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Canadian Pacific Railway Limited (NYSE:CP)

Q3 2010 Earnings Call Transcript

October 27, 2010 11:00 am ET

Executives

Janet Weiss – Assistant VP, IR

Fred Green – President and CEO

Kathryn McQuade – EVP and CFO

Jane O'Hagan – SVP, Marketing and Sales, and Chief Marketing Officer

Ed Harris – EVP and COO

Analysts

Scott Malat – Goldman Sachs

Walter Spracklin – RBC Capital Markets

Gary Chase – Barclays Capital

David Newman – Cormark Securities

Tom Wadewitz – J.P. Morgan

Cherilyn Radbourne – TD Newcrest

Bill Greene – Morgan Stanley

Ken Hoexter – Bank of America/Merrill Lynch

Benoit Poirier – Desjardins Securities

Chris Ceraso – Credit Suisse

Jeff Kauffman – Sterne, Agee

Scott Group – Wolfe Trahan & Co.

David Tyerman – Canaccord Genuity

Operator

Good morning. My name is Beth and I will be your conference operator today. At this time, I would like to welcome everyone to the Canadian Pacific third quarter 2010 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Ms. Weiss, you may begin your conference.

Janet Weiss

Thank you, Beth. Good morning and thank you 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, Senior Vice President, Marketing and Sales and Chief Marketing Officer; Ed Harris, Executive Vice President and Chief Operations Officer. Also joining us on the call today is Brian Grassby, our VP and Controller. The slides accompanying today's teleconference 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 an additional question, you may re-queue and time permitting, we will circle back. Here then is our President and CEO, Mr. Fred Green.

Fred Green

Thanks, Janet. Good morning, everyone. This morning, we released our third-quarter results reporting an operating ratio of 73.7% and adjusted earnings per share of $1.21, a 27% increase over last year. These results are consistent with our game plan to drive for a low 70s operating ratio as we discussed at our June Investor Day.

It has been a busy quarter and we've made positive progress on many fronts. On the marketing side, we announced the new 10-year agreement with Teck Coal and I believe that the collaboration and hard work by the Teck and CP teams have established the foundation for a very productive working relationship. This should enable Teck to fulfill its stated goal of growing its coal volumes by 50%, a very exciting prospect for both Teck and CP.

On the operation side, we initiated some organizational changes. We are consolidating from 11 service areas to six regions as part of our plan to ensure clear alignment and accountability. This step is an important pre-requisite for our focus on service reliability. And I expect that we will see benefits in 2011 with longer trains and improved on-time performance from Ed and his team.

Finally, on the finance side, in September, we elected to take advantage of today's low-cost financing environment to prefund our pension. Kathryn will tell you more about this, but it is an important building block for our goal of increased financial flexibility.

I'm pleased with the Q3 financial results. We are sustaining our cost performance and continuing to progress initiatives designed to deliver sustainable improvements. I expect to see improvements in both service reliability and productivity from our operations team going forward, which will serve both our customers and our shareholders well going forward.

I’ll now turn it over to Kathryn for our financial results, Jane for an overview of the revenues and then Ed for an operations update. Then I will come back and wrap up with a few closing comments. Over to you, Kathryn.

Kathryn McQuade

Thank you, Fred and good morning, everyone. Q3 was a good quarter with volumes and earnings continuing to improve. We leveraged our capacity, handling 14% more traffic while sustaining productivity and achieving a 73.7 operating ratio, our best OR in 3.5 years. In addition, we progressed our strategic higher priorities to strengthen the balance sheet by improving near-term liquidity with our debt offering and pension pre-payment.

So let's get into the numbers and begin with slide six, which provides a reconciliation of our GAAP, non-GAAP earnings we refer to as adjusted earnings. Reported net income was $197 million or $1.17 per share. When we take out FX on long-term debt and other specified items, our adjusted earnings were $205 million or $1.21 per share. In 2009, there were similar adjustments, as well as a large one-time after-tax gain of $68 million from the sale of properties, which masked our year-over-year improvements we saw this quarter.

Turning to slide seven and the FX-adjusted column on the right side, total revenues were up 18% due to higher volume, fuel surcharge revenues and price. Jane will provide more details on our freight revenues. Operating expense increased 14%, resulting in a 32% increase in adjusted operating income. Our operating ratio of 73.7% improved by 270 basis points.

Moving to slide eight and looking below operating income, interest expense increased reflecting the impact of our new debt issuance – issuances. And you will see a slight uptick in Q4 as well. Income tax expense before FX on long-term debt and other specified items increased due to higher earnings and the effective tax rate of 26% is in the range previously provided.

Looking to 2011, I expect our tax rate to stay in the range of 25% to 27%. The Canadian dollar remains strong and the headwind it created reduced EPS by $0.02 this quarter. Adjusted earnings and adjusted earnings per share were both up 27% over 2009.

Now, let's move to each expense line item starting with comp and benefits on slide nine. In total, including an FX gain of $5 million, comp and benefits was up $43 million or 13%. Volume-based expenses were up only $14 million, reflecting continuing productivity improvement on a 14% volume increase. And we sustained GPMs per average active expense employee at $4.4 million. Expense employees for the third quarter came in at just under $14,000 and should remain at a similar level for the rest of the year.

Incentive compensation was higher due to better corporate performance and a higher stock price. Performance-based compensation should be slightly higher in the fourth quarter versus Q3. Wage and benefit inflation increased this line item $10 million and the year-over-year increase in pension expense remains at $4 million.

We took a minor restructuring charge of $4 million as we continue to implement our structural cost initiatives. And all other items added up to an increase of $5 million, which largely reflects higher training costs and overtime.

Fuel expense was up $32 million, or 24%. Higher traffic volumes drove increased consumption and expense by $21 million. Price increased fuel expense $18 million as our all-in costs were U.S. $2.34 per gallon, up from U.S. $2.07 in Q3 of 2009. This quarter, we delivered fuel efficiency of U.S. $1.12 gallons per 1000 GPM, a sequential improvement from our U.S. $1.13 we saw in Q2 of this year, but below our all-time record last year of U.S. $1.09.

We had some tough compares as we brought back older locomotives that were stored last year. We are still on track to deliver our annual 1% improvement in fuel consumption this year. Other items decreased fuel expense $1 million and finally, foreign exchange was a tailwind of $6 million.

This quarter, purchased services and other was up $17 million or 9%. Volume-related expenses increased this line by $12 million, driven principally by higher locomotive overhauls and Intermodal cost. Maintenance projects were higher by $5 million and we saw other items favorable by $4 million, including some higher IT development costs.

