps in the neighborhood of 700 ,800 cars, 900 cars a day or less, and that's with some of the cars being humped more than once.

So this hump yard rationalization gives us a great deal of opportunity to save a lot of cost, to expedite the movement of cars and reduce the dwell time, the tension time, if you will, through the hump yards. I think you're going to hear some numbers tomorrow. I mean, don't take mine, take theirs, but somewhere in the neighborhood of $40 million to $50 million in what I would call direct cost and much, much more in indirect cost as a result of the closing of those yards.

Now let me give you another -- some gravy to that story that people don't take into account. If we looked at our Montréal operation, which I think you will see maybe an aerial photograph of tomorrow, which was really a hump yard style operation without a hump, which might have been the worst of all worlds. If you look at that operation there, we had a freight yard operation. And by the way, in a hump yard, you at least have to have 3 yards, individual groups of yards, where in a flat yard you could have 1 or at the most 2. But within that huge complex and about 60% of that track capacity today is not being utilized there. We have, I guess, 6 work centers. We have the freight operation, we have 2 separate auto compounds, we have what we call our expressway service, which is the only actual trailer on flatcar service that we have, and we have our Intermodal business.

Now that footprint, in the future what we will try to do is to take the auto compounds, the expressway, the Intermodal and all consolidate them in 1 yard in this 1 footprint, which will allow us to take one of the yards in the Montréal market that has a value of somewhere in the neighborhood of $40 million or $50 million and to convert that, monetize that into free cash flow and every yard that we're looking at in that regard has that potential. So the whole hump yard rationalization is an exciting part of this exercise.

One of the things we learned through that, which I had learned many times, is effectively what we did. And if you go back and look at those yards, they're mostly 1950s and '60s vetted yards. So obviously, we've outgrown the technology there. We -- our book of business is extremely different than it was then. At that time, if you look back, and I hate to be able to remember it, but it was pretty Intermodal effectively. We were still moving grain and 40-foot boxcars. And about 85%-plus of a typical railroads business need to be classified or sorted in what we refer to as blocks or classifications. Today, that's changed. If you look at CP today, with our book of business, we have about, including Intermodal as unit train operation, about 72%, 73% of our business does not need sorting or classifications. So once again, not the need for hump yards. So what we did was we took people that were very good switchmen that could read a list, and even go back and date myself even further, people that are really into technology and SAP. We didn't have SAP then, we had a piece of chalk and we wrote on the side of the car where it went. But we turned those people into kind of robots with pushing buttons, and we decided to not to push the buttons anymore. We found out that we have to go through a lot of retraining with our people.

Now the other significant operating issue that I would bring up to you is that we are further doing, siding extensions. This year, we have -- we're completing, I think, our eighth siding with the length of 11 to 12,000 feet, which is going to give us the opportunity to further be more productive with our train sizes. Those have already increased both weight and length in the first 5 months about 10% round numbers. But these additional sidings -- and we're taking a little bit of a different approach there. We're taking sidings that what we call obsolete because they're not long enough to accommodate the size of trains today. And rather than let them sit in the ground and rust, we're picking up those surplus sidings, putting them together to make one large productive citing, which effectively says that the only thing that's capitalized in, in that exercise is just the labor to move the sidings.

Those additional sidings, and we will do a few more next year, all within the book of, you don't have to get your pencil and paper out and start adding up the additional capital spend, will be within the $1 billion capital spend guidance that we have -- that we've shared with you before. But they will allow, over this time frame, these 4 years, to reduce train starts in about the 30% range, which is huge as far as cost. It's the most direct, quickest labor savings that you can achieve in this industry. So I would emphasize to you that the rationalization of the hump yards and the siding extensions and reduced train starts are 2 of the most significant initiatives that will take place here.

So where does that leave us then? What kind of results are we looking for as a result? We have talked a lot about the old operating ratio, which we always fall back to. The operating ratio has a lot of moving parts. We've talked about mid-60s in 4 years. I think it's very doable. Every day, I work, I gain more confidence. In fact, I reach over sometimes and start to change the number, and they take the pencil out of my hand. But I'm very, very confident. And one of the things that you will see displayed here is this, in no way, is to try to indicate that we're not confident about this number.

