Canadian Pacific Railway Limited Q2 2010 Earnings Call Transcript

Jul.28.10 | About: Canadian Pacific (CP)

Canadian Pacific Railway Limited (NYSE:CP)

Q2 2010 Earnings Call

July 28, 2010 11:00 a.m. ET

Executives

Janet Weiss - IR

Fred Green - President & CEO

Kathryn McQuade - EVP & CFO

Jane O'Hagan - SVP, Strategy and Yield

Analysts

Walter Spracklin - RBC Capital Markets

Chris Ceraso - Credit Suisse

Scott Malat - Goldman Sachs

Bill Greene - Morgan Stanley

Ed Wolfe - Wolfe Trahan

Ken Hoexter - Bank of America-Merrill Lynch

Tom Wadewitz - JPMorgan

Fadi Chamoun - BMO Capital Markets

Cherilyn Radbourne - TD Newcrest

Benoit Poirier - Desjardins Securities

Jeff Kauffman - Sterne, Agee

Jason Seidl - Dahlman Rose

David Tyerman - Canaccord Genuity

Operator

Good morning, my name is Andrea and I will be your conference operator today. At this time I would like to welcome everyone to the Canadian Pacific's Second Quarter 2010 Conference Call. (Operator Instructions).

Thank you. Ms Weiss, you may begin your conference.

Janet Weiss

Thank you, Andrea. Good morning and thanks for joining us. The presenters today will be Fred Green, our President and Chief Executive Officer; Kathryn McQuade, our Executive Vice President and Chief Financial Officer; Jane O'Hagan, our Senior VP, Marketing & Sales and Chief Marketing Officer.

Also joining us on the call today are Ray Foot, our Group VP of Sales, Brock Winter, our Senior VP of Engineering and Mechanical and Brian Grassby, our VP and Controller.

The slides accompanying today's conference call are available on our website. Before we get started, let me remind you that this presentation contains forward-looking information. Actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described on slide one and two in the press release and in the MD&A filed with Canadian and U.S. Securities regulators. Please read carefully as these assumptions could change throughout the year.

All dollars quoted in the presentation are Canadian, unless otherwise stated. This presentation also contains non-GAAP measures. Please read slide three. Finally, when we do go to Q&A, in the interest of time and in fairness to your peers we will be asking you to limit your questions to two. If you have additional questions, you may re-queue and time permitting we'll circle back. Here then is our President and CEO, Fred Green.

Fred Green

Good morning and thank you for joining us. This morning we reported adjusted EPS of $0.92 and 96% increase over Q2 of 2009. Volume growth coupled with our cost management efforts resulted in strong operating leverage. Our operating ratio improved 430 basis points and on a flat adjusted basis is improved roughly 600 basis points.

As you can see on the chart we continue to see significant volatility and weekly demand. This makes for a challenging operating environment. We are adjusting our resources inline with volume and sustaining our productivity improvements.

Looking more specifically at the quarter, and at the end of June Southern Alberta and Saskatchewan experienced some extreme weather with the heaviest rainfall in more than a 100 years. The rain and subsequent flooding resulted in nine communities declaring a state of emergency. The closure of the TransCanada Highway and nine washouts over 60 miles that took our main line out of service for 11 days.

This was the single worse line outage of my career and likely of the past 50 years. The team did a tremendous job working with customers, rerouting some traffic over our North mainline and safely and efficiently restoring the operation.

During the outage our associates that's DN, UP and CN assisted us greatly by providing numerous detours. Additionally we had fantastic cooperation from union leaders and our employees to adjust their locations and keep our customers freight moving. Our thanks to everyone who helped us during this difficult phase.

As we have highlighted at our Investor Day there are some core metric that we are watching, safety, train productivity, asset utilization and reliability and even with the flooding disruption we are seeing some good early progress. Due to a commitment that Ed had prior to his joining CP he is unable to be here this morning. So, his absence let me take you through our operating results starting with safety.

Personal safety in Q2 improved 15% over last year and train incident safety improved 24% continuing our Q1 trend. I am very pleased with our progress but of course this is an area where we are never finished. Turning to slide eight, our long train strategy and fuel conservation actions are delivering improved train productivity. As you can see on the chart, train weights and lengths are both up 4%. This is allowing us to handle traffic growth with fewer incremental train and crew starts saving fuel, labor and creating low cost capacity.

Our GTMs per active horsepower decrease slightly due to the flooding and the impact on the network velocity detours and reroutes created higher online queuing and we added locomotives to assist with the recovery.

Fuel efficiency showed modest improvement even with the larger road fleet which now includes some of old or less productive units out of storage. Good disciplined execution of the operating plan drew these results.

Turning to efficiency through on time trains and continuously tighter schedules, we're targeting improvements in asset velocity and service reliability. Well our network speed decreased with increase in volumes other critical metric are showing improvement.

Our Terminal Dwell time improved 3% versus Q2, 2009, a good result given the significant increase in work levels and the flood impact. Our locomotive velocity improved 2% meaning we are working these expensive assets harder. Our labor productivity as measured by GTMs per employee is up 18% and our car miles per day improved 11%.

In fact we were tracking at 15% year-over-year improvement prior to the flooding disruption. Car miles per day is a critical metric because it reflects the productivity of key assets, yards network and rolling stock and I am pleased with our early results.

On the service front, our Winnipeg yard pilot project is progressing well and we have received favorable feedback from our customers. It's a joined effort with our clients to improve the first mile last mile service. Given our early success, we are rolling it out system wide starting with Montreal and Toronto this fall.

Finally, we continue to progress structural cost reduction plans in addition to our long train and fuel conservation efforts. This quarter we completed construction of additional capacity at our Calgary locomotive shop allowing us to permanently close our Vancouver repair facility.

We announced a number of personnel and facility consolidations affecting our DM&E and Soo properties and we took the necessary steps to implement work role changes giving us added flexibility and how we execute track renewal programs.

These changes are consistent with our new agreement with the Canada Maintenance of Way Employees. In closing I am pleased with our progress but there is much more to be done, I will turn it over to Kathryn and Jane to report on our financial performance and the current market. Over to you Kathryn.