Now, looking at land sales. As mentioned earlier in the year, routine land sales can be lumpy. Q3 land sales came in at $3 million, roughly the same as last year. And we now expect it to be around $20 million in the fourth quarter.

Turning to slide 12, which summarizes the remaining operating expenses, all favorably impacted by FX. Materials were down $2 million with very favorable scrap sales offsetting higher volume-related expenses. Equipment rents were up slightly on higher per diem equipment costs driven by an increase in intermodal and automotive volume. Depreciation was up $2 million due to capital spending.

Turning to slide 13, I would like to highlight our cash since cash flow from operations was dramatically reduced by our voluntary pension pre-payment. Last month, we made a pension pre-payment of $650 million from cash on hand and the proceeds from our debt offering. We took advantage of a historically low interest rates and put our cash to work to ensure we stabilize pension contributions for the next three to five years in the range of $150 million to $200 million.

With volumes returning and disciplined cost management, cash from operations before our pension pre-payment added $771 million. Free cash flow after consideration of our capital program and dividends, but before the pension pre-payment, was a strong $238 million. Including the pre-payment, reported free cash flow is a negative $412 million.

In conclusion, we have a strong balance sheet, which is getting stronger and our commitment to continuous improvement is delivering results that keep our three to five-year goal of an annual operating ratio in the low 70%s on target. We are driving efficiencies by leveraging network capacity with our long train strategy and transforming CP through our structural cost initiatives and investments in the digital railway.

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

Jane O’Hagan

Thanks, Kathryn and good morning. Starting on slide 16, this was our fifth quarter of sequential growth with carloads increasing 1.5% versus Q2 2010. On a year-over-year basis, total carloads were up 14% and as we expected, revenue ton miles or RTMs, were up in line with carloads.

On a currency adjusted basis, revenues increased 18%. In addition to volumes of 14%, fuel surcharge revenues generated approximately 2% of the gain and price and mix contributed 2%. On the topic of price, I will note that renewals in the quarter came in close to 4%.

Now, I’ll walk you through the markets, giving you comments on the quarter, insight on the remainder of the year and some perspective on 2011. For clarity, I will speak to currency-adjusted revenues.

Grain revenues were up 10%. Overall, the cool wet summer in Canada and the upper Midwest resulted in delayed harvest activity affecting overall supply chain fluidity and resulting in a modest year-over-year carloadings increase of 2%.

Recent USDA numbers suggest a record soybean harvest and large corn and wheat crops in the territories we serve. In Canada, the latest production forecasts for the six majors is now at 40.7 million metric tons, a reduction of approximately 16% from last year. In addition, there is variation in quality across the prairie that could become a factor affecting volume.

Grain prices are strong. This means that our grain volume should be robust through the balance of 2010 and into 2011. As we move through next spring, the effects of a smaller crop in Canada will be felt and despite strong U.S. shipments, we’ll likely see volumes slightly under 2010 compares until the 2011 harvest.

Moving to coal, revenues were flat year-over-year. Demand was good but shipments were impacted by a labor situation at one of Teck's mines in August and into September, as well as some capacity issues at the port. We expect fourth quarter coal volumes to be somewhat stronger than Q3 given the resolution of the labor situation and plans to improve port throughput.

As we look into 2011, Asian demand for met coal continues to be strong and this bodes well for exports. On the U.S. front, we will not retain some very short haul movements of approximately 50 and 250 miles. This will result in a reduction in the range of 40,000 carloads annually phasing in over the year starting January 1.

The revenue impact will be limited as the average revenue per car on the short haul business is significantly lower than the average for coal. I know you are all wondering about our recently announced Teck deal. This confidential agreement will go into effect on April 1, 2011.

The agreement was reached through a collaborative effort with Teck about our respective plans and capabilities. It aligns Teck's needs for growth with our need for volume certainty and expansion.

We are partnering with Teck in their growth plans for met coal in the export market over the next 10 years. And we have committed to work together to make those plans a reality. We have the capacity to move Teck's volume and have agreed to provide them with coal chain supply capacity for their future volumes as they materialize.

The agreement will see our share of Teck's westbound volumes increase on the implementation of the agreement in April 2011. Volumes will continue to grow as we enjoy the full benefits of Teck's growth in production in southeast British Columbia.

I’m pleased with the commercial terms of this agreement and believe they reflect a good economic bargain for both parties. The structure provides the flexibility required in a long-term deal that may see a range of economic and marketplace dynamics.

There are various components of total price and yield in this agreement. The right component will be dependent on volume with the benefits of increased volumes shared with Teck. We are excited about working with Teck to achieve their growth plans and to realize our collective vision for the coal supply chain.

Now, turning to sulphur and fertilizers on slide 20, revenues were up 39% on the quarter. International demand for potash was up versus easy compares in Q3 of 2009. Rising commodity prices helped to contribute to robust domestic movements as the supply chain prepares for a strong fall season. Beyond the end of 2010, it remains difficult to predict trends in fertilizer demand, but we remain prepared to move the demand presented.

In our Merchandise portfolio, revenues were up 25%. Automotive continued to be strong despite lapping the start of increased production in Q3 2009. We also saw improvements in mines, metals and aggregates as demand and production improved off of recessionary lows in 2009. Energy-related demand has been positive and we are seeing growth from long haul ethanol movements and in unit trains of Bakken crude oil. In other merchandise sectors such as forest products, we continue to see modest volume improvement.

As we have signaled, we continue to believe the energy-related demand will be positive. In areas such as forest products and autos that are more directly linked to the North American consumer economy, future trends are less clear and economic growth forecasts are weak, tempering our 2011 volume growth expectations.

Turning to Intermodal on slide 22, revenues were up 20%. The increase was primarily driven by strong west coast imports due to some restocking and a more traditional fall peak. Domestic Intermodal volume was up in line with GDP. There is continuing uncertainty about the duration of the improvements in import volume and we will be watching the strength of the fall retail season and consumer confidence. So to summarize, Q3 continued the trend of growth both year-over-year and sequentially.

Looking to 2011, we face a recovery that will be multi-phased and punctuated with volatility. As we lap tougher compares, the rate of growth will naturally slow. We remain prepared to prepare in – participate in any volume recovery and are pursuing the growth opportunities we outlined on our Investor Day. Our focus on service reliability allows us to continue to target 3% to 4% on renewals.

Now, I will turn it over to Ed to give you the operations view.

Ed Harris

Thanks – excuse me – thanks, Jane. As we highlighted at our Investor Day, turning assets faster and more consistently is a win-win, creating better service for our customers at a lower cost operation for CP. That is why I have asked my team to focus on three things, safety, asset velocity and network fluidity.