My point here is it's all relative. If you look at our potential CAGR and as far as revenue growth over this 4-year period of time, and you're going to hear Jane again talk tomorrow about this opportunity in the revenue growth and when you get through listening to her, the number will probably go up 2 or 3 percentage points, okay, because I don't know if anyone in the industry that's more passionate or enthusiastic about some of the opportunities that we have there. But if we come in, let's just say, if everything doesn't hit, there's a little bump along the way, we've come in at, say, 5, 5 and a fraction of CAGR, that's where we think would put the OR in this mid-60s range. Or if you want to take a dart and try to hit it, 65. If we see that CAGR go up more in the range that I think Jane truly believes we can do, you see the operating ratio didn't come down because I've said and I talked about publicly that 65 is not a world record and it's not the end. But the point here is it's all kind of relative to what happens on the business levels. And you can see the capital spend in this kind of environment stays in the 1 billion, 1.1 billion range.

And one of the most impressive things to me is the free cash flow that it throws off. And when you look at our history of free cash flow and you look at the potential of what this presents, it gives us a lot of opportunity to do the things we want to with the capital structure of the organization, strength in the balance sheet, reinvested in the company where we have appropriate returns, and then decide with the other cash how we'll reward the shareholder further, whether it's through dividends, whether it's through share buyback, special dividends or other opportunities, which will be decisions that hopefully this kind of performance will allow us to present to our Board of Directors.

Now what I've tried to do tonight is just give you a little opening, whet your appetite, if you will, on what you're going to hear and see tomorrow in a much heavier level of detail by the players that are going to actually drive those efforts. I'm looking forward to it, myself, and I'm going to take a moment tonight, I'm trying to look at the time we have, to answer some questions that are not going to be maybe directly addressed tomorrow or that I can shed some light on tonight or ones of you that might not be with us tomorrow. But let me leave and close with just a quote that I have learned to love and adopt over the last few years and I think it is very, very appropriate with the position that we at CP are in right now. And it's a quote by George Bernard Shaw which goes something like this, "Forget about the likes and dislikes. Just do what should be done. This might not be happiness, but it's greatness." And that's what this organization will pursue. Thank you.

Question-and-Answer Session

E. Hunter Harrison

I'm very aware and cognizant and sensitive, too, that I'm the only thing that's between you and your favorite beverage. So we will try to take a few questions and then move from there.

William J. Greene - Morgan Stanley, Research Division

Hunter, Bill Greene, Morgan Stanley. Two quick questions. The first is just you mentioned this unit train mix issue. Is that materially different from other railroads you've worked with? In other words, I think of unit train economics as being much, I guess, far superior to a manifest train or whatnot. And so maybe one of the reasons you've expressed this confidence, as you've been with the organization now for less than 6 months, is due to the unit train. And then the second question is just on some of these targets. How much does labor have to play ball with you to hit this? How big a deal is that? You talked about attrition, of course. That's all in your control. But the labor contracts that you've got to negotiate, how important are those to achieving those goals as well?

E. Hunter Harrison

Well, first, the unit issue, the sensitivity there. Everyone has it's kind of book of business. If you look in the West in the U.S., you would probably say that BN is more bulk. EP is a little more merchandise, so less bulk. You could look at the East. Clearly, I can look back to my previous employer, and they have not as large a book of unit train business as we do. So that brings some things with it. The issue that one of the things that was so amazing to me to some degree was all the argument about structural issues. And I'm sure you remember those issues. This company, pre-Harrison, has dealt with large trains in the mountains better than anybody that I've ever seen. From a technology standpoint, from moving a lot of tonnage over a mountain, nobody does it better. So we don't have to improve the potash, the grain, the coal. And we're incrementally going to make little gains, but we've made huge gains and strides there. It's in the Intermodal, the merchandise and the other type business that presents the largest opportunities. Second question, to the labor issue, none of this is dependent upon some breakthrough that's not being expected with labor. Now having said that, I have had, in the last week or so, some pretty encouraging dialogue. And some of the labor people get nervous when the top of the labor group and me start talking. But some very encouraging dialogue. Is it going to happen? I don't know. It's all great if it does. So this plan is dependent upon the type of agreements you've seen signed and what you could expect or predict and probably similar to what you're going to see in the arbitration coming out in January.

Unknown Analyst

Yes, it's Tom Watter [ph] with JPMorgan. Two questions also. So one would be the path of progress. It sounds like you're pretty enthused about the pace of activity and that the headcount reductions are coming on -- occurring quickly. So do you think that as opposed to a linear path, you see pretty big step-ups or step-downs, I guess, more appropriately in operational performance early on? Is that reasonable way to look at it? How would you think about the path? And second on the revenue side, I know you said we'll hear more about Jane's optimism and so forth. I guess at a high level, it looks like you don't have headwinds with the U.S. names like utility coal, which now not having utility coal is a bit of a blessing. You've got a great franchise on crude by rail. So it seems that you're kind of 5% revenue CAGR is likely a bit conservative, but maybe there's something else behind it. So those 2 topics.