Kathryn McQuade

Thank you Fred and good morning everyone. Q2 was a good quarter with volumes recovering and the continued discipline around cost management. We leveraged our capacity to drive productivity and improved our operating ratio 430 basis points despite the late June flooding.

Before I get into the details let me speak to our housing keeping item. This quarter we changed our accounting policy for rail grinding. Previously, we capitalized and depreciated this item. We now believe that is preferable to expense these cost and have adopted this more common industry practice. This is a minor change and essentially increases purchase services and is offset by lower deprecation. You will find details of this change in the appendix at the end of this presentation.

Slide 12 provides a reconciliation of our GAAP, non-GAAP earnings we referred to as adjusted earnings. Reported net income was 166 million or $0.98 per share. When we take out FX on long term debt and other specified items our adjusted earnings are 156 million or $0.92 per share.

In 2009 there were similar adjustments as well as a one time gain from the partial sell of our Detroit River Tunnel partnership interest. For the remainder of the presentation I will be referring to adjusted earnings.

Turning to slide 13 and the FX adjusted column on the side, total revenues were up 27% due to higher volumes, fuel surcharge revenues and price. Jane will provide more details on our freight revenue.

Operating expenses increased only 20% and our operating ratio of 77.8 improved 430 basis points from 2009. I have noticed that some people have been quoting 410 basis points but the difference is the retroactive application of our rail grinding changes.

With improving volumes, operating income increased 61%. The team is doing a good job to quickly and efficiently adjust resources to changing economic demand. This ability will serve us well as I believe that the U.S. and world economies are fragile. A sustained recovery will be prolonged and market demands will remain volatile.

So moving below operating income to adjusted earnings on slide 14, other income was positive versus 2009 which reflected charges from our debt restructuring and interest expense is lower as well. Income tax expense before FX of long term debt and other specified items increased due to higher earnings and the effective tax rate of 26% is in the range we previously provided.

We had a Canadian dollar headwind which reduced EPS by $0.03 this quarter and we expect the Canadian dollar to remain strong for the remainder of the year. Adjusted earnings almost doubled and adjusted diluted earnings per share was $0.92, up 96% from 2009, overall solid improvement year-over-year.

So let's turn now to the financial impact on the quarter of the main line flooding Fred mentioned. The late June flooding and heavy rains delayed loadings and reduced second quarter revenues by an estimated 23 million and we believe that roughly half of this load will be recovered in Q3.

During the outage we utilized our secondary mainline and detoured over other railroads to keep traffic moving. We estimate additional expenses of approximately $9 million as a result of these reroutes. All in we estimate the impact of the flood was approximately $0.12 on EPS. The damage to track was significant and the repairs to rebuild the line was capitalized at a cost of approximately 15 million but this should not change our capital guidance of 750 to 800 million.

Now let's look at each of the expense lines in more detail, starting with compensation and benefits on slide 16. We continue to see sequential productivity improvements as our GTMs per expense employee improved to 4.4 and FX adjusted comp and benefits was up only 11% as our GTMs or workload increased 22%.

Volume contributed 12 million to the increase and wage rate and benefit inflation contributed 10 million. The increase in our pension expense run rate remains at 4 million and we had a 7 million head win from a benefit recorded in 2009 associated with labor negotiations.

On the quarter, our expense employees remained essentially flat at 13,800. However we do expect to see this increase closer to 14,000 in Q3. In total, including an FX gain of 11 million, compensation and benefits was up 25 million or 8%.

Moving now to slide 17 and fuel expense which was up 60 million or 51%. Price increased fuel expense 45 million as our all in cost were U.S. $2.55 per gallon, up from $1.78 in the same period last year. Higher traffic volume drove increased consumption and expense by 22 million.

Last year our fuel efficiency was a record Q2 performance of 1.14 U.S gallons per 1000 GPMs and this quarter we delivered 1.13 or a 1% improvement even with the flooding conditions and the return to service some of our less efficient older locomotives. We are on target to deliver our annual 1% improvement in fuel consumption Mike spoke to at investor day. Other items increased fuel expense 4 million and finally foreign exchange was a tail wind of 11 million.

Turning to slide 18, purchased services and other was up 10 million or 6% before land gains. Volume related expenses increased only 7 million with productivity improvements being seen in areas such as intermodal.

4 million of the additional flood costs were purchased services and we also had a 4 million year-over-year head win from one time favorable tax adjustments in 2009 and FX was 11 million. The balance of the increase was primarily due to lower land sales. As mentioned in Q1, we still expect routine land sales to pick up in the last half of the year for a normal annual run rate of 30 to 40 million.

Turning to slide 19, the remaining operating expenses were all favorably impacted by FX. Material decreased 3 million due principally to currency. Equipment rents were flat despite higher car hire payments on volume increases particularly in automotive and intermodal. This increase was partially offset by lease returns began in the second half of 2009. We will see this year-over-year benefit narrow as we lap our 2009 savings. Depreciation was flat.

We saw good operating leverage on higher volumes. Slide 20 summarizes our Q2 leverage. RTMs were up 23% and we saw core operating expenses which exclude foreign exchange, fuel price and land sales only increased 11%. We continue to sustain and leverage our productivity improvement. How we will face tougher compares in the second half of the year as we lap last year improvement.

I'd like to highlight our cash on slide 21. We began the year with a strong cash balance of 679 million. With returning volumes and disciplined cost management cash from operations excluding pension added 550 million.

We filed our year end 2009 actuarial valuation and elected to accelerate most of our 2010 pension contribution requirements in the second quarter. Our 2010 required contributions will be approximately 190 million and to date we have already contributed 178 million.

As planned we paid our debt maturity of 350 million this quarter and in May the Board of Directors approved a 9% dividend increase confirming our confidence in generating cash flow. Our capital program remains on target and we will continue to evaluate the best ways to put the remaining cash to use.

In conclusion, we continue to strengthen our financial position and deliver continuous improvement. We are driving productivity with returning volumes by leveraging our long trained strategy and network capacity. We are building momentum to deliver improved bottom line results.

With that, I will turn it over to Jane for the marketing section.

Jane O'Hagan

Thank you Kathryn and good morning. Starting on slide 24, this was our fourth quarter of sequential growth with carloads increased 8% versus Q1'2010. On a year-over-year basis total carloads were up 20% and revenue ton miles or RTMs were up 23%. The differential between carloads and RTMs is largely driven by the recovery of export potash.

