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Executives

Janet Weiss - Assistant Vice-President of Investor Relations

Kathryn B. McQuade - Chief Financial Officer and Executive Vice President

J. Michael Franczak - Executive Vice President of Operations

Jane A. O’Hagan - Chief Marketing Officer and Executive Vice President

Frederic J. Green - Chief Executive officer, President, Director and Member of Health, Safety, Security & Environment Committee

Analysts

William J. Greene - Morgan Stanley, Research Division

Scott H. Group - Wolfe Trahan & Co.

Ken Hoexter - BofA Merrill Lynch, Research Division

Walter Spracklin - RBC Capital Markets, LLC, Research Division

Cherilyn Radbourne - TD Newcrest Capital Inc., Research Division

Turan Quettawala - Scotia Capital Inc., Research Division

Garrett L. Chase - Barclays Capital, Research Division

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

Kanchana Pinnapureddy

Benoit Poirier - Desjardins Securities Inc., Research Division

Christian Wetherbee - Citigroup Inc, Research Division

David Tyerman - Canaccord Genuity, Research Division

David F. Newman - Cormark Securities Inc., Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Jacob Bout - CIBC World Markets Inc., Research Division

Canadian Pacific Railway Limited (CP) Q3 2011 Earnings Call October 25, 2011 11:00 AM ET

Operator

Good morning. My name is Alicia, and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific's Third Quarter 2011 Conference Call. [Operator Instructions] Ms. Weiss, you may begin your conference.

Janet Weiss

Thank you, Alicia, and good morning and thanks for joining us. The presenters today will be Fred Green, our President and CEO; Jane O'Hagan, EVP and Chief Marketing Officer; Mike Franczak, EVP of Operations; and Kathryn McQuade, our EVP and Chief Financial Officer. Also joining us on the call today is Brian Grassby, our Senior Vice President, Finance and Comptroller. The slides accompanying today's teleconference are available on our website.

Now 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 2 and 3 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 4.

Finally, when we do go to Q&A, in the interest of time and in fairness to your peers, I'd ask you to limit your questions to one primary question. If we have time and you've got additional questions, you can re-queue and, time permitting, we'll circle back. Here then is our President and CEO, Fred Green.

Frederic J. Green

Thank you, Janet. Good morning, and thank you for joining us. This morning, CP reported third quarter diluted EPS of $1.10, which includes the $0.04 of expense related to the early redemption of our 2013 notes. Sequentially, EPS grew by 47%, and our operating ratio improved by 600 basis points as we transition from the first half challenges back to a normal operation.

As you'll hear from the team, our third quarter is a two-part story, with our results in the first half of the quarter reflecting the end of flood-related challenges, which extended through July, and the start of normalized operation. Our results in the second half of the quarter reflect a railroad back in its rhythm and gaining momentum. I'm satisfied with our progress and I'm particularly pleased on 2 fronts: service where our on-time performance of our most time-sensitive traffic improved to well over 90%; and yard and train performance, whereas you'll hear from Mike, we're driving efficiency improvements on several fronts. There are many puts and takes in the quarter's results, but the key takeaways of the railroad is now back and on a path of steady improvement. I'll also note that the October metrics are even stronger than September, and that Mike and his team are delivering a great product for Jane and her group to sell.

I'm going to turn it over to Jane, Mike and Kathryn to provide more color on our results and outlook, and then come back and wrap up with some concluding thoughts. Over to you, Jane.

Jane A. O’Hagan

Thank you, Fred. Good morning. Starting on Slide 7, with an overview of the revenue performance in the quarter. Overall, freight revenues improved 5% for the quarter, with revenue ton miles up nearly 4%, as positive mix continue to drive growth. On the quarter, the FX impact was minus 3%, so on a currency adjusted basis, revenues grew 8.2%. Fuel surcharge revenues generated nearly 5% of that gain, and the combination of price and mix was nearly 6% offset by the reduced carloads of 2.5%. Renewals and same-store price are tracking in line with our previously stated targets of 3% to 4% and 2% to 3% respectively, and we expect the trend to continue for the remainder of the year.