E. Hunter Harrison

I agree the CAGR is probably -- you can make a case it's conservative given that I think -- and Jane is going to talk to you about this tomorrow, but clearly, the big upside is all the energy-related things that you hear. Although I wouldn't have believed this 10 years ago, we're moving -- we, CP, are participating in the Powder River Basin coal move today out of the Powder River Basin moving coal over our line that eventually goes over Prince Rupert. Now is that an aberration? I don't know. But I think there's going to be more export out of Powder River Basin than a lot of us ever dreamed that played a little part in the basin. The second question is relative to the operating ratio and linear, as opposed to. I think if I had to look back from what my initial thoughts were, there's a little lag always from a headcount standpoint. You have certain things that catch up. I would think that the first 18 months, we're going to be a little ahead of schedule. But then I think we'll settle in. So I think the first 18 months, and you're all going to jump to next year on me and I'm not ready to talk about specifically yet, but I think if you look back and you kind of figure out where our starting point is, so wherever the starting place is, in fairness to what we're going to try to achieve and you kind of divide that by 4, I think you're going to see the first 18 months ahead of what we predicted or I thought. And then I think you're going to see a little bit of a leveling effect, and it will be more stair-step or linear given we make some of these other "breakthroughs."

Christian Wetherbee - Citigroup Inc, Research Division

Chris Wetherbee from Citi, Hunter. How do you think about the economy and the mix over the course of the next 4 years? How much of a tailwind? Is that probably a headwind in the near term? And then kind of from a structural perspective, is there anything specific that you're looking at that kind of gives you the most concern about being able to overcome as you head towards that 65 or that mid-60s OR?

E. Hunter Harrison

You're asking me about the economy?

Christian Wetherbee - Citigroup Inc, Research Division

Well, I guess what's in the target? Do you have something baked in there...

E. Hunter Harrison

Yes. Brian's going to talk to you tomorrow about the assumptions. He will give you the assumptions in the plan and what we're looking at. I think it's all under the category of conservative. I think that my personal view is we're going to see some upturns in the economy. Now don't make me explain all of these things. It's a timing issue. If I go back and look at my career, okay, and look at how prolonged some slump was or whatever and you look at what we've been through now and you look at people are concerned, all of a sudden that there's a cliff there, we've gotten concerned, so there's some pretty positive things coming out with housing starts and auto sales. And I just feel some things happening that I think over time, things are going to pick up, which is just good for us. Structurally, I just don't see anything in the way. We've got a nice franchise. We've got good fiscal plan. We talk to you about things that we're going to -- that are under the microscope. We're trying to figure out what they mean to us in the future. No, I just feel pretty positive about this.

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Jeff Kauffman, Sterne Agee. The customary 2 questions here. Number one, this railroad gets hit with a lot of weather. And maybe the last year or 2 has been unusual, but it seemed like kind of the other track that could have been used to get around the weather, the Plan B track, maybe wasn't in the right condition. So I guess 2 questions. Number one, can you assess the ability to recover from, say, weather or flooding or things like that? Is that anything different? Number two, you've talked about evaluating the DM&E, the D&H, closing Intermodal ramps. How much revenue might we be walking away from to move forward here?