On a currency adjusted basis the increase was 28%. On top of volumes of 20%, fuel surcharge revenues generated approximately 5% of the gain, and price and mix were 3%. Now I'll walk you through the market giving you comments on the quarter, and then I'll provide the insight on the remainder of the year finishing with price. For clarity, I'll speak to currency adjusted revenue.

Train revenues were up 3%. In Canada, deliveries into the elevator system were impacted by the wet conditions on the ferries. On our U.S. franchise, revenue was up versus Q2 2009 particularly due to movements to ethanol plants and processors. Moving to coal, revenues were up 47%. Demand for exports of metallurgical coal to Asia was strong and thermal coal in the U.S. was lapping a quarter that last year saw several receivers have significant outages.

Turning to sulfur and fertilizers on slide 27, revenues were up 88% on the quarter. International demand for potash was strong versus easy compares from Q2 of 2009, which was the bottom for the export market. In our merchandize portfolio, revenues were up 43%. Automotive continued to be strong and was lapping easy compares versus Q2, 2009 where there was major restructuring place.

We also saw significant improvements in ethanol and fuel shipments. In other merchandize sector such as forest products, we continue to see modest volume improvement. Now turning to intermodal on slide 29, revenues were up 18%. Imports to the West Coast grew significantly as Canadian retailers replenished inventory and benefited from the improving Canadian economy.

Eastern volumes were flat, and we continue to see the impact of the loss of some short haul business. Domestic intermodal volume was up in line with GDP. Turning to slide 30, I'll run through our views on the balance of 2010. There is still a uncertainty and the lack of consensus around the pace and sustainability of the recovery of both the U.S. and global economies. In grain, there has been a very wet start to the season on the Canadian quarries that has resulted in seeded acres being roughly 15% below traditional levels.

We expect Canadian train which represents approximately 60% of our grain volume to be weaker than 2009 from harvest forward. At this time, it is too early to determine the size of the impact or when in the crop year it will be felt. We continue to model normal volumes in our U.S. grain franchise. The very early week harvest reports in the Southern part of our territory make us optimistic that crop could be above normal due to strong yield.

Looking to coal, we expect the second half to be similar to the first half which is in line with Teck's forecast. On the potash side, there is limited visibility to second half volume due to the shorter term sales contract in international markets. I'll note the first three weeks of July have been below our Q2 run rate. In domestic fertilizers, the good progress in the crop should create a decent window for application in the fall, but the amount of application remains to be seen, and will depend on commodity pricing as we have demonstrated in the first half we will be ready to move the volumes as they are presented.

In both merchandise and intermodal these segments are linked to the overall North American economy. In the Canadian, economy the second half growth rates are forecast to be lower than the first half and the U.S. forecast to be lower than the first half and the U.S. forecast is for modest growth.

Most segments are both merchandise and intermodal are likely experience slower growth compared to the first half and year-over-year as compares are starting to get tougher. Moving to price, renewals during the quarter were inline with expectations coming in just under 4%.

As we said in Q1, price results would turn positive as the year progressed and we did indeed see positive price in Q2 of close to 2% on a same store basis. Looking forward, we continue to target 3 to 4% on renewals and we expect positive price results to continue through the second half.

We'll remind you that the regulated grain index will increase 7% on august first and FX about 40% of our grain revenues. To summarize, Q2 was another quarter of growth both year-over-year and sequentially.

In the second half of 2010, we faced some tougher compares and there is uncertainty around the U.S. and global economies and the sustainability of the recovery.

We are well positioned to participate in any volume recovery and continue to pursue the growth opportunities we outlined on Investor Day. Our focus on service reliability allows us to continue to target 3 to 4% on renewals. Finally, I will note that we expect that RTMs increasing more than carloads will not continue as we lack the bulk recovery in the second half.

Now over to Fred to wrap up.

Fred Green

Thanks Jane. As you have heard market visibility remains limited, we have proven we can adjust quickly up or down to fluctuating markets and we are monitoring traffic trends closely. We are ruling out our first mile last mile yard initiatives and expect this will deliver enhanced service reliability and yard fluidity.

Our improvements are leading to the elimination of redundant assets and as Kathryn highlighted we are seeing the benefits in our financial results. And we are confident that by focusing on asset utilization and service reliability we can create new market opportunities, sustain price in the market and improve our cost efficiency. Our priorities are clearly established and our progress is on track. Now I will turn it over to Andrea to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Walter Spracklin with RBC Capital Markets. Your line is open.

Walter Spracklin - RBC Capital Markets

Sorry about that. Good morning everyone.

Fred Green

Good morning Walter.

Walter Spracklin - RBC Capital Markets

Just on the pricing, I am curious to -- you're guiding SG&A at 3 to 4%. Is that reflecting what you consider to be the maximum pricing you are going to get now going forward or is that still reflecting a little bit of the economic recession, some of the uncertainty that you pointed to. In other words, when we look further out, is that a good number to use longer term or is there some opportunity to a little bit more than that further out?

Fred Green

Walter, its Fred. I think Jane and Ray and the ream have a pretty clear balance in mind. We were reluctant to chase numbers that are extremely high. All of those kind of trigger reactions from the regulators, from the marketplace. We believe that if we can attain price increases greater than inflation that's good because that's helping margin. We think the code of the product that we have been assembling and are continuing to improve is going to enable us to that and that will allow us to have competitive pricing but fair pricing for the shipper community as well.

Walter Spracklin - RBC Capital Markets

Okay, did you mention what percentage of your book you priced for 2011? I don't know if you…

Fred Green

Jane will catch that.

Jane O'Hagan

Yes. Walter, just so that you know 50% of our business is locked in. So this would be where price would be adjusted by either indices or by fixed amounts. So possibly half of those price adjustments for us are known.

Walter Spracklin - RBC Capital Markets

That's great. Second question here is on time, thank you for the color on the flood. I noticed 4 million in the purchased services. I don't know where the other, I don't know if the -- the other 5 million I guess is spread throughout costs I assume?

Jane O'Hagan

Yeah, it is Walter. It's just, its what we estimate an additional fuel cost, improved overtime, it's just spread all over the place.