I'll now move to a summary of the market performance and provide some perspective on future quarters. For clarity, I'll speak to currency adjusted revenues. Grain revenue was up 1% on 3% fewer carloads, with strength in Canadian grain offsetting reduced demand on our U.S. franchise. Our Q3 Canadian grain carloads were driven by increased market share and strong global demand for canola and high-quality wheat and durum. In fact, since the start of the new crop year on August 1, we have originated on average 13% more carloads per month than the same period last year. This speaks to the strength of our customer relationships, our elevator network and the scheduled grain operations model.

The Western Canadian grain harvest is essentially complete, and estimated production for the 6 majors is about 45 million metric tons, up 6% from last year. Markets for Canadian grains are strong, so looking through this fall and into 2012, the combination of production, carryover stock and our improved operations should enable year-over-year growth.

As we move to mid-2012, compares will get tougher as we start to lap our improvements and shippable grain supplies dwindle, we'll feel the effects of the nearly 6 million unseeded acres bias to CP's Southern Prairie rail network. I'll also remind you that effective August 1, the grain revenue entitlement for the crop year 2011, 2012 was increased by 3.5%. The revenue entitlement is volume-variable, and the 3.5% increase is the average for the crop year, but our pricing can and does vary over the course of the year.

Moving to our U.S. grain franchise. Flooding and late-season weather have reduced the quantity and the quality of the U.S. Midwest harvest. Overall, crop production in the areas we serve is estimated to be down roughly 1% versus last year, with wheat production in North Dakota down substantially. With global supplies of feed grain competing with U.S. corn and soybean, the U.S. experienced a soft export market in the quarter, which resulted in an 11% reduction in the carloadings compared to Q3 2010. Looking forward, lower U.S. wheat production combined with volatile corn and bean export markets make forecasting through the first half of 2012 difficult.

On coal, revenues were up 26% on a 2% carload increase. Canadian export coal volumes coupled with the new PRB export thermal coal movements we referenced in Q2 have offset the reduced short haul U.S. carloads. As noted last quarter, we are on track to move more volumes in the second half than the first half of 2011 with average revenue per car continuing at about the current run rate.

Looking to 2012, the long-term demand fundamentals remain in place and Teck has indicated they will continue to ramp-up production capabilities. We are watching the near-term economic condition, but to date, rail demand has remained positive.

Sulfur and fertilizer show continued strength, with revenue up 28% and volume up 16%. Overall, 2011 demand for potash and fertilizer has reduced -- to returned to historic levels driven by global agronomic requirements and high grain prices.

Q4 domestic fertilizer demand is coming in flat versus 2010 with fundamentals signaling flat to marginal growth for 2012. Q4 export volumes remained strong. The year-over-year unit comparisons will toughen as we begin to lap the export demand improvement that was ramping up in Q4 of last year. The fundamentals of strong grain pricing and agronomic needs are in place. We believe this will continue to support export demand into 2012 at the levels we are currently experiencing.

In our merchandise portfolio, carload growth was 4%, with revenues growing 16%. Industrial products led the way with revenues up 18%. Forest product revenue grew 13% and autos were up 12%. Industrial product continues to be primarily an energy story. The Bakken and Marcellus Shale are providing year-over-year revenue uplift, and we continue to capitalize on the inbound materials growth associated with the development. On forest products, growth was driven by increased pulp demand, while lumber was relatively flat. In autos, with the return of normal auto production, we have seen more typical movements as compared to last quarter. Looking forward, we expect sales and production levels will drive solid improvement in autos for Q4, but the rate of growth will slow given the most recent forecast of auto sales for 2012 being in the low $13 million range.

Overall, CP's AAR carload growth in merchandise has been in line or better than the other class one railroads. I'm very pleased with my team's ongoing success in making new markets. This is underpinning an overall GDP-plus growth capability for our merchandise portfolio.

Moving to Intermodal. Revenues were down 5% and units were down 10%. The Intermodal story continues to be about regaining customer confidence. Like in our grain portfolio, our Intermodal franchise is characterized by a strong network of facilities combined with deep, long-term customer relationships. Given this foundation, I'm confident that our improvement in service quality will allow us to repeat rate volumes. In fact, we have started to see share return in both our domestic and international business. We will earn back the business by demonstrating service consistency on a sustained basis and through winter conditions. My team and I have been actively communicating to our customers about the improvements in our service, and we've been walking our customers through our winter-preparedness plan to further rebuild their confidence.