E. Hunter Harrison

Well, I don't -- we're not in the habit of walking away from business. I think we've only gotten expressions put out that we will take expressions of interest on the DM&E the last 650 miles or so, and I heard people go "whoosh". Now is there business out there? Yes, there is business out there. But look, a lot of it is going to come our way no matter what happens. So we're okay there. We would have taken potentially where it tried to lead us in a little different direction. But there's so much excitement and upside potentially on energy that's made us say whoa, let's be sure we're right here. And the group is probably saying, yes, finally. Let's be sure I'm right or we're right about potential D&H. So we're not going to quick draw and shoot our toes off. We're going to be very cautious there. And none of the ramps' closures cost us any business. I think they only strengthened the business. What we're really doing is take Chicago, Bensenville, for example. We were kind of halfway freight and half humping, halfway Intermodal, and you could argue weren't doing a really good job at either one. We closed Schiller Park. One operation is much simpler and less costly than the 2. We closed Schiller Park. We're bringing all of that into Bensenville under one roof, and over time -- which is one of the reasons that St. Paul and Minneapolis stayed strategically, over time, Bensenville will go into a full-blown, probably, Intermodal with a lower cost structure. Now every time we lower our cost, I just think that opens up opportunities in the market for further growth. So we sure don't want to walk away from any business. Now having said that, I'm not going to buy any business either. I'm not going out and buy business. Jane and I are on the same page. We don't buy business. We're putting the first class serving offering out there. We're going to do what we say we're going to do. We're going to put it on the shelf, and we hope it's priced competitively and hope you can buy it. But we're not going to be -- take a gun to our head and say you either do this or we are taking all the business away. Now for the weather issue, the company has taken other actions pre-Harrison what we call the North Line, the northmost line from Winnipeg, out that route to Calgary. We have spent, and Scott will talk to you about this tomorrow, he's going to answer more of the specifics, a lot of money in the last couple of years and capital to upgrade that line. So hopefully, if something, God forbid, happens to the main, we've got the North. We've got alternatives. And one of the things that the hump yard rationalization does for you is you don't have all of your eggs in one basket. We have several places that I even have been having trouble pronouncing, one, because I haven't heard them before and I'm not very good with Indian names, that are becoming places where we're doing this work pretty effectively. The engineering group has recognized some vulnerability in certain areas, and I don't think we're going to be any worse off for weather all in than anybody else. We're going to have some bad years and some bad luck, and we'll gut it out, and toughen it up and get smarter and do better with our winterization plan. But I don't think we're going to have any disadvantages to others from a weather standpoint. You're not going to hear me sitting here and saying, "Well, we had 4 years of bad weather, so we can't make it."

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Hunter, Chris Ceraso with Crédit Suisse. So some of the things that you outlined, particularly the hump yard closures and the lengthening of the sidings, seem to be delivering pretty real very near-term gains and profitability. So I have to ask, in your opinion, why hadn't some of these things been done before? And is there any trade-off or anything that you've given up to make those changes?

E. Hunter Harrison

I've been trying to turn the page, but except where it provides some context, and I think this is appropriate. I think there's a lot of people, number one, who don't understand hump yards. Number two, it's not really the great job that run in say, "I've got a great idea. We're going to close some hump yards." Because guess what, it's harder work. You've got to go through change. You've got to go through pushback. Sometimes people don't want to fight the battles. As I told you, our pitching staff wasn't the strongest. It's getting stronger every day. And as it gets stronger, okay, we're going to move from the bottom to the top faster than people could ever imagine, okay. We're probably have improved our pitching staff, our transportation group, enough to get in the playoffs. And you wouldn't have given us a chance 1 year ago or 2 years ago to get in the playoffs. We're probably one closer away -- to use another baseball analogy. We're a closer away from making it to the series. So that's just my take. Now if there's other reasons, I missed it. The siding issue, I had used that model once before. And I don't know why they hadn't done it there, and I don't know why we hadn't been it here. I don't have a good answer for that except to say that it takes in this business a little bit of dreaming and a little bit of-- you got to be a visionary. And the first thing I did when I came with this organization or any new organization was take the map home and start saying, "What if? What if? What if we could do this? What if we could do that?" And I have to say this. This is my best experience of saying to people, "Why hadn't we tried this good idea, and accept it and say let's go for it, let's try it. If it doesn't work, we'll miss. We'll miss quick. We won't spend 2 or 3 years with committees doing it, okay, and we'll get on with it and mark that one off the list." I just think that maybe some of the right leadership weren't provided in those areas. I mean, historically, look at certain railroads. Look at the whole group of railroads. And look at the backgrounds of the top leadership and see where they've been and what they've done. And it starts answering some of those questions for you without me being critical to anybody.

Ken Hoexter - BofA Merrill Lynch, Research Division

Hunter, Ken Hoexter from Merrill. So with more of a bulk railroad, should we still think in terms of this scheduled rail like you had at CN? Is that the aim of the new operating plan as you roll forward? Or are you suggesting that you need to hire external talent to get that extent?