Walter Spracklin - RBC Capital Markets

Okay. And I guess where I was really focusing on was the impact of the port strike. Do you have any quantification for the third quarter on what that might have meant or is the deferred, were there any shipment deferrals that you will just make up in the balance of the quarter.

Fred Green

Walter, I don't, maybe it was, I think five or six days all in. We would characterize it as a pain in the butt but not one that has a material impact on us and some of those shipments which were diverted ended up coming there anyway or will come there anyway with people changing their plans. So I would call it a non issue unfortunately. It just disrupted some service but I don't think of a material impact of any kind.

Walter Spracklin - RBC Capital Markets

Okay, that's it for me. Thanks very much.

Fred Green

Thank you.

Operator

Your next question comes from the line of Chris Ceraso with Credit Suisse. Please go ahead.

Chris Ceraso - Credit Suisse

Thank you. Good morning.

Fred Green

Good morning.

Chris Ceraso - Credit Suisse

A couple of items. Did you see any slowdown in your exports to Asia, either in the grain business for coal or potash or anything as you got deeper into the quarter?

Kathryn McQuade

No, we did not Chris

Chris Ceraso - Credit Suisse

And what about here into July?

Kathryn McQuade

No, we have not seen that. I would say that if you looked at Fred's slides that he put up at the beginning, we've seen a little bit of fluctuation in terms of volume but as we've said from 2008, the biggest impact that we've in the last three weeks is really around the potash side and as we said certainly the recovery we will see is volatile and we'll see some movement in volume in terms about week-to-week.

Fred Green

Just want to add a little bit of color. It would be, recall the Teck did have a explosion fire at their drier at one of the mines. So we did go through a couple of weeks of uncertainty as they got their contingency plans in place but I think on a call as recent as yesterday they've basically confirmed their expectations with regard to 23, 24 million tones and they expressed how they are going to do that while they repair the facility. So the first couple of weeks have been kind of funny, both in potash and coal, not the perfect pattern. Plus we were going to the recovery from the flood. But all the customers to still feel fairly strong about whether its export potash or coal or the green business subject to whatever the crop is. So we're getting good feedback from the client base that they still expect a strong balance of the year.

Chris Ceraso - Credit Suisse

Okay. I understand in your comments with some caution about the second half in terms of the growth rate relative to the first half, but comps are getting harder, how do you think about things in absolute terms, should we expect absolute carload volumes to go sort of sideways from where they are now, can they get better or are you nervous that carload volumes could be lower in absolute terms in the second half?

Kathryn McQuade

At this point, as we've said we can't clearly predict the market. What we can say is that, Tom, we will be ready to move what we can, we've proven that we've been nimble, we've been agile, the only other comments that I would say is that the trend that we saw, RTMs and carloads growing at a different pace as I said, we'd expect that to level off in the second half.

Chris Ceraso - Credit Suisse

Okay and then just one sort of big picture question, Fred, may be how would you rank the growth drivers per CP on a three to five year view growth either in volume or revenues whether it's potash or coal or energy, what's your rank list or what's going to drive growth at the company?

Fred Green

Well, Chris, it's going to kind of -- it's kind of an industrial date level question so I'll just repeat what we said then is that the feedback we have from the producers of metallurgical coal, they are making major investments they feel there's a strong long-term growth opportunity supply coal, particularly to China, but also other parts of Asia. The potash guys, you've heard that story directly from them, not through us, not just through us and obviously, they've got, I think they're spending almost $2 billion a year in capacity expansion in Saskatchewan.

So when you add up the combination of just those two big drivers granted driven by the Asian economy, those are the fundamental big ticket drivers and then there's whatever happens in the North American economy happens. So I think those are the two big ones, and we'll continue to keep improving the quality of our product, which will allow us to pool more and more product off of or anybody else who is a competitive alternative to us. =

Chris Ceraso - Credit Suisse

Okay, thank you.

Fred Green

Thank you.

Operator

Your next question comes from the line of Scott Malat with Goldman Sachs. Please go ahead.

Scott Malat - Goldman Sachs

Hey good morning, thanks. I just wanted to talk about the improvement in car miles per day, that's up 11%, how much do you think to the drivers here, how much of that is volume improvement, how much of it were initiatives and kind of what's your outlook for this metric?

Fred Green

Well, Scott, I think in broad terms, I'm going to make aggressional statement up as good and a lot of our focus over the last quarter has been looking at the yards and how we operate the yards, what we could do differently. There's a whole other set of activities with regard to train design and making sure that we don't unnecessarily go through yards. So avoid going through them first, secondly when you do through them, go through them as efficiently as you possibly can.

The train speed over the course of time is a little bit of a deceptive number. I'm not particularly concerned about that because we'll get that up overtime, and so I think the key drivers are avoid the urge when you can, and when you do get their mixture you handle exceptionally, efficiently, and we've made some pretty strong aspirational statements about moving train such as grain. We've come from 18 days right down to 12 day cycles. It's been a bit blippy lately because of the floods, but those are massive improvements when you start to move the 24,000 per fleet that much faster.

So those are the kinds of things you're going to expect from us, and we'll just kind of take it one chunk at a time rather than say a long-term aspirational statement but then we want to be overtime, why wouldn't we want to be best-in-class, so we'll keep driving towards that.

Scott Malat - Goldman Sachs

Thanks, that's helpful. The other thing that was a little surprising us trying to model it, it's just a revenue ton mile per gross ton mile in the quarter, that ratio is much higher we would have thought usually down in 2Q, was that a function of, and how do we think about that, is there improved scheduling or any other initiatives that are helping that ratio?

Fred Green

I think it's probably just generally a mixed issue Scott, we might have to take it offline for more details, but my -- whenever you get major mix shifts such as a massive increase in the bulk commodities that you've seen, those are different RTM GTM ratios because you don't have triangulation occurring, it is basically a 100% empty movements on one half of the move. So instincts would just be a mix, but I -- we'll take it offline for more details.

Kathryn McQuade

I would just add that it's like a return of the export potash and of our coal volumes coming back in the quarter.

Scott Malat - Goldman Sachs

Alright, that's helpful thanks so much.

Fred Green

Thank you.

Operator

Your next question comes from the line of Bill Greene with Morgan Stanley. Please go ahead.