Moving to slide 25, this quarter, personal safety improved 26% over last year. Our industry-leading train operations, safety, improved 4% in the quarter and year-to-date has shown a 12% improvement. I’m pleased with the intense focus on safety and the progress that has been made by the team. And we are applying that same discipline and intensity through the execution of our strategies to improve asset velocity and service reliability.

Turning to slide 26, coming into quarter three, we needed to regain our momentum and recover from the flooding late June that created network backlogs. To do that, we increased the number of active locomotives to handle volume growth and reset the network. The units pulled out of storage were some of our older, smaller, less fuel-efficient units. As anticipated, our fuel efficiency, as Kathryn noted, was lower than the record performance that we recorded in the third quarter of 2009.

Regaining our momentum also cost us a bit on train productivity as we limited the number of overlinked trains to maximize corridor capacity in the short-term. Despite this, train productivity was very good in the face of higher volumes that came with a change in traffic mix. Specifically, we saw strong growth in our Intermodal and Merchandise segments, which are lighter trains than our bulk designs. That being said, we continue to work on driving our long train initiatives and you can expect continued improvements in train productivity through 2011.

Onto slide 27. We continue to make improvements in key efficiency metrics. Our network speed decreased slightly from volume growth and the lingering effects of clearing out the backlog of trains. However, the other key metrics did show very positive results.

Our terminal dwell time improved 5%, which is a great result given the increased work levels. Our labor productivity, as measured by GPMs per employee, was up 10% and our car miles per car day improved 8%. You have heard me say this before, but I want to again reinforce that car miles per car day is a critical metric because it reflects the productivity of key assets, yards, network and rolling stock.

It is indicative of doing a lot of things right and we’re setting the table into next year for individual car service plans and scheduling our bulk operations. I’m pleased with our early results, but know we can and have much more to do.

Onto slide 28. We are also continuing our efforts to go further on structural costs. We are in the process of organizational layering aimed at improving accountability and speed of decision-making. We’re consolidating 11 service areas down to six regions. The changes will increase the effectiveness of my organization, remove field redundancies and drive responsibility and accountability right down to the first line supervision.

To sum up on slide 29, our main focus will continue to be improving asset velocity through a focus on yards, executing our long train strategy and in the short-term, changing our management structure to enable continuous improvement in productivity, efficiency and service reliability.

I will now turn you over to Fred to close.

Fred Green

Thanks, Ed. I will summarize by saying that this quarter CP posted solid results, sustaining the improvements we’ve made and are taking action that will enhance service and reduce structural costs going forward. As you have heard from Jane, we are poised to respond to changes in customer demand and we’re excited by the prospects for growth and efficiency that underpin our new arrangement with Teck.

Looking to 2011, our efforts to deliver sustainable improvements in safety, service reliability and cost performance will continue by simplifying processes and adopting and leveraging technology will increasingly drive the digital railway, delivering value to all of our stakeholders. This is a very exciting time for our company and our industry.

Now, I’m going to turn it over to Beth to answer any questions you may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Scott Malat, Goldman Sachs. You may go ahead.

Scott Malat – Goldman Sachs

Good morning. Thanks. I was just wondering if you could help us think through the mix impacts in the quarter. It seems like there were some negative impacts in mix that you had to work through. Take us through that?

Kathryn McQuade

I would say that, by and large, mix was not so much a factor in the quarter. What we saw was a return to our more traditional long-haul loads, including our export potash. Any mix change that you might have seen in terms of, say, revenue per RTM was again a function of this long-haul business and a function of the FX headwind that we faced.

Scott Malat – Goldman Sachs

Okay. Thanks. That’s helpful. And then just on the Teck Coal contract, I was wondering about anything you can give us on the timing and magnitude of any CapEx needed to support any of Teck's growth plans. Thanks.

Fred Green

Scott, it is Fred. I think that the arrangement is probably best understood. It is such an upside opportunity for Teck and for ourselves that the commitments that I’ve made to my counterpart is that we will create the capacity in advance of their delivering on the volumes, if I can phrase it that way. Teck is making substantial capital investments. And I don't want to put words in their mouth, but I think if you research them, you will find that it is literally hundreds of millions of dollars over this year and next, which will create that capacity to produce the coal. And my commitment to my counterpart is that we will be there with capacity when they have got the coal to move.

So I think what you should think about is it is a gated set of investments over the course of time with a combination of intent, part of which is geared at productivity for both parties, part of which is geared at moving more volume. So think of it as a gated set of investments for the benefit of moving what could be a 50% increase in Teck's volumes.

Scott Malat – Goldman Sachs

That's helpful. Is there a way that you can kind of frame how much more capacity you have today, is there 15%, 20% right now that you have available?

Fred Green

Well, again, I think we’ve to be cautious not just to look at Teck in isolation because if it was just – say could we go do it tomorrow? The answer is absolutely; we can meet the needs of our major client. But part of what we have to do is also look at the many other aspects of business, whether it is potash or whether it is containers or grain. So we have capacity, we can meet any short-term needs, we are going to get ahead of the curve, stay ahead of the curve for all of our clients with capacity going forward. And we will just pace that and gate that out in a fashion that it doesn't have this big front-end load to it, but rather a thoughtful sequential series of investments to meet the demands as they arise.

Scott Malat – Goldman Sachs

Okay. Thanks.

Jane O’Hagan

If I could just add to Fred's point that that is the basis of the collaborative agreement that we have with Teck over the next 10 years is to sit down and collaborate on the appropriate investments to achieve a division of a low-cost supply chain that Teck is aiming for.

Scott Malat – Goldman Sachs

Thank you.

Fred Green

Thank you. Hello, operator.

Operator

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

Walter Spracklin – RBC Capital Markets

Thanks very much. Good morning, everyone.

Fred Green

Good morning, Walter.

Walter Spracklin – RBC Capital Markets

So just to continue on the Teck deal here, I know it is confidential, but we are starting to hear a little bit of, sort of, kind of differences on what the base rate is going forward. Just for our own purposes, is it fair to say that we should reflect the forward base rate off the recent FOA or is there any reason why we should adjust that either up or down when we look at driving the rate on this deal going forward?

Kathryn McQuade

Again, Walter, I think the best way to look at this deal is that the rate portion of the total price is going to be tied to CP long-haul volume. And basically that the rate structure will share the benefits of the total volume growth with Teck as the volume materializes.

Walter Spracklin – RBC Capital Markets

I guess my question was just say volumes are flat, would the rate be flat compared to last year?

Fred Green

Maybe put it to you this way, Walter, if volumes go down, the price goes up. If the volumes go up, the price goes down.