E. Hunter Harrison

No, I don't -- look, one of the decisions we made was this new efforts on our part was not going to have a name because we haven't been very successful with names. And that wouldn't mine to suggest that, that was in-house. They said, please don't give it a name. Because we haven't been very successful with naming stuff. So it's just our operating plan. It's just the ABCs of railroading. The same principles of schedule railroading that apply, they apply here. But having said that, I'm excited about merchandise business that only makes up 18%, 17% of our business, I'm excited about that. If you put a service offering out there that we can grow, keep our strength in bulk, in unit train operation and still grow the merchandise, the same principles apply. One of the things that people miss when we did the Intermodal initiative that taken the 19 hours out, and effected it the next morning out, then somebody said to me, a couple of people said to me, good observation, I'm not sure we're going to capture any of the market right away like that. And I said, that's okay, because I know what we are going to capture. What's that? Lower cost. You mean faster trains, lower cost? Yes. So one of the things I think you'll see tomorrow is that initiative of taking a day out of the schedules saved 45 locomotives. But when you save 45 locomotives, you save fuel. And so guess what? If you just went on half of it, it's a winner. If you bring the market share with you and then bring lower cost, you really got a home run and those things just build on each other. And every day, every day out there that we perform, that we do what we say we're going to do, it develops a stronger product in the market that people are willing to make a change and put us in a different category as far as a worthy competitor. Yes, sir?

Walter Spracklin - RBC Capital Markets, LLC, Research Division

It's right at the back here, Hunter. It's Walter Spracklin, RBC Capital Markets. Just a question if you could talk to us a little bit about your assessment and your experience of -- your very strong experience in dealing with your history in railroads about risk. And what, when you look at your targets that you've set out, they notice a little bit of widening of those dials there. Is that to capture the potential risk that you could see? And could you talk a little bit specifically about when you take resources out of the system and you touched on weather, but you get a shock to the system, are you worried at all about the risk that if so much resources are stripped out that there won't be as much flex system in the event of a shock?

E. Hunter Harrison

No, let me take it in steps. We're operating right now with about 400 less locomotives than we were. We're able to defer, I think we've said we would defer any locomotive, the 6 axle locomotive purchases for 4 years at least as a result. Now at the same time we're cognizant, we don't want to put those up and let them sit and rot, and valves get brittle and leaks develop and so forth, they've got to stay in a good working condition. Same kind of numbers apply to freight cars. So we're not going to be in a position where there's a lot of opportunities that are good opportunities that's coming we're going to miss. Now having said that, look, we discussed that internally just a few days ago. I've got a theory of this. You can't get so emotional and fall in love with growth that you put yourself in a vulnerable position. I call it kind of the snowcap theory. There's peaks and valleys. You go down the mountain and it's no fun to hit the bottom. You say, what are we going to do now? You get all this fixed cost, okay. And then we forget that lesson and the next time somebody says, oh, there's going to be some upside, well, let's get ready for it and load up with assets. Now when we do that, these assets that we have, they're 40 years assets. Put a piece of rail on the ground, buy a new locomotive or a freight car, that's kind of the -- so you need to know what you're doing with that. So given that if we cannot handle that peak of the mountain in a variable cost fashion, we're going to be very cautious about going after it. This slide of the -- all I was trying to be is realistic. Look, as smart as I think I am about railroading, I can't throw a dart up there and tell you that I've got all this insight right now that says we're going to plunge right into 65, okay? So what impacts it? Obviously, the revenue impacts it. And then -- but I can tell you this. Some of the questions that have been asked is this. Is any of this volume related? Effectively, none. I can grow our merchandise business when we're running trains 6,100 feet or whatever we're going to see tomorrow in the graphs. And we know we could do it successfully 9,000, 10,000 feet, bring the growth on. The drivers are the same. It's just a little bit of incremental cost with that additional growth. So only thing I was trying to do here was I was ready for one of you say, Hunter, when you figure you're going to call a shot in this kind of economy with all of the peaks and valleys and the moving parts, and you're going to say 65? Are you that bright? So I just kind of gave a little attitude here. Look, nobody wants to say it, but would you sell us out if we hit 66.5? I mean I think some of you would love it. Now do I think it's more likely that we go below than we go above? Probably. Why is that? Because I happen to be an optimist, okay? That's the only reason. There's no -- we didn't run any sensitivity analysis of the risk here. I just -- we've got a pretty good track record, we've done it before, we're always blown by the numbers and it's hard to hit you folks correctly, okay? I went through this with my previous employer. I got there, and don't hold me to the numbers, but it was 74, I said we're going to 71, you all said, no way. We went to 70. Then I said 68, 69, no way. We went to 67. The next year, I said 65, and you said, ah, you're saying Vegas. So you pick them, Mike. I've also been in some of your offices where previous colleagues of mine have gone in and said, I never missed a number in my career. And the guy said, well, all you said is you just set the hurdle that is high, anybody can do that. So I just was trying to get a little attitude here.