Bill Greene - Morgan Stanley

Yeah, hey there, good morning. I just wanted a one clarification on the comments you've made about the percent of business, I think you said that's locked in for 2011. Do we know the rate at which that's locked in? Is it in line with the sort of the guidance you have here for the second half as well?

Kathryn McQuade

No. I was just --

Fred Green

I asked Jane to be short with her answers. Bill, I can just help out there. It's really important that we say this clearly that 50% of the business as Jane said is -- we know that it's either under a fixed rate, in other words we know that number and that portion would be consistent with the guidance that Jane and Ray have provided. But then half of that or 25% of the total base is under an index. Well we don't know what those indexes will be until the indexes -- the year completes and then the indexes are adjusted, so 25% is a fixed number, and that is consistent with the targeted pricing ranges and 25% has an index, though they will be what they'll be and 50% remains to be negotiated.

Bill Greene - Morgan Stanley

Got it, okay good; thank you for that. Second question is, as we look at the forward sort of margins, if you think about OR rate so the second quarter OR obviously had an impact from weather. If we adjust for that, I think normal seasonality would say, your third quarter is typically better than your second, is there anything about the third quarter this year that would cause that not to be the case, is the logic sort of sound or is there something in this third quarter that we need to keep in mind as we start modeling this on seasonal patterns?

Fred Green

Well Bill, we don't give guidance on operating ratio by quarter so I think you guys know the patterns. I leave it to you to judge from what you can see, it's really -- Q3 is generally a pretty good volume quarter, and if everything materializes the way the shippers seems to think it can, then that should be a good news story for all of us.

Bill Greene - Morgan Stanley

Okay and then just last question is, I know you expressed a little bit concern on the economy, but what are the customers tell you about -- so the merchandise customers on their inventories, have they fully restocked and they want to start to destock, or are we still in a rebuilding mode in terms of inventories, thank you.

Kathryn McQuade

I think as we look at the merchandise side, what we've seen is -- we have some restocking that's taken pace but it's hard at this point to really be definitive in terms of whether or not this restocking is in fact over. I think that, again given the outlook for GDP and that type of growth rate, it will all depend on how strong sales are to drive that much further.

Fred Green

And Bill, if I can add any color to that, it would simply be that both Jane's recent trip in Asia, and my visit to a certain steam ship lines within North America in the last couple of months -- last couple of weeks, even though GDP doesn't seem to be growing very quickly, there still appears to be a very strong lineup of containers arriving at the West Coast right through Q3 because they probably got three to five weeks for the visibility into what's being presented back in Asia, so there seems to be an inconsistency and I guess you could conclude that may still be the tail end of, or may be not the tail end of inventory replenishment because the volume of containers arriving on the coast is certainly greater than GDP consumption of retail products, so I guess there is still some of that going on.

Bill Greene - Morgan Stanley

Yeah, I think that makes sense just from the prospect of what we heard about other rails that they are reasonably upbeat about the peak season. Your comments seemed a bit more subdued. So, that's why I want a clarification. Thank you.

Operator

Your next question comes from the line of Ed Wolfe with Wolfe Trahan. Your line is open.

Ed Wolfe - Wolfe Trahan

Hey good morning.

Fred Green

Good morning, Ed.

Ed Wolfe - Wolfe Trahan

Is there any ongoing flood impact you talked about, maybe some makeup of volumes? Is there any additional impact to the network or to the cost side, or how should we think about that for third quarter?

Fred Green

I would say none with regard to the Saskatchewan floods. I think like, everybody else in the U.S. Midwest were having, I would call the minor situations right now and then Chicago and Iowa, you know, there is been another little series of minor floods occurring down there, which is leading to a little bit of rerouting by virtually every railroad on other people, and also is leading to a little bit of congestion. But it appears from what we've seen so far is it that that area of flooding will be a reasonably minor incident and will probably pass within weeks or of to a normal pattern. So, in summary, the answer is we don't see any impact going forward what we've experienced other than that first couple of weeks of having to clean up of what was left over on July 1.

Ed Wolfe - Wolfe Trahan

Okay. But am I right, that's the Saskatchewan and that positive then because you've got same makeup?

Fred Green

Well, we hope so. But again the volatility that we experience, day-to-day, week-to-week on demand is making it very hard to decipher how much of that is catch-up and how much isn't. There is a nice opportunity in the grain side and obviously we're working very hard to catch up on some of those loads.

Ed Wolfe - Wolfe Trahan

Okay. What does the 15% decline in Canadian grain acreage typically mean for your volumes? Is there any way to think about what a normal impact that might have?

Kathryn McQuade

At this point, I think, you know as we talked about it. You know, what we're seeing is a 15% reduction in seeded acres, but we got to see how this crop matures over the next month to see how that impacts actual

Yield, so I think if you look at it last year, there had been some discussion about some, the crop being 44 million metric tons, and it ended up coming in at 48. So, there is some play there.

Ed Wolfe - Wolfe Trahan

Right and you had mentioned that 7% Grain Index increases or impacts 40% of your grain businesses. What happens to the other 20% of the Canadian business? Why does it only impact 40%?

Kathryn McQuade

Because it's a regulated portion of our regulated grain. The rest is -- of it is, it's commercial grain.

Ed Wolfe - Wolfe Trahan

So, now with commercial grain, what are you expecting, I guess, is what I mean.

Kathryn McQuade

Well, as we said, we have our price plan; as we look at on a go-forward basis. We are talking about tops 3 to 4%. That's what we're targeting.

Ed Wolfe - Wolfe Trahan

Okay. And then the last question, you had mentioned that in July, for export of coal that the run rate had slowed a bit. Is that just a year-over-year comp?

Fred Green

No. That was my comment. And it was really to do with the fact that they had an explosion and a fire. And as a consequence, the first couple of weeks at one of their mines led to some disruption. And the good news is that they are back in to a pattern. We've been hauling, we did the last, let's say week and a half to two weeks, it's back in to a very normal rhythm, and they've come up with a contingency plan on the ability to ship, basically, wet coal as opposed to going through the drier, which would be good from what they say, good to get through the season and they will have the drier repairs in time for the colder weather.

Kathryn McQuade

And just to add, as we -- as I said earlier in my remarks is that we expect the second half to look much like the first half and that we are modeling in fact to the Teck forecast.