Walter Spracklin – RBC Capital Markets

Okay. Then congratulations on that deal. That must have been a big relief for you guys. Second question here on your – I guess a general question on your guidance plans. I know you used to – when you did your Investor Day in November, you used to give us guidance for the following year. I guess my specific question is do you intend on providing 2011 guidance at any point? And I guess as a corollary to that, given you've got some pretty good OR trends here already done in the third quarter around the 73% level. Do you see some flex to that three to four-year guidance as potentially coming in earlier than what you anticipated?

Kathryn McQuade

So Walter, I think I will take this one. In terms of guidance, we’re not seeing any need to bring that in the public domain at this time. I think, we get really good clarity around the makeup of our costs and give enough information that allows you some pretty good modeling. And so for us, with the volatility in the economy, I just don't see any reason to be out there with guidance at this point, when and if maybe the economy is stabilized, that may be a decision at a later point.

In terms of operating ratio, I think the important thing to remember is we have seasonality in our operating ratio. And so when we talk about an OR in the low 70%, we are talking about an annual OR, third quarter tends to be one of our better ones. So we are making great progress, we are well on the way of meeting the three to five-year target, that’s a long number of years as well. But we also have the pension headwinds that will continue to be ahead of us over the next three to five years as well.

Walter Spracklin – RBC Capital Markets

Okay. That's great. Thank you very much.

Operator

Your next question comes from Gary Chase, Barclays Capital. You may go ahead.

Gary Chase – Barclays Capital

Just one for Kathryn, if I could and then one for Ed. Kathryn, you talked about the pension headwind. I just wondered if, is there something that we don't maybe understand about the accounting? It would look that the funding that you’ve completed here is going to be accretive next year. Is there some reason that that wouldn't be the case? I mean it doesn't look like much has gone on with bond yields this year.

Kathryn McQuade

Well, actually, the bond yields have gone down this year. So that will continue to be a headwind for us. And of course, I am not in a position to understand where it will be at December 31, which is the critical date. So we will give guidance on our pension expense in January when we release fourth quarter. But then we will have the certainty around where the stock market and our equity returns close, as well as on bond rates. So those are two critical things that do hit us with the pension expense and at today's low rates, it still appears that we will have a fairly significant increase in our pension expense. But you are absolutely correct in the view that the pension pre-payment is accretive.

In other words, what we have seen – what we will see in terms of the improvement in earnings, whatever our base would have been, the pension pre-payment lowered the pension expense more than the interest expense that would have been realized. So it is accretive, but it is off of what base and that will be determined at year-end.

Gary Chase – Barclays Capital

Okay. And then I wondered, if I could ask one of Ed, you mentioned the flooding in the quarter that kind of disrupted the operations. Is there any way for you to give us even a qualitative sense of what might be going on? And we are specifically interested in Merchandise and Intermodal where at least we have always thought that is where you have kind of articulated the largest efficiency opportunities. When you got beyond the recovery, were there data points you might be able to share or could you at least give us your views on how that progressed during the quarter once you got beyond the disruption?

Ed Harris

Well, Gary, as we got through the disruption, naturally we had a bit of a headwind against us. As far as the question regarding Merchandise and – Merchandise business and the mix of traffic, I may have to defer to my commercial partner here. But I can tell you the efficiencies that are out there, we’re gaining a foothold on now that we have got the railroad reset. And we continue to push forward in driving not only velocity but asset utilization as well.

Gary Chase – Barclays Capital

Okay. Thanks, guys.

Operator

Your next question comes from the line of David Newman, Cormark Securities. Please go ahead.

David Newman – Cormark Securities

Good morning, folks.

Ed Harris

Good morning, David.

David Newman – Cormark Securities

Out of your 270 basis point improvement, how much would have been due to volume or the early impact of some of the structural changes and the cost reductions and productivity initiatives that you have undertaken? And secondly, are you still fairly comfortable with $100 million in cost reductions that you can see or are you seeing more out there that you can do?

Kathryn McQuade

This is Kathryn. I will respond I think to all those. Janet will work with you if you want to see some clarity. I think we give great clarity in each line item of what’s going on in terms of volumes, what is going on in terms of initiatives, et cetera. So that is a broad question and you can't categorize everything. We have been pretty clear that we haven't quantified exactly what all the initiatives are, but we are going to deliver upon our OR target. And we are well on track with that, which I think you can see in the quarterly results.

So Janet is there to work through the line items with you for whatever is in the public domain that you may not understand. But I think we have given about as much clarity into that as we can at this point.

David Newman – Cormark Securities

Well, let me just ask you this, Kathryn. I mean in terms of timing, you’ve got a plan out there to get down to the low 70%. How would you view it? Would you view it, I mean, obviously, there was seasonality this summer, but how would you view it in terms of the timing. Do you think it will be a little bit more back-end loaded or will it be a fairly even track down to that level?

Kathryn McQuade

Yeah. David, it is not going to be an even track and one of the biggest unknowns at this point will be the pension headwind that we have…

David Newman – Cormark Securities

Right.

Kathryn McQuade

because we are moving against that. So when we have better clarity on that, I think you will see kind of what the 2011 headwind will be from pension and then be able to model in but until we get that, that is the biggest unknown at this point. But certainly, we have to make capital investments. There is timing of when Ed can completely reset some of the schedules, et cetera as we work through the velocity of the assets.

So everything in a railroad is not linear and so as we – some of them will be capital-based and those will be a little later in coming. Some of them are not. They are just operational and we are driving to that on a continuous improvement basis.

David Newman – Cormark Securities

Okay. And last one from me, of the 2% on pricing, how much would have been directionally affected by the reversal in the regulated green and I would assume directionally given you are going to get the full quarter of benefit in Q4, maybe we will see a little bit of a lift on the pricing heading into Q4?

Kathryn McQuade

Well, at this point, our focus on, for our pricing, is our renewal strategy of 3% to 4% but when it comes to VRCPI, we need to be sure that we separate that from overall pricing because that only is affected on a portion of the book, which is our regulated Canadian grain.

David Newman – Cormark Securities

Right.

Kathryn McQuade

As you will recall, like 60% of our grain is Canadian and of that, two-thirds impacts a portion of that. Of the VRCPI, of the 7%, it will apply on the first half of 2011. And as you know, it applies for the crop year. And so on a quarterly basis it could be different because we are in a dynamic pricing environment.

David Newman – Cormark Securities

Right. Right.

Kathryn McQuade

So again, it is in as part of that, but our target again is 3% to 4% on renewal.

David Newman – Cormark Securities

Very good. Thank you.

Ed Harris

Thank you.

Operator

Your next question comes from the line of Tom Wadewitz, J.P. Morgan. Please go ahead.