Brandon R. Oglenski - Barclays Capital, Research Division

Hunter, Brandon Oglenski on from Barclays. It sounds like maybe the network was built for growth in the wrong places in the past. And it sounds like you've identified a lot of very quick opportunities to make some changes and drive some real tangible results. How far along are we in that process? I mean have evaluated all the yards? Have you gone through all the service metrics? Are there places where we can seek quick changes over the next 12 months as well?

E. Hunter Harrison

Yes, I think you-- I think, for an example, Gio [ph] will tell you tomorrow. But I think, for an example, that he was working something like 23 assignments in Calgary a day. When we say assignments, conduct your engineer and sometimes a helper, and I think today he works like 5. Now that's significant to me. And I looked at all the yards, all the ones of any size. Now I'm down to the ones I can't pronounce, okay, looking for further opportunities. So there's a lot to do yet. So what did I miss? I maybe missed this. I thought we were going to walking in and do a white board, which is kind of starting from greenfield approach if you want to say it a different way and schedule every movement. Well, I learned that, that wasn't a way to do it because we weren't ready with our basic skill sets to do that. So we needed to go back and improve our blocking and tackling first before we did the white board because we were going to fail on the white board. But are there more ideas we haven't thought of? Always. Are there some we haven't gotten to yet? Yes. Is this going to be fun watching the race? Yes. I mean I think you're going to -- 2 or 3 years, you're going to nod and say, they did it again. God damn them. But some of you are missing this train, I'm telling you, okay? Yes?

David Tyerman - Canaccord Genuity, Research Division

David Tyerman, Canaccord Genuity. You put some very impressive numbers up on the employee front, I think 1,700 out by the end of the year and 2,300 out by the end of Q1 and 4,500 out by 2016. So my question is, will I see when I look at the head count, 1,700 out at the end of the year from the 14,500 roughly you had at the end of the last quarter and so on down?

E. Hunter Harrison

No, because I can't find out what the headcount number is myself. It's a tricky issue. If you've gone back and look historically at our reportings, we have shown active expense employees, capital employees. We went through an outsourcing exercise. So let me give you another number you probably never heard. I got frustrated with that exercise and I said, how many checks are going out the door? And there's 19,000 checks. Now that includes contractors, consultants, advisors, capital employees, full-time expense employees, people that have been disabled for 15 years, a whole host. What we're going to do because of your question, because I knew if I couldn't answer it, you all going to have a hard time answering it, we are tentatively going to stay in another place, here's the checks going out number as we go forward. We made a decision, right or wrong, that one time we're going to outsource IT. And we have and it got away from us. And we brought in a new IT chief, which you're going to get to meet, and we have somewhere around 800 or 900 people working in IT that about 300 are employees. So I would suggest some of you sometimes don't put a lot of emphasis on revenue per employee because you drive the wrong kind of behavior. But we'll help you with the count. But you're not going to see that was one of the amazing things I looked at, public information just like you did. Pre-proxy contest and it's 14.5 and 16.5, and it's confusing. We're going to have 4,500 less people drawing checks. And the contractors, for an example, are much higher than "employee" because of lodging, refurnish and other perks and stuff. So we'll help you sort through that. We got time for a couple more.

Fadi Chamoun - BMO Capital Markets Canada

One here. Fadi Chamoun, BMO Capital Markets.

E. Hunter Harrison

I know the -- oh, I know the voice.

Fadi Chamoun - BMO Capital Markets Canada

We're accustomed to see usually, when the top line is growing, CapEx grows with it. And here, what you showed us is really some material capital efficiency in the next 4, 5 years. Where is this coming from and how is it becoming so...