Ed Wolfe - Wolfe Trahan

Great. Did I hear right, was it coal or did you say potash in July it was below the 2Q run rate?

Jane O'Hagan

I did say that it was potash and again as we've said the move to shorter term contracts create some lack of visibility for us and we certainly see and believe in the long-term fundamentals of a potash and we'll expect some volatility but our messages are clearly that we have the resources, we have the ability to be nimble, we've have demonstrated that in the past that this has become a reality and we'll continue to do that.

Ed Wolfe - Wolfe Trahan

Okay, thanks everyone for the time.

Fred Green

Thank you.

Operator

Your next question comes from the line of Ken Hoexter from Merrill Lynch. Please go ahead.

Ken Hoexter - Merrill Lynch

Hi, good morning. Kathryn, just -- I guess looking at the employees, they have jumped up a bit on a sequential basis, is that related to the floods or are you starting to significantly add some headcount again?

Kathryn McQuade

Well, they did come up but I think it's consistent to what the guidance that I gave which I said we would probably hover around 14,000. Part of it is the fact that we have some business in the U.S. and we are hiring in the U.S. in the running trade there as well as trying to get ahead of the curve on our demographics as well a little bit through training. So, it's responding to the higher volumes, its right inline with the estimates that we have consistently given over the last couple of quarters and we do see it somewhere between 13.8 and the 14 through Q3.

Fred Green

And Ken, I might add that, remember that the recovery has been in big bulk commodities, potash and coal. So those aren't incremental cars on a train. Those are train starts which require running trains.

Ken Hoexter - Merrill Lynch

Have you used everything that you had -- what do you still have left in storage I guess in terms of locomotives, employees?

Fred Green

We still have a couple of hundred employees, in laid-off status. We have approximately about 10,000 cars of different kinds and about 120 locomotives still in storage.

Ken Hoexter - Merrill Lynch

And as you get to the end of the locomotives and cars in storage, presumably, those are ones that may need some more maintenance. Are you seeing that as you pulled them out or we're going to see a capital budget impact, it sound like Kathryn, I think, said that CapEx is still the same, the same even with everything with the floods and everything, is that something you're going to start to refocus on?

Kathryn McQuade

We don't see any immediate capital changes at this point, of course, as you bring equipment, older equipment out there could be some higher maintenance cost but overall, we're not seeing anything that would be a major item for you guys to concern.

Fred Green

Ken, I would add that, I would like the source of those incremental cars to be cars moving more quickly; so, I don't particularly want to bring more cars unless there is a massive spike in demand. I would much rather see the assets we have utilized more efficiently and that creates capacity in itself and we'd avoid all the things you've talked about.

Ken Hoexter - Merrill Lynch

Wonderful, I just have two quick numerical ones. Kathryn, there was a collection of a receivable from a financial institution on the cash flow?

Kathryn McQuade

Yes.

Ken Hoexter - Merrill Lynch

What was that from?

Kathryn McQuade

Well, I tell you it's a little complicated, why don't you take that offline with Jane, we can walk it through, it' a net-net not much.

Ken Hoexter - Merrill Lynch

Okay, and then the other one was the tax-rate which after adjusting for the foreign exchange gains and fair value adjustments still seem a bit low, is there anything sustainable to that?

Kathryn McQuade

All right. Well, we do believe it's sustainable and it's within the range that I have given you, it's 26% and we have to consistently said that based upon our tax planning, etc and we believe it will be in that range, I think we've given 25 to 27, so it's right in the middle of that range and of course any incremental effective tax rate is always the function of the level of your income.

Ken Hoexter - Merrill Lynch

Understood, I'm sorry. So, that 25 to 27 that should continue through the end of the year.

Kathryn McQuade

We haven't changed that at all.

Ken Hoexter - Merrill Lynch

Wonderful, thanks for the time, appreciate it.

Fred Green

Thank you.

Operator

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

Tom Wadewitz - JPMorgan

Yes, good morning.

Fred Green

Good morning Tom.

Tom Wadewitz - JPMorgan

Wanted to ask you a little bit about some of the productivity, it sounds like you are having a pretty good fraction on a number of productivity initiatives in the quarter. I know this little noise related to the line outage at the end of the quarter. But how would you view that progression? Is that something where you think you build further momentum in second half and looking into 2012 and I guess I'm thinking of train's length type of things and other I guess weight per train, those types of productive metrics? I know it's also a function of volume growth, but maybe if you can give us some thoughts on that that would be helpful.

Fred Green

I think Tom, again we have to look at it by segments, so remember that we've got bulk trains recovering as we've spoken about and you recall from the investor day that we've got some plans to take those already productive trains where we can, we'd like to migrate towards some of the longer trains. But it's a function of terminal capacity at origin and at destination and of course our ability for sighting's etc. So, on the merchandise and intermodal side we have the capacity as I think we've said in June, probably 15% to 20% on those trains.

We've already run a series of 12,000 foot trains, some 14,000 foot trains we are experimenting with. So, I think directionally you should expect us to continue to strive particularity in merchandise and intermodal and I'll call it reasonably short term. To continue to drive those train lengths and wait up. On the bulk side, they will come, but they come with some technology and with some cooperation from the parties at origin and destinations to ensure that the full supply chain is capable of making those step function improvements.

So, directionally, I would expect us to continue to drive up, now the thing to remember of course is a lot of our initiatives kicked in the summer of last year and so as we work into the second half of the year, the percentage increase, the comps become more difficult.

Tom Wadewitz - JPMorgan

Okay, thank you that's helpful and then on the Sicily consolidation, the St. Catharine you mentioned about or maybe you did Fred, on the locomotive, maintenance facility and expanding Calgary and shutting Vancouver and I think you may have some other facility items that you are working on, what kind of impact might that have had in second quarter or going forward in terms of expense savings and which line items would that show up in? Is it materials or purchase services or what?

Kathryn McQuade

You know Tom, I think as we even talked about it on Investor Day, when you close a facility it hits every line item, I think whether it's utility, supplies and services, communication cost, property taxes, it's runs the gambit, it's just hits your entire income statement, so for us to be able to quantity each and every piece of that is really -- it's just impossible. It's moving the right direction, it's moving to larger facilities, getting higher productivity out of this facility that we have and bring work together to improve the productive through the shop, so at this point, it's just not reasonable for us to try to quantify each and every piece of where those savings are.