Tom Wadewitz – J.P. Morgan

Yeah, good morning. I wanted to see if I could ask you a little bit more on your view on capacity of the system and if you see kind of, say, 3%, 4% unit type volume growth next year, what type of – how well do you handle that with existing capacity? And how much work do you need to do in terms of added headcount or other meaningful cost drivers to handle that type of growth next year?

Ed Harris

Well, Tom, Ed Harris. That’s a long question, so let me just first say that this railroad has plenty of capacity within our Merchandise franchise. As we bulk, as we size towards bulk in Intermodal, certainly we adjust capacity or fill to capacity through trainload and throughput. That being said, moving on to the manpower situation, I can tell you that our strategy in line with manpower will be indeed just that, will be very strategic. Some areas it will be a 1-for-1 ratio. Other areas we'll be ensuring that we've reached our full efficiencies in line with our longer train strategies and our operating plan. That being said, I will relate to the fact that we are indeed hiring now and training now as we speak and that looks to continue on into 2011, to protect those various capacities.

Tom Wadewitz – J.P. Morgan

So would you think that there is a big differential between the volume and the headcount that you add, or how would you look at that? I guess that was a little what I am trying to drill down on.

Fred Green

So, Tom, it is pretty difficult because it is not a homogeneous business, obviously. So Ed differentiated and he said that if our merchandise growth occurs, we can probably do that largely on existing trains. So you wouldn't see a correlation to substantial staff count increases. On the other hand, if you end up with a massive surge of bulk business or container business, they dictate largely incremental train starts and that would have with it an associated set of running trades employees and perhaps some mechanical if you need more locomotives to do that.

So because we don't really have a good picture yet of 2011, because it's still a pretty uncertain economy, I think probably how you should model is simply to say if the economy is going to grow 2% or 3%, whatever number you want to pick, that tends to impact the Merchandise portfolio and it tends to impact most of the retail portfolio which is your international business.

There will be an additional restocking. I would suggest to you we have certainly seen a strong restocking this fall, but I don't think that is a sustainable level of activity on the container side. And then the bulk business, well, it is only good news. If people want to move more grain, potash and coal, we would be delighted to hire more people.

Tom Wadewitz – J.P. Morgan

Okay. And one short numbers question for Kathryn. The gain on the total return swap, is that offset by a change in stock-based comp so it is not really a pure benefit from that? Or how would you think about the impact to P&L from the 8 or 8.8 million gain on the total return swap in the quarter?

Kathryn McQuade

So total return swap does offset comp and benefit as prices go up. But again, not all of our stock-based comp compensation is covered. So we are about in the range of what I have given consistently on, as our stock price moves $1, it is about 1.5 million to 2 million. It does work within ranges, but that is probably a good range to work it in. So there are other things in the performance-based compensation, which is performance-based as we continue to improve our operations and our profitability that is also driving that incentive line.

Tom Wadewitz – J.P. Morgan

Okay. Thanks for the time.

Ed Harris

Thank you.

Operator

Your next question comes from Cherilyn Radbourne, TD Newcrest. Please go ahead.

Cherilyn Radbourne – TD Newcrest

Thanks very much and good morning.

Ed Harris

Good morning.

Cherilyn Radbourne – TD Newcrest

I wanted to come back to the pension issue for just a moment and just wanted a reaffirmation that pension expense – I guess your best guess based on information right now – would be that the trajectory is going from $37 million in 2010 to $150 million in 2013, which is what you gave at the Analyst Day and curious whether the pre-payment that you made in the quarter gives you any flexibility to reduce your cash funding over the next three to five years.

Jane O’Hagan

So, Cherilyn, 2013 is really – I am having trouble trying to figure out what is going to happen at the end of the year, so 2013 is pretty far out. We do have a couple of things working with us on the pension, which in addition is our demographics as well, which will impact pension expense. So there are a lot of different moving factors, but whether it will be $150 million in 2013, we aren't sure. It will depend on what long bond rates are and our equity returns are. We tried at the Analyst Day to give some range of it and also indicated it is not a linear one as well. So it’s not – it increases $50 million every year.

So at this point, it would be – we know we are heading the headwind, we know it is going to be significantly higher than the $37 million we have this year, but what that will actually end up being is a continual calculation. So once we get better clarity, we will give you the 2011. I think the 2013 that we gave is what we are thinking about could be worse case, but again if there is another stock market crash or some other uncertainty, I don't know about 2013. So I think we are still good at leaving it within that range, but certainly our pre-payment has gone a long way at helping mitigate the headwind there.

Cherilyn Radbourne – TD Newcrest

Okay. And on the cash funding side, presumably that gives you some more flexibility. Would you envision taking advantage of that flexibility?

Kathryn McQuade

It is going to depend on what our free cash flow is, what our capital needs are. That is exactly why we did it. Right now, we feel very comfortable with leaving our – 150 to 200 also includes your normal costs as well, so that runs about $70 million. So how much we choose to use of the pre-payment will be a function of the economic climate in that year and our capital needs. So that was the whole purpose of our pre-payment. Right now, we estimate this is what we want to keep it in, but if circumstances change, we could choose to do more or less.

Cherilyn Radbourne – TD Newcrest

Okay. That's really helpful. Last question from me, I just wondered if you could make some comments on the preliminary report out of the Canadian Rail Freight Services review and just your perspective on the findings.

Fred Green

Well, Cherilyn, I think the report has got a lot of parts of it that we think are rather editorial in nature with regard to some of their commentary about the behaviors of the railways and they are not substantiated. In fact the research that was done on behalf of the group actually is contrary to the statements made in the report. So that part is kind of odd in our view. But I think if you look at the essence of what the Rail Service Review was meant to do, it was meant to ensure that the full supply chain, not just the railroads, the full supply chain was taken into consideration on how it is that we can best make the Canadian economy efficient from the purposes of transportation and rail services part of that.

And I think the intent is understood and I think the behaviors of the Canadian railroads has certainly acknowledged that with some of the work that we have done on first mile, last mile, some of the work we have done on our contractual and mutual agreements with the terminal operators. These are all efforts to try and bring transparency and visibility to each other.

And the difference here is that the tone that some people would choose to put on it would be let's beat up the railroads, but the reality is it is a complex supply chain and the behaviors of other parties affects the ability for the railway to perform well. And that is why the mandate of that Rail Service Review included the full supply chain. It was not meant to simply beat up the railroads.

So we take exception to a lot of the editorial unjustified unsubstantiated statements. However, the intent of the agreement as provided by Transport Canada as opposed to the panel we fully understand and we are very supportive of because the more efficient the supply chain is, the better we are going to be and the more efficient we are going to be as a company and we want to be not just part of that, we want to be stimulating that.