E. Hunter Harrison

Well, I told you about that in the exercise and nobody listened to me. A couple of places coming from. One, if you're taking 2 sidings and making one, and the only thing you're capitalizing is the labor, and you're reutilizing the rail and the ties and some of the other jewelry, that's pretty efficient and much more efficient than laying new, certainly initially. The second thing is, I would bring to your attention is this. We are involved heavily right now in what I would call capital productivity. I don't remember hearing in my career. I remember hearing about OR and about productivity in this area, I've never heard about anybody talk about productivity with capital. And so what we're saying is this. We haven't been measuring it maybe appropriately, and we do an audit and we say, we're getting 3.5 ties per man-hour. We ought to get 5. If I can get 5 ties a man-hour instead of 3.5, I can put much more hardware actually in the railroad rather in "labor" that I don't get in return for effectively. I can do the same thing with rail, with tires and with those things, particularly also if we could plan better, even though this is a bulk railroad, and get longer, more effective work blocks, we could be much more efficient with capital. Now I have questioned, for an example, some of our practices, and I'm not an expert yet, and I'm not -- I don't say this in a way of criticism, but in my view, when you go out and take the railroad out for 5 or 6 hours, you better put all the resources there you've got. Don't have a 20-tie person gang here taking 5 hours. 200 miles down the road, somebody else is taking -- when you go, check the railroad, I'll give it to you for 8 and put 125 people in there and let's do everything. Let's do rail, tires, ballast, bridge, signal all at once. So I'm more sensitive, contrary to popular belief, to free cash flow than anything, okay? I learned that the hard way, okay? And I won't bore you with that story, but attention to capital, okay? And always the rule of never spend $1 in capital until you've explored every, every operating potential efficiency before you spend that capital. And then put the same emphasis on productivity with the capital dollar you do with an operating dollar, and you see the ability to grow without spending capital. It's not some linear, straight-line movement. Two more, if somebody's counting. I got one here.

Cherilyn Radbourne - TD Securities Equity Research

It's Cherilyn Radbourne from TD Securities.

E. Hunter Harrison

Where are you, Cher?

Cherilyn Radbourne - TD Securities Equity Research

Back here.

E. Hunter Harrison

Oh, got you.

Cherilyn Radbourne - TD Securities Equity Research

I think one of the areas where we all understood CP to be behind CN was with respect to information technology and not having the kind of system feasibility that they do with data cities. So I wonder if you could just speak about whether you were positively or negatively surprised in that respect and what role technology plays in your 4-year plan.

E. Hunter Harrison

I was not surprised because you all told me about it. So your questions were, wait a minute, CP is way behind in IT and there's going to be big capital spends and so forth. I think we got a little handle on this now. I think the best way I can describe it. We were trying to do MNO before we did ABC. And we had a lot -- and it's easy and nice for people to go out and say, I need this and I need that, and I need it asap and I need to look pretty, and I need graphics and I need all this until you say, okay, how's that going to help you in your budget? You mean I've got to pay for it? Yes. It's going to be competitive. We're okay ringing round the railroad like we are, fine. We're going to -- we need to build up a better foundation and base to build on. And then we need to take a little breather and decide what do we really want our information systems to do beyond the basic information to operate the railroad. What are the things they can do? And then we're going to have some long, internal strategic discussions about those and let people start getting an appreciation for what it does, it really do for us besides look nice and win you some IT award in the book. And I don't think that we need to spend a lot more money. In fact, I think we can be more effective with far less people but have the right type leadership. I mean, look, I don't have anything against contractors. Except when my IT chief is a contractor, I don't feel very good about it. I'd like him to be on the team. And so we're behind, but it's not going to affect that, okay? And if I see opportunities that it will push us in another realm that we can do certain things, we'll certainly make the investment that we need. But I've just been out there too long and right now, you ask the customer what they want, they'd tell you one thing. If you ask them what they need, they'd give you another answer. You ask them what they're willing to pay for, the answer is something else. And really, what they want to move is stuff from A to Z, and I hear a lot about the logistics chain and supply chain, and we're going to manage all that for them. And when you start to really get down the nitty gritty, they say, I'll manage my own supply chain, this is going to cost me. So we're behind, we're going to catch up in a reasonable, rational type way. One more.

Scott H. Group - Wolfe Trahan & Co.

Hunter, it's Scott Group from Wolfe Trahan.

E. Hunter Harrison

That would be a home run, okay?

Scott H. Group - Wolfe Trahan & Co.

I'll try my best for you. So 2 things. First, can you talk about how service over time leads to pricing? And what kind of opportunity do you see in the model to start seeing better pricing gains and how much of that is built into the assumptions you laid out? And then secondly, when you think about the team, where are you in the process of putting the final team together? Is it just one closer away like you mentioned or is there still a lot more to do there? And maybe what's the timing for that?

E. Hunter Harrison

Hot damn last question, I thought I'd dodge that bullet. The first question was the...

Scott H. Group - Wolfe Trahan & Co.

Service leading to pricing.