Looking forward, the demand uncertainty I spoke about last quarter continues. In the import-export segment, we're seeing some caution on inventory replenishment and weak consumer sentiment that tempers volumes. For domestic, we continue to model GDP-like growth. Our portfolio consists of both food and merchandise, so in combination, we expect stability in the food segment to mitigate weaker consumer demand.

In closing, we're pleased with the recovery of our operational performance, our growth in coal, fertilizers and throughout the merchandise portfolio. Our focus in Intermodal is to continue demonstrating service reliability. In merchandise, we're making our markets in the Bakken and Marcellus Shale. Our low-cost ethanol customer base is well-positioned to compete in markets across the United States. These energy sources are delivering secure sources of supply to the North American market and will continue to develop. Combining these stronger demand segments, with resumed automotive production from the Asian manufacturers, has us modeling GDP-plus growth in merchandise.

Bulk is based on strong fundamental. There are strong pricing in the global grain markets. The Chinese economy continues to grow in the high-single digits, and the existing producers of potash are investing in mine expansions. We haven't seen weakness in the Asian commodity demand, and we're watching, but our customers are indicating they see sustained demand through the fourth quarter and into 2012.

Now I'll turn it over to Mike to speak to you about our operational recovery, ongoing service performance and the winter plans.

J. Michael Franczak

Thanks, Jane, and good morning, everyone. Let me start by saying that Q3 was a quarter of recovery. We entered July still battling floodwaters and exited September with the network in balance and an operation back in rhythm and gaining momentum. You're going to see this in the metrics today.

Despite the challenges, I'm very pleased with the progress we've made delivering improved service and productivity while executing a large capital program focused on network renewal and efficiency. Let's get started on Slide 15. This quarter, train operation safety matched last year's strong performance. However, we saw a deterioration in personal safety. Although most of the increase was related to minor strain-type injuries, these results are not where I want them to be. I'm personally involved with the team in reviewing our safety plans and opportunities, and I'm confident our improvement trend will return as we have both the processes in place and a culture built around personal commitment to safety.

Let's turn to Slide 16. On the efficiency front, we gained momentum as we move through the quarter. As Fred mentioned, during July, we were still managing through some flooding, and our emphasis was on operational recovery. As you can see on Slide 16, while our overall performance was flat to slightly down during the quarter, during the quarter, train speed and car velocity showed steady improvement, with train speed up in the second half and car velocity now back at historic norms.

Turning to Slide 17. We also saw an improvement in terminal dwell of 6%, a result that builds on last year's 5% improvement. Performance continues to improve through October as we realized the benefits of our local service reliability program. Our fuel consumption rate increased slightly. I expect to see improvement in this metric over the coming quarters, considering a more normalized operation, the introduction of 91 new more fuel-efficient locomotives through Q1 2012 and the addition of fuel trip optimizer to 100 of our existing locomotives scheduled for completion by the end of 2012. I remain confident in our ability to achieve a 1% to 2% annual improvement in fuel efficiency over the next several years, with some catch up in 2012 as we lap easy compares especially in the first quarter.

Turning to Slide 18 and productivity. You can clearly see the success we've had in ramping up both train weights and lengths through the quarter. The combination of increased bulk traffic and our long train strategy has boosted train weights by 2%. We're now operating 4 coal sets at 152 car lengths, and during the quarter, we ran 66 potash trains at 170 cars versus none in 2012. You're seeing some of the early benefits of the network improvements we're making to enable productivity and low-cost growth.

Please turn to Slide 19. Locomotive productivity decreased by 3% in the quarter, reflecting the challenges of the early part of the quarter and our decision to sustain a slightly larger fleet to drive improvements and service levels. Employee productivity continues to improve with GTMs per expense employee up by 2%.

And turning to Slide 20, service on our most time-sensitive shipments has improved dramatically and is now back on target. For example, as you can see from the chart, our Intermodal train performance has improved and shipment performance is now exceeding standard. In addition, our ability to meet customer railcar orders and merchandise in grain significantly improved from earlier this year, and we are now back on target. And as noted in Jane's commentary, our scheduled grain program is working extremely well. Our service is back on track and we're driving for even better performance.