Cherilyn Radbourne – TD Newcrest

Thanks very much. That’s all my questions.

Fred Green

You’re welcome.

Operator

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

Bill Greene – Morgan Stanley

I just wanted to follow up on the OR question. When you gave your guidance back at the Investor Day, obviously you had sort of a long-term view and it sort of made sense in the context of where the industry was, but since then, we have seen a number of your peers go into the 60s and even give guidance for that. Does pension expense explain all of the structural reason why you couldn't be in the 60%s or is there something more to it and is there room for you to revise this as we go?

Kathryn McQuade

Bill, Pension expense does differentiate us to some extent from the U.S. carriers who have lower retirements and their defined benefit pension plans are essentially top-up plans. So the two Canadian rows do have a different pension situation than what you would see in the .US.

Can I tell you that Fred is not driving to a 60s operating ratio? Absolutely, what we put in the market is what we can see at this point and where we believe we know we have confidence that we can deliver an operating ratio on an annual basis. But three to five years is pretty far out there, so we will constantly be driving for continuous improvement and driving our efficiencies. And if we choose to adjust that in the later time then that will be, but that is what we are confident in right now.

Bill Greene – Morgan Stanley

Okay. Maybe I can ask a follow-up. Canpotex announced that they have got sort of a new deal with an Asian customer. And I am just not clear how to think about what that means for CP. They talk about it being a longer-term deal. I think in the past, they have had some shorter-term deals. And so maybe you've got more visibility, but how do we think about how this flows through for you in terms of rate and volume?

Fred Green

Bill, the relationship between Canpotex and its clients is not something that we would necessarily be involved in. We might or might not be aware of it. It kind of varies by circumstance. The way you should probably think about anything involving Canpotex and CP is that there is nearly two years to run. We have an incredibly good relationship and that we are very excited by the possibility that they are going to start to sell a lot more potash offshore, taking them back perhaps even into the zone of where they were in '6, or '7. So it is an exclusive contract. If they sell it, we are going to move it and that’s got to be a good thing for everybody.

Bill Greene – Morgan Stanley

Okay. Thanks for the time.

Fred Green

Thank you.

Operator

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

Ken Hoexter – Bank of America/Merrill Lynch

Yes, thank you. Good morning. Ed, you talked about the train lengths falling just a bit maybe due to the floods and some other issues. Can you talk about how that has rebounded as we've moved past that and as we enter the quarter? And then as you talk about kind of the productivity potential, can you kind of refresh us on what you still have in terms of parked equipment on the side?

Ed Harris

Okay. Ken, let me just say that the longer train plan certainly is still in place. Our current citing extension work that is already underway and scheduled for completion next year, will help us to expand train counts for length. But I have got to tell you, we are not waiting. We have already got a pair that is running along over to Toronto, as well as an opportunity to run even more. I think what – our meets then have to be scheduled and certainly done with a precise approach. Our longer train plan already includes extended service runs, which we can take advantage of with our crews with the current contract. So that is already in place and already moving.

In line with the production side or the productivity side, you are right, our metrics were down, but not significantly. Comparing to 2009 is a bit tricky because it was a bit of a lighter year or a lighter quarter certainly. I would point out, in line with just some minor reduction in our train efficiencies, our car miles per car day being up 8% and dwell being down 5% is very, very significant with what we were presented to deal with in this quarter. So believe me, I am very satisfied with our improvements. I see no reason why this can't continue and we are certainly headed in that direction.

Ken Hoexter – Bank of America/Merrill Lynch

Okay. And can you quantify what – how locomotives and cars that are parked down? I don't think I caught that earlier.

Ed Harris

We have approximately 250 locomotives still parked. The preponderance of these units of course are the lower horsepower, smaller type engine, four axle engines and stuff, but that is basically where we are at today.

Ken Hoexter – Bank of America/Merrill Lynch

And cars?

Ed Harris

And cars, almost 10,000 parked overall in the network.

Ken Hoexter – Bank of America/Merrill Lynch

Is there any commodity that you are really testing your capacity on? Is there anything that you have already pulled out and you need to go get more intermodal cars or grain cars?

Ed Harris

No, no. Hopefully, it will just go the opposite way. No, we are doing fine.

Fred Green

So Ken, I will jump in and just say that we think probably the single greatest opportunity is car miles per day creates that capacity. So success would be not having to pull many cars out. It would rather be driving the car miles per day up, which creates capacity. And that is pretty – well, Ed and his team are headed down that path.

Ken Hoexter – Bank of America/Merrill Lynch

Great point, Fred. Thank you. Thanks, Ed, for that. Just my follow-up for Jane, on the coal side, I just want to understand not so much on – I guess you talked a bit about the Teck volume increase potential and then also on the short-haul lost contract, are we – obviously that was high volume, but low yields and thus low margin. Are you looking to more than offset some of that volume or I just want to understand how we should think about kind of carload levels as we move into 2011?

Jane O’Hagan

What I said in my remarks, starting January 1, we will start to experience about 40,000 carloads of short haul and again, I'll remind you, it's very short haul. So again the revenue impact is there again. Our focus is always to be out there looking for opportunities in the marketplace.

Fred Green

I think, at this time, Ken, though what it comes down to is we haven't replaced the short-haul traffic yet. So as Jane and her team have success, we will let you guys know. But unless we end up with something more, you should probably assume that you will see those short hauls disappear.

Ken Hoexter – Bank of America/Merrill Lynch

Great. Thanks for the time.

Fred Green

Okay.

Operator

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

Benoit Poirier – Desjardins Securities

Good morning. First question, Kathryn, is related to the CapEx. I mean when we look in terms of your – for the guidance this year, $750 million to $800 million, I am just wondering what is the incremental CapEx you should spend per year in order to get the operating ratio in the low 70s in the next three to five years.

Kathryn McQuade

Yeah, so Benoit, in our Investor Day, we are targeting I believe it is 16% to 18% of revenues, but we are also very clear that they could be chunky and some years may be higher percentage than that, but in kind of on a normalized basis, we would be targeting that. Because we have some initiatives that have some very high rapid paybacks and return, we will accelerate because we have a strong cash position and deploy that capital in these high returning projects as quickly as we can.

So we will see probably over the next couple of years some higher capital levels, but they will all be great discretionary projects that have high rapid returns and will be quick paybacks in order to help us get to our targeted operating ratio. So, again, we are going to target and keep in that range of 16% to 18%, but don't expect that to be necessarily the same thing every year. It will vary within that and could go above one year and below one year.