E. Hunter Harrison

Yes, look, I think this. I think more and more, I'm learning that our customers are becoming more sophisticated in understanding the true cost, particularly when they own -- of the equipment we handle, our ownership of our cars is about 40%. 55% of it is customer-owned. The rest is what we call foreign cars. Customers start to understand now, we're going through a phase where we're going back to the timeframe when customers started buying equipment. And now, they appreciate the cost of that equipment. The appreciate cycle times, they appreciate capital avoidance, they appreciate velocity. They understand it and they want to work with us. I've got just me. Now look, there's a lot smarter people than me in this room, but 4 or 5 major customers that want to sit down with me and say, would you talk to us about how we can help you improve our turns capital avoidance, and so forth. So they're being -- they're becoming, not that they haven't before, but they're becoming much more sophisticated. They understand the game, they understand what needs to be done and where there's value there, they're willing to pay for it. So -- and I would make this point to you, is this. There's not the emphasis today on transit times and velocity that there have been in the past, and guess why? Because their carrying costs are very low. And the interest rates are not going much lower. I don't think how you can do that, but I mean think about it. If you go back 1980, when just in time all of a sudden came in, prime was about 20% in the U.S. if I remember it. People were looking at their carrying costs at about 45%, 46%, 47%. They wanted -- they were getting out of their warehouse business, we can't afford to carry this weight and let interest rates go up. They're going to. I don't know if it's next year or the next, they're going to go up. And the carriers that have the ability to provide velocity to the customer, raw speed and velocity, are going to be rewarded in the marketplace. Even more so than you can today. So today, I think we're in a position that I have -- of all the CP customers I've sat down with, I haven't heard anybody say anything unreasonable, ask anything unreasonable or be too overly critical. Even my friend from the town hall meeting in Toronto, if you all remember. He's a friend now. So and the second part?

Scott H. Group - Wolfe Trahan & Co.

The second question was just about the team.

E. Hunter Harrison

Okay, the team. The team is pretty well in place. Now I just got through reading a book called, There is an I in Team, contrary to teamwork conventional wisdom. And if you hadn't heard the story, the story about Michael Jordan, who was in my view when I happened to be in Chicago, then during when they were winning the 6th. And John Winter (sic) [Tex Winter], those of you who follow basketball, was an assistant coach then, and Michael had a bad habit if the team wasn't playing right, and it's early in the second quarter and they're down about 15 or 16 points, kind of dogging around and he gets mad, okay? And he takes over the game. And he goes down and dominates the ball and the game, and scores 18 points in the second quarter, and they go out leading by 2 at half time. And Coach Winter runs over to him and said, "Michael, Michael, there's no I in team." He said, "Yes, coach, but there is an I in win." What we got to recognize is this. We've got some Is and we need them. We need some outstanding stars. So I've got a team here to build on. I told you, we need maybe a closer, we're that far away. So I'm very comfortable where we are. If a couple of Is come along, they're superstars, we're not going to turn our back on them. We'll find a way that they can make a contribution. There's a key role here that all of you are aware of, called COO, that we haven't filled yet, that slot. And at the right time, at the right place, we'll do that. I don't know whether it's the first quarter, the second quarter or the third quarter, it's not something we have to do. It's not something we're forced to do. I think we're in a position that we can get the best there is out there, we can recruit the best. I think we can offer them what nobody else can offer them, an opportunity at a CEO job in 2 or 3 years to get a chance to maybe learn a little bit from me and the rest of the team. And so at the appropriate time, whether it's internal or external, within the industry or outside, we'll make the right decision there. And it will only be additive to the whole effort. But I've learned, although it takes a little more hard work on my part, I have never been so energized in my life, okay? Even my wife will tell you that, okay. In fact, I wouldn't have come back in this business if it hadn't been for her, and I was on the phone discussing some of these opportunities. And I say this seriously. I got off the phone and she said, "You need to go back to work." And she is one of the ones that kind of said, "Stop. You've done enough." And I said, "Why?" And she said, "You have never been so enthusiastic and passionate about anything for the last 2.5 years. Go to work. Use that positive energy." This has afforded me an opportunity to be a little more hands on without stepping on people's toes too much, to really learn myself and that I can be of even further assistance if we have an opportunity to bring an I onto the team.

So let me just wrap up by saying we certainly appreciate all you being here. We appreciate your support. We hope that we have continued support. The crowd here is overwhelming. Looking forward to tomorrow. You will hear about that much from me. I will introduce and sit down and shut up until the Q&A, and let's call it upon by the team to help. And we'll be visiting with you the rest of the evening. So thanks, again.

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