But it spread throughout. So, we will continue on our plans on facility consolidation because we believe that it will ultimately drive to lower structural cost.

Tom Wadewitz - JPMorgan

Again I mean not on a line item basis, but can you give a broad sense of the item you mentioned, the consolidation of the locomotive facility in Vancouver and expansion of Calgary? Is that a C$5 million or C$10 million type of benefit annually looking forward or what is the magnitude?

Kathryn McQuade

We're just aren't going to quantify each and every consolidation, because, you know, again, even when we look at the overall consolidations of our shop, so, it will be puts and takes in every direction, because it's looked at as a major overall plan. So, as we move and drive towards higher efficiency and whether it's all of our different facilities, you know, you're going to see some increases in some line items and decreases in other. So, we're not going to quantify each individual facility closures separately. We've a good ROI just as we have some capital additions. And so as we look at what we have to do at each facility in order to draw these consolidations, they are based on good and solid ROI.

Tom Wadewitz - JPMorgan

Right. Okay, thanks for the time.

Fred Green

Thank you.

Operator

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

Fadi Chamoun - BMO Capital Markets

Good morning. Still, one more question. The contribution margin in the second quarter, if I back out the flooding impact something around 55% or a little bit more, and as you've said, the recovery has been led by potash and coal to a large degree. I am just wondering if you can shed some light on the degree of influence this sort of volume bias towards the bulk on this contribution margin. And as we go into the second half, then how would the makeup of volume impact, sort of your operating leverage and your contribution margin, if you can help us out there?

Kathryn McQuade

So, Fadi, I'll start out and Fred will probably add, but, the way I look at it is as we have fit consistently. You are going to have different operating leverage because your merchandise train and the intermodal trains have more capacity on them, and just the spread has spoken to our bulk trains are already very large trains.

When bulk comes in, back-in as we leverage up, it creates more train start than our merchandise and intermodal network. So, yes as we saw in the second quarter, a lot of our volume improvement was in the bulk side. So, you are going to have less leverage on those because you already are running big train. So, just as we spoken in Investor Day, where we have capacity is on our merchandise and intermodal network and as those cars come on, we won't have to be adding train start. So, it does vary depending on where the volumes are coming back.

Fadi Chamoun - BMO Capital Markets

Can you give us a degree of magnitude, sort of for merchandising trains, sort of contribution, or operating leverage magnitude versus bulk at this point?

Kathryn McQuade

You know, Fadi, we're not going to give different margins on each amounts of traffic. But as I think Mike gave in the Investor Day, we have on an average, 20% or more capacity on our merchandising intermodal trains. So, that next car goes on that train at literally very little additional cost except for fuel. And so, that's where, the group looks consistently, even if we can put some bulk on those merchandise and intermodal trains in blocks or whatever. So it will depend on the OD point pairs. It depends on what the -- where the traffic is but mostly you just think about it whenever you have -- if you've got 20% more capacity on this merchandised and intermodal trains, it's at very margins because it's additional cars. So it's a great thing. But when you have to starting adding train starts, that's when your leverage changes.

Fadi Chamoun - BMO Capital Markets

Okay, that's helpful. Thank you.

Fred Green

Thank you.

Operator

Your next question comes from the line of Cherilyn Radbourne with TD Newcrest. Please go ahead.

Cherilyn Radbourne - TD Newcrest

Thanks very much, good morning.

Fred Green

Morning, Cherilyn.

Cherilyn Radbourne - TD Newcrest

I wonder if you could remind us of what's going on in your intermodal business in the East. You did refer to some short haul traffic that was down. Can you just remind us if that short haul traffic that you deliberately demarcated or if something else is going on in the East?

Kathryn McQuade

I would just remind you that as we've said, our Eastern volume is flat and the short haul business that is -- is business that we let go.

Cherilyn Radbourne - TD Newcrest

Okay. And then I wonder if you could speak about the rollout of your Winnipeg -- your pilot project to Toronto and Montreal and as you look those yards, is there any thought that you may need capital at any of those yards in order to achieve the productivity that you're targeting or you're generally happy with the physical state of those assets?

Fred Green

Cherilyn, I think the assets are in wonderful shape. The capacity exists. Its really a matter of working with the client base to spread the flow over seven days a week instead of kind of Monday to Friday, nine to five that many have historically encouraged or insisted on or demanded and as we've learned in Winnipeg with a more concentrated dialog and communication, the shipper community has generally been quite accommodating and that's enabled us to literally reduce by half the dual time of cars arriving before they are placed and that's -- when you multiply that over all of the yards, that could be a pretty good opportunity to one of the earlier questions about how do you get car miles a day up.

Cherilyn Radbourne - TD Newcrest

And so have you had to in Winnipeg do anything from either an incentive or a penalty point of view to kind of encourage that seven day a week activity?

Fred Green

No, nothing at all. It's really a better level of communication, a more frequent level of communication, reopening channels that overtime for whatever reasons have not been as open as they should have been. So I would call it a huge win on -- hopefully on everybody's part shippers, ourselves, car utilization, yard fluidity. It's a win-win all around the waterfront.

Cherilyn Radbourne - TD Newcrest

Thank you. That's all from me.

Fred Green

Thank you.

Operator

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

Benoit Poirier - Desjardins Securities

Thank you very much and good morning. My question is on the flood, the impact that we should expect in the third quarter. If I understand, about half of the revenue will be recorded in Q3 so as of 23 million and you mentioned 00 you talked about additional expense of 9 million. Will it impact only in the third quarter and what should we expect on the bottom line and on the operating ratio? Thank you.

Fred Green

Benoit, Kathryn's going to address the -- I'll just frame it up. I think, the revenue assessment we think is right but it is very hard as we said earlier to identify whether those revenues that we're seeing are in fact attributed to this deferred. We know for instance in grain that there is some deferred revenue.

That's probably the only thing you can identify. You should assume that intermodal business that was diverted to highway or to other railroads during those periods will not return. So it's pretty more of a handful of merchandise in some of the bulk business that we have that you should see to come forward.