Benoit Poirier – Desjardins Securities

Okay. Thanks, very good. And second question, when we look at your operating ratio improvement versus last year, 2.7%, the U.S. peers average about 5.6%. You previously spoke about the pension explanation. But I was just wondering if there is any other elements you could point out to explain that lower performance, Kathryn?

Kathryn McQuade

Everybody has been releasing over the last couple of days and we haven't had a chance to evaluate everything, but we had good leverage in this quarter. I mean we were in the mid-40s in terms of our leveraging and I think that was consistent with others. So it would take sitting down and looking at where everybody got their additional increases or decreases, but I think all we can concentrate is on what we are doing internally and we feel very good about the leveraging that we are seeing as the business is coming back, as well as our structural cost initiatives.

Benoit Poirier – Desjardins Securities

Okay. And maybe just a quick one, if I may. What is the upcoming restructuring charges we should expect going forward?

Kathryn McQuade

The thing that we stressed at Investor Day that we continue to talk about is our demographics. We have huge demographics, I believe, it is 1100 people a year that become eligible over the next five years. So our intention is to draft off of those demographics in terms of efficiency. And I have also spoken very clearly on – restructuring will be done when there are appropriate rates of return on that.

So there will be some situations, which we had in this quarter such as when we were doing some consolidation of functions with the DM&E, as well as some of our staffing departments where it makes sense and so those situations will use it. But otherwise, we will be looking at when the demographics make the decision to take the restructuring correct.

Benoit Poirier – Desjardins Securities

Okay. Thanks for the time.

Operator

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

Chris Ceraso – Credit Suisse

A question for Ed. I know that when you spoke to us at the analyst meeting, you said that one of the primary areas you would focus would be on the yards. Maybe you can talk a little bit about what you found so far, changes that you have implemented and what the next steps are and the kind of gains that you think you can achieve in the yards?

Ed Harris

Chris, I think the biggest impact or the biggest thing we have been able to do is identify that not every car needs to be yarded on every trip. I mean we have generated run through traffic out of Alberta through Calgary, either going to Vancouver, going to the States via Chicago or some of our interchange traffic. I think that has had the biggest impact on some of our dwell efficiencies and improvement in the facility itself. The second area that I would mention would be controlling our inventory and controlling our assets.

Chris Ceraso – Credit Suisse

And as it relates to the RGU, I know I hate this analogy, but are you in the third or fourth inning or how much more do you have to go on that strategy?

Fred Green

I think he is in the first inning.

Ed Harris

Well, there you go. So I have got a lot of work ahead of me. But I am pleased with the progress, all right? At least he has got me out of the dugout. That is a helpful thing.

Chris Ceraso – Credit Suisse

All right. And then just one on headcount. You had also mentioned that there was a fair amount of attrition. Maybe you can just revisit what the expectation is for the number of people that are expected to leave over the next few years and what percentage of those do you think you will have to replace?

Ed Harris

Let me just phrase it like this. I want to steer away from exact numbers, although we do have a number of people that are in training right now. I can tell you right now we are looking at being able to protect our business levels, which we are planning on a 2% to 3% increase there. We are also looking for the productivity improvements and the efficiencies through our longer train strategy, less yard engine assignments, better service offerings. We see an offsetting 2% to 3% improvement as well as that goes. So as we massage the numbers and as we, as I said earlier, as we strategize on where we need to place these people, I feel very confident we have got a good plan in place and we will be able to protect the business well into 2011.

Chris Ceraso – Credit Suisse

Okay. I guess I had the impression that there was a large number of people that were going to attrite over the next few years.

Ed Harris

Well, certainly there are and to that point, the standard attrition will be protected on a one-to-one basis if and when necessary.

Fred Green

So I mean the math is pretty simple. There is about 1100 people a year for the next five years that will retire. That is a combination of supervisors and various unionized employees. A big chunk of those, of course, are running trades employees, which is particularly what Ed was referring to. And then some portion of those would be mechanical or engineering.

And as we talked about at Investor Day, we would very much like to, wherever possible, implement the ready for primetime technologies, the digital railway technologies, whether it is on the engineering side or whether it is on the mechanical so that we don't simply replace people in kind.

So if we can adopt those technologies in a time working collaboratively with our union associates, with the regulators, we can avoid hiring one-for-one in some of those cases and in other cases, of course, we will take – as Ed said, some of the efficiencies on longer trains, etc. will also indicate the need for one-for-one. So there is 1100 people. I would rather not higher them in identical roles, but we can't have 1100 people leave and not hire somebody. So Ed has got a big recruiting program underway and lots of training classes in place right now.

Chris Ceraso – Credit Suisse

Okay. Thank you.

Fred Green

You’re welcome.

Operator

Your next question comes from Jeff Kauffman, Sterne Agee. Please go ahead.

Jeff Kauffman – Sterne, Agee

Thank you. It has been a long call, so I will be quick. One for Jane, one for Ed. Jane, you mentioned that some of the harvest had been delayed this year. Your best guess, last year at this time on a scale of 1 to 100, what percentage of the harvest had you carried versus this year, on a scale of 1 to 100, what percent of your harvest-related carloads do you believe you have carried?

Jane O’Hagan

I mean that is a really difficult question to answer given the late period of this harvest and the fact that farmers were getting the crop off the field only weeks ago. Each period is different, so I would say that the impact here is that there is basically a lot of demand that wants to move to export positions over 2010 for sure. And as I said in my remarks, we are going to see a very robust 2010. I think as we get into 2011, specifically with the Canadian crop as we move towards the spring and depending how yields and all of the other pieces align, we could see that starting to tail off. But again, it is really kind of a tale of kind of two different franchises because the U.S. side is a little bit different in that we have had very good yields in our brochure, so still we see that we are going to have a good 2010 and good 2011.

Fred Green

Jeff, it's Fred. It is important to understand that there are other forces at work, right, so the global demand for grains is a function of the production in Australia, the production in Russia, which isn't a big issue. And as a consequence, you had the forces at work on the stuff not coming off early, but then in addition to that, you had this massive demand for people to sell their product at prices higher than they had been in recent times.

So as Jane said, it is a complex web here and how much we've moved or haven't moved or how much is to move – the summary position is we are going to be busier than heck for the balance of the year and we will probably have a lesser end of Q2, I suppose, next year than we would have otherwise had.

Jeff Kauffman – Sterne, Agee

Okay. No, that was very helpful. Thank you. Ed, you had mentioned that there were a lot of costs related to the soggy Saskatchewan so to speak and you showed how it hit productivity. I guess my question is how long did this last and at what point do we start seeing some of these productivity hits with shorter trains, lighter trains, older locomotives start to reverse?