Now let's turn to Slide 21 and our winter plan. I know many of you are interested in our winter operating plan and what we've learned from last year's experience. Let me assure you we've taken steps to protect our service. CP has what I believe to be the most robust winter operating plan in the industry. However, last year's extraordinarily harsh conditions gave us added opportunity for learning. We've spent several months enhancing our plan and have elected to increase our contingent resources to further protect and enhance service levels and fluidity. For example, going through the winter, we'll have approximately 500 incremental Running Trades employees on the property. We'll have 61 new AC locomotives, with another 30 coming on in Q1. Any locomotives deemed surplus to the fleet will be placed into warm storage, making them easily accessible and immediately available to the operation if weather conditions trigger an increase in power requirements. Furthermore, we've increased our fleet of snowplows, added additional switch heaters that can be monitored remotely and we've added more snow fencing in high snow drift areas of the Dakotas. There are many, many other changes we've made to protect our service and production plans, and I'm very confident that we're ready.

Moving over to Slide 22. To sum up, as we told you on our Q2 call, key efficiency, productivity and service reliability metrics have shown steady improvement, and I expect that trend to continue. We remain focused on the key initiatives we spoke to you about in June, and our game plan remains unchanged to improve safety, service reliability, productivity and efficiency. I'll now turn you over to Kathryn to cover the financials.

Kathryn B. McQuade

Thank you, and good morning, everyone. As you heard from Mike, Q3 was the quarter of recovery, with normal operations returning by the second half. We saw the same pattern in our financial as our operating metrics improved. Flooding cost us about $7 million this quarter in terms of direct expenses. Additional fuel consumption from added miles and detour costs make up the majority of this amount. However, it is fair to say that disruptions to a network business create collateral impacts that are not readily identified or quantified.

Now let's turn to the financials, and I will walk you through the lines. Let's begin with earnings on Slide 24. Looking at the FX adjusted column on the right, total revenues were up 8%, with price, mix and fuel surcharge offsetting lower volumes. Jane has already provided you the details. Operating expenses were up 11% and operating income was flat to last year. And I will get into the details in a moment. Other charges were higher by $13 million, and I will speak to this on the next slide as there is a little more movement than normal in this line. Interest expense was higher by $4 million, reflecting changes in long-term debt. Income tax expense was lower, with an effective tax rate of 24% versus 29% last year. For the year, we expect the effective tax rate to be around 25%.

Diluted earnings per share were $1.10, and the operating ratio was 75.8%, up 210 basis points.

Turning to Slide 25. Other income and charges were $13 million higher. The charges of $9 million associated with the early redemption of our 2013 Notes we press released earlier in the quarter reduced diluted earnings per share by $0.04. Additionally, there was volatility in the Canadian dollar, which weakens dramatically at the end of the quarter. This led to an increase in foreign exchange loss on U.S.-denominated working capital of $6 million, or $0.03 of EPS.

So let's now move to the expense line items beginning with compensation and benefits on Slide 26. Including an FX tailwind of $7 million, this line item was lower by $29 million, or 8%. The decrease was primarily driven by lower incentive and stock-based compensation of $49 million, which more than offset the other increases. Roughly half of the reduction is due to sharp -- to the share price, which increased in Q3 2010 and decreased this year. Wage and benefit inflation was $9 million. Training expenses were also higher by $9 million, as we continue to bring on new employees to meet attrition and demand needs. The training costs are primarily tied to our crew hiring, and at the onset of the year, I indicated 2011 training would be higher by $25 million. That is still a good estimate year-over-year. Our average active expense employees came in at 14,262, an increase of 2.2%, and we ended the quarter at 14,295. I estimate our year end expense employee count will be about 14,700, about 4.5% higher than we began the year.

Pension expense is higher by $3 million, and other nets to $1 million.

Turning to Slide 27. Fuel expense was up $72 million, or 43%, after a FX tailwind of $11 million. Price increase this line item $69 million with the all-in cost of $3.44 U.S. per gallon, up sharply from last year's price of $2.34. This increase, while substantially recovered in our fuel surcharge program, does put pressure on the OR. Total consumption was up 8 million with higher workload and the impacts of additional miles from reroutes. Efficiency, as measured by gallons per thousand gross ton miles, was 1.13, not where we have targeted, but showing sequential improvement. Other items netted to $6 million.