From an expense perspective, there is no reason that there should be any Q3 expense impacts. We tried to either incur or accrue all of the anticipated expenses in Q2 as far as that is a concern. Of course there is the capital spend that has occurred and incidental but there probably will be a couple of million dollars next year just buried in our normal program to do a handful of bridge work and things that we've got temporarily repaired that need more work.

Benoit Poirier - Desjardins Securities

Okay. Perfect, thanks, it's clear. And on Canpotex, is it too early to talk about the upcoming renewal, Fred?

Fred Green

Yeah, I think it has Benoit because the contract has still got two full years to run on and so it's like, we could talk a lot about it but I'm not sure what it accomplishes. So my view is it's a great client, one that we've had a long, long relationship with, one that we hope to have a longer relationship with over time and when the time is right for that type of dialog, we'll have it and of course we'll communicate. But I anticipate it's pretty far into the future.

Benoit Poirier - Desjardins Securities

Okay, thank you very much. Thank you for the time.

Fred Green

Thank you.

Operator

Your next question comes from the line of Jeff Kauffman with Sterne, Agee. Please go ahead.

Jeff Kauffman - Sterne, Agee

Thank you very much. Congratulations on a very solid quarter with the challenges.

Fred Green

Thanks Jeff.

Jeff Kauffman - Sterne, Agee

Most of my questions have been asked. So I'll just do two quick ones. First on the grain rate adjustment, if indeed your grain haulage is below expectations as a result of the Canadian crop, is there the possibility of a further upward adjustment in the rate or no?

Jane O'Hagan

The way that that process works is its set for one crop year. So in fact the 7% that I spoke about is an adjustment that will be effective for the 2010-2011 year.

Jeff Kauffman - Sterne, Agee

Okay, so if there -- so this just takes us back to where before last year's 7% reduction but nothing else beyond that.

Jane O'Hagan

That's right.

Jeff Kauffman - Sterne, Agee

Okay, second question. Fred if I interpret your comments correct on the run rate on the export potash being a little bit below what it's been, export potash was still a bad market in the second half last year. So it's not to say that you still don't have better year-on-year comps in the second half even with a slightly lower run rate. Am I thinking about that right?

Fred Green

I clarified two ways Jeff. One is -- your summary is absolutely correct. I do believe that you are going to see a strong second half relative to things that we experienced in '09 but I really am going back to what the potash shippers underlying Canpotex are telling us as recently as weeks ago.

They've identified a set number. They believe the markets are there. Obviously just like some of the other bulk commodities when people have gone from year long or multi year pricing agreements back to 30 or 90 days, they can't give us the visibility of exactly what sale will occur to what country at what point.

They have to basically work the marketplace, gain the sale and we become aware of it. So that's back to nimbleness and agility. But all in, these underlying potash companies are basically making statements publically that they believe they will move x amount of tons over period of time and that's the communication we have and we are preparing ourselves to move it, albeit not perfectly smooth every day of the week or every week of the month or every month of the quarter. It's going to be a little choppy. So what? We'll figure out how to work it and we've shown our ability to do that.

Jeff Kauffman - Sterne, Agee

Okay, great. Again congratulations and thank you.

Fred Green

Thanks Jeff.

Operator

Your next question comes from the line of Jason Seidl with Dahlman Rose. Please go ahead.

Jason Seidl - Dahlman Rose

Thank you. Hello everyone. Two quick questions. You talked about targeting 3% or 4% gains on pricing. Is that excluding the 7% adjustment to grain or including it?

Kathryn McQuade

No, that would be excluding it. So we would be targeting 3 to 4% and as I indicated our price went positive this quarter and we expect positive price for the remainder of 2010 and the 7% price will help us to deliver that as well.

Jason Seidl - Dahlman Rose

Okay, fantastic. That's good in the clarification. Also, if I can just circle back to the short haul intermodal business that you guys walked away from; can you clarify why the business was walked away from?

Fred Green

Jason, that was a piece of business that was very short haul and very much out of balance between the U.S. ports and Canada. So, the consequence was it became quite inefficient for us to participate in because you're ending up hauling either huge numbers of import containers from a port in the U.S. Northeast into Canada and then weeks later you might get a huge movement the other way. But it was a lot inefficient movement. So we elevated the expectations between our self and the client with regard to a balanced movement which is good from railways and we were unable to find terms that were acceptable to both parties and they've found other ways to move it.

Jason Seidl - Dahlman Rose

Perfect. That's fantastic. That's all I have and I appreciate your time as always guys.

Fred Green

Thank you, Jason.

Operator

Your final question comes from the line of David Tyerman - Canaccord Genuity. Your line is open.

David Tyerman - Canaccord Genuity

Yes, good morning. Your employment productivity gains are pretty impressive in terms of GTMs per expense employee. I'm assuming a lot of this is related to the rebound. I'm wondering if you can help me understand how I should think about the kinds of gains that would be sustainable at more normal volume growth rates?

Fred Green

David, it's a complex question because of the mix activities. Depending on the type of business that comes back and how fast it comes back, we're going to find 18%. I agree with your assessment. It was very good. We're delighted with it. But you're not going to see that kind of incremental bump because you're starting to hit the point last year where the recovery was beginning.

All that said and done, you know that we're going to continue to look for longer trains, look for heavier trains. Depending on the amount of bulk that comes back you could well see continued improvement. You will see continued improvement in productivity. But I don't think anybody could expect that level of increase quarter-over-quarter for the balance of the year.

David Tyerman - Canaccord Genuity

Right. Should we be thinking in kind of a long-term sense of more-like, I don't know mid-single digits or low singles? Is that more of a reasonable kind of thing in a longer term context?

Fred Green

Well, I don't think we've quantified it. So I'd hesitate to kind of use this call to make those kinds of predictions. I think directionally, if it's helpful at all David I would say that directionally productivity per GTM is an underlying aspiration in everything that we're doing in product design, everything we're doing in the adoption of new technologies, everything we're doing in our labor negotiation. So, I wouldn't want to quantify it with a little more thought but directionally, you're on the money as far as what we would aspire to deliver.

David Tyerman - Canaccord Genuity

Okay, great. Thank you very much.

Fred Green

Thank you.

Operator

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

Fred Green

Well, very good. Thank you all for spending time with us and we look forward to talking to you next quarter. Bye now.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!