Ed Harris

Well, I think you can start seeing the reverse right now. You have to remember one thing, Jeff. It was indeed an aberration, a 100-year flood or whatever the situation was and you can relate to not only resetting the network, but imagine the amount of lost car days experienced when we couldn't get grain to the elevators and lost production there and just trying to get caught up and get caught up quickly, which is a hard thing for this industry to do, as we all know.

So the aberration is certainly behind us. We are proceeding full speed ahead and you will see some of the power heading back based on normal fourth quarter flows, which business is good. So it will start going back and we will get rid of some of our older, less efficient models and go back into storage with them.

Jeff Kauffman – Sterne, Agee

Okay. But it is a gradual process; I shouldn't expect a snapback immediately in the fourth quarter?

Ed Harris

We are headed that way, believe me.

Jeff Kauffman – Sterne, Agee

Okay. Thank you very much and congratulations.

Ed Harris

Thanks.

Operator

Your next question comes from the line of Ed Wolfe, Wolfe Trahan & Co. please go ahead.

Scott Group – Wolfe Trahan & Co.

Hey, good afternoon. It's Scott Group in for Ed.

Ed Harris

Hey, Scott.

Scott Group – Wolfe Trahan & Co.

So you guys have been talking pretty consistently in the past few years about pricing renewals of about 4%. Yet the reported pricing number each quarter continues to be a good amount lower and closer to 2%. And I would have thought now that we are behind the Teck Coal and the regulated grain headwind that that pricing number would have been a lot closer to the 4%. What is driving that disparity at least in third quarter and what do you think about going forward?

Kathryn McQuade

Well, I think the first thing I would tell you is that, again, we are priced positive and on a same-store basis, we are close to 3%. Again, we have a good product. We believe we have put good value into the marketplace and we are targeting 3% to 4% on our renewals.

Fred Green

Scott, I am not sure you're taking into account – the total overall price is a function of renewals, as Jane says, but it also has a component of indexes in it, right? So just as you found with other railways, if you have got substantial portions of your business that are on multiyear contracts or some form of index, the indexes have not been coming in whether it is RCAF or any other index, they have not been coming in quite as hot, exclusive of fuel because we are being compensated for fuel independent.

So you have to look at the weighted average to say, yes, the renewals are coming in closer to 4%. We are doing 3% overall and that means that some of the indexes are coming in somewhat under that and that is quite anticipated.

Scott Group – Wolfe Trahan & Co.

Okay. That's helpful. And then just a follow-up for you, Fred, on the Teck contract. I think you mentioned earlier in the call that something to the effect of tremendous upside over the next 10 years from that contract. When we think about that upside, is it really just a volume story or are there real pricing or cost potential on top of what you expect to be real robust volume growth? How do you bucket those three pieces between price, volume and cost?

Fred Green

Well, I think, Scott, the way I would look at it is that we have purposely sat down with our partner and tried to figure out how do we motivate and incent each other. And so I am very pleased with the arrangements. I don't think anybody should look at this as an opportunity for prices to go up beyond the – we will call it an index arrangement. I think what one should look at is, if you can move 00 take a 20 million ton customer and increase it by 20%, 30%, 50%, that is a heck of a lot of volume over largely fixed plants and overhead.

So the benefits for our associates are that we want to see them move a lot more. We want to incent them to move a lot more and the challenge that we have is how do we now take the supply chain and make it even more efficient than it already is and maybe there is some benefit to our company in that if we do that really, really well. So my point is we still have the opportunity by working collaboratively to improve the margins on the business. We just may not do it purely by price increases.

Scott Group – Wolfe Trahan & Co.

Got you. Okay. Great. Thanks for the time, guys.

Fred Green

Thank you.

Operator

Your final question comes from the line of David Tyerman, Canaccord Genuity. Please go ahead.

David Tyerman – Canaccord Genuity

Yeah, good morning. Two quick things. First, on the CapEx, your guidance is unchanged, but you are only at $444 million for the first nine months. Is there the potential here for you to come under the $750 million to $800 million?

Kathryn McQuade

Right now, we are projecting we will be in the $750 to $800 and there are some back-ended loaded things that are being completed. So right now, it looks like we will be in that range.

David Tyerman – Canaccord Genuity

Okay. And then on the pricing side, just looking sequentially, there were some pretty significant changes in three areas. Just wondering if I could get some comments on that and whether they imply any sustainability going forward. In particular, forest products is up 9% sequentially and I am talking revenue per revenue ton mile. The industrial and consumer products were down pretty substantially and then the autos were up pretty substantially, especially on the year-over-year. So is there something that has changed here in any of these that we should think of these as new levels?

Jane O’Hagan

I would say that, as you look at each of the items – certainly, in forest products, we are seeing the impact of extended length of haul and just longer haul traffic as we look at replenishment. In the industrial product side, again, some of the impact that we experienced on this is on FX because it is primarily a U.S. denominated book of business. And then on the auto side, again, this comes down to a question again of mix where we are seeing certainly increased volumes through the Port of Vancouver and also some increased volumes on the Ontario through the U.S. side.

Fred Green

So David, if I could kind of wrap that up because your question was is there a pattern that we should monitor, et cetera. I just suggest to you that the really massive volatility on autos, on housing starts, on some of the industrial products can have a huge impact on revenue per RTM or revenue per carload during these volatile periods. So I would not jump to any conclusions about pattern having been established.

I would simply say let's monitor that and see directionally where that goes over the course of time because we really do have some big chunks of traffic arriving and disappearing. It just completely changes these numbers and they are not as relevant. What is really important, as Jane said – look, on renewals, we are getting that number and on our indexes, we are obviously getting numbers that are in that 2% to 3% range as well. So please don't read too much into that. It is really a giant mix equation going on for all of us right now.

David Tyerman – Canaccord Genuity

So if we were thinking of modeling on the basis by line item, should we be thinking in terms of maybe last 12 months type of trends?

Fred Green

There has been a lot of volatility out there, so I would suggest – that is a very broad statement to say yes or no to. I would encourage you to work with Janet and the team and we can provide our kind of hot-cold as far as what we think is more realistic because I can't say, sitting here today, whether what you're seeing in the last 12 months is in fact representative of what might have been the previous three years. I'd like a little more context before we make a statement like that.

David Tyerman – Canaccord Genuity

Okay. That's fine. Thank you.

Fred Green

You’re welcome.

Operator

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

Fred Green

Well, thank you, Beth and thank you, everybody, who took the time to spend with us. We are pretty satisfied with the quarter, but a lot more work to do. So we look forward to chatting with you again in a couple of months. Bye now.

Operator

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

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