Purchase services and other was up $14 million, or 7%, including the FX tailwind. IT expenses were $5 million higher. We are seeing this variance narrow as more work becomes -- moves from expense to capital, and a similar run rate will continue in the fourth quarter. Property taxes were higher by $4 million. Locomotive overhaul costs are higher by $3 million with the total number of overhauls up this year, 40%. Dismantling costs were also higher by $2 million, a function of our higher capital program. Detour and weather-related costs were $2 million. Other is a net of $4 million.

Turning to the remaining operating expenses on Slide 29. You will note all had FX tailwind. Materials was higher by $13 million, with $4 million of it due to increased maintenance of locomotives and freight cars, $4 million from lower scrap credits and $3 million from higher fuel prices related to non-freight use. In equipment rents, higher leasing costs were essentially offset by FX gains and depreciation was essentially flat.

Let me take a moment and review a few other items on Slide 30. On the financing side, this quarter, we redeemed our 2013 Notes with a $0.04 earnings impact reflected below the line. In early October, the 2011 debt of USD $246 million matured and was repaid as planned. And in the fourth quarter, we have arranged secured locomotive financing for the units delivered this year of about $140 million at 3.88% for 15 years. The remaining $30 million will be financed as they are delivered in the early part of next year.

Looking at capital, I estimate our spending to be about $1.1 billion, but this will be highly dependent on how late in the year the gains can continue to work. I know many of you are interested in our pension guidance. We have seen a lot of volatility, and much more uncertainty entered the market since we have last met. Pension expense is sensitive to both equity returns and discount rates. And let me remind you, nothing walks in until December 31. I will provide you guidance for 2012 in our January call. But for those of you interested in modeling, sensitivities are outlined in our MD&A and we've added some additional details regarding pension expense.

With respect to cash contributions, the $1.1 billion in prepayment continue to provide us certainty in the near term. This year's contributions will be $100 million at the low-end of our guidance and $125 million to $150 million per year for the next 3 to 4 years.

In summary, Q3 was a quarter of recovery, with normal operations returning in the second half. Mike and the team continue to move forward with their productivity and efficiency projects supported by our multi-year capital programs. While economic volatility appears to be the new normal, the investments we are making will be supported by productivity lifts, as well as modest growth. We are making progress to our longer term goals, which have been mapped by the unusual events this year and remain committed to our low-70s operating ratio. With that, I will hand it back to Fred.

Frederic J. Green

Thanks, Kathryn. And just to sum up the market perspective, visibility to the near-term remains limited, but we remain positive about our prospects in both the bulk commodities and energy sides. And we continue to position the organization for longer-term growth. Operationally, our service is great, and we're looking to build on our recent results. We have more crews and locomotives in place as we enter winter, and we expect this will give us added resiliency and enhanced flexibility should mother nature throw us a curveball. We are resourcing with the bias to service and we stand ready to react to swings in both operating conditions and customer demand. We've targeted improvements in Q4 in service, in productivity, and of course, in financial performance. On a final note, the government of Canada has put forward legislation that will eliminate the Canadian Wheat Board as a single desk marketing agent for wheat and durum. The supply chain implications, we believe, should be minimal. Ownership of elevator and port infrastructure is unaffected and there will be no impact on the regulated grain rates. As Jane described, we're having great success today, and with 60% of the high throughput elevators located on CP, we expect to continue to build on our industry-leading position. With that, I'll turn it over to Alicia for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Turan Quettawala with Scotia Capital.

Turan Quettawala - Scotia Capital Inc., Research Division

I guess, my question was on the Intermodal business. I'm just wondering when you're having conversations with customers, I know you talk a lot about the operating plan as well as how you're trying to source here for winter and how your service metrics are getting better. But I'm just wondering how much are sort of customers willing to have that discussion right now considering that winter is around the corner again? So any more update there will be great.

Jane A. O’Hagan

Well, this discussion is all about service and earning back the confidence of our customers. And really, customers are really willing to have these discussions because it's about defining those expectations and mutually agreeing that the sustainability of and our quality of our product offering is consistent with the original intent and that we've earned back the right to move the volumes. And it's about collaboration, it's about rebuilding and strengthening that relationship. And we're doing that very well right now. Our train performance is also excellent so we're having discussions, we're -- and we are seeing customers returning volume to us now. Our domestic loadings are up in the mid-single digits in the first 3 weeks of October, and the international business is starting to return as well. And so we feel that we're in a really -- we feel very confident that we're going to see these volumes return to us.

Turan Quettawala - Scotia Capital Inc., Research Division

So I guess, should we expect -- I mean, I got the comps [ph], these are in Q1 more so than Q4, but should we expect sort of some growth here in the next couple of quarters or in Q4?

Frederic J. Green

So, Turan, it's Fred. I think one of the things I really am reluctant to do is -- the customer is king. The customer will make those decisions. The customer will select the time that is right for them. Mike is delivering a great product. Jane is communicating and illustrating that success with the customer base. But really, it is a customer who will make those choices. So I'm not going to put a false or any kind of indication on the timelines other than to say that, obviously, sooner would be better than later. But it's incumbent on us to earn their respect and to get it back. And we'll have to leave that in the hands of the customer base to time that as it best suits their interests. And I can tell you, as Jane said, the receptivity and the evidence that is mounting of our performance is obviously very helpful. But it really is their call, so we won't predict the timing.

Operator

Our next question comes from the line of Jacob Bout with CIBC.

Jacob Bout - CIBC World Markets Inc., Research Division

I wanted to expand on the opportunity to rail crude and maybe talk a little bit about the number of unit trains you had in the third quarter, what your expectations are for the fourth quarter and 2012? And then if I might, what is the incremental volume per unit train that you expect from that? And then maybe talk a little bit about the backhaul associated with that, and does that grow proportionally?

Jane A. O’Hagan

Okay, well, let me start off by saying with respect to the Bakken, we're already at this point in time moving about 50% more than we were moving when we talked to you at June at the Investor Day. So when we look at the size of this market, clearly, we see growth there. And it's just the start to what the volume we talked about over time being around that 35,000 carloads that we mentioned back in June. If we talked about this market from a revenue perspective, we could be talking around $70 million to $75 million. And what we're seeing in this market is, from a unit train perspective, is that where we're getting our gains, and Mike talked to you about this at your Investor Day, is some of the investments that we're making on the New Town that will see us taking our unit trains and growing them about 10% to 15% in terms of size. The key in this game is really to work on what those originations are in and around the New Town area and again, to work on your destination markets in the Gulf and in the U.S. Northeast to be able to terminate the volumes. With respect to backhaul, I'm not sure that I'm getting right to your question, but much of this product has moved in ship release equipment. And again, there is no ready backhaul for it. So it's primarily driven as a unit train model.

Operator

Our next question comes from the line of Ken Hoexter with Bank of America Merrill Lynch.

Ken Hoexter - BofA Merrill Lynch, Research Division

If I could, I think the first question started off on the Intermodal side and kind of going into the potential impact there. But if we could take a look on what you're doing as opposed to customer, what are your prepping differently now than maybe say a year ago to kind of head into -- knowing that we're going to get some inclement weather, how are you preparing maybe perhaps differently going into this season than you have in the past?

Frederic J. Green

Ken, it's Fred. I'll kick off, and then Michael will jump in a second here. I think, for context, it's really important to go back and review the story that we told during the more difficult times. Last year, 2010, Canadian Pacific grew as fast or faster than any railroad with regard to RTMs. I think our number was 17%, and we're right at the top of the pack, if not the top. In the process of growing that quickly, when we had planned for growth of clearly less than 1/3 of that, we consumed what one would call the contingent resources, or the capacity that one naturally has to deal with extraordinary events or to deal with upside opportunity. So having consumed that and moving into the New Year and watching the extreme weather events contract our normal capability, nevermind the fact that we didn't have any contingent resources, we experienced what we experienced. So the context is entirely different. What we have done over the course of the year is to rebuild our normalized contingent capability in every aspect of our business. And in addition to that, we've taken other steps, which Mike can elaborate on. So I want to kind of set the stage to say that we've gone back to a normal approach as we would expect to. We -- the success of our growth caught up with us because our resourcing was not such that we could eat that much capacity and still have contingent capability. We've corrected that. And now Mike can give you a few more specifics.

J. Michael Franczak

Yes, Ken, I've already spoken to the additional locomotives, crews and so forth that we'll have, the engineering resources we'll be directing towards the network this winter. But a reminder also that our long train strategy is allowing us also to buffer volumes at either end of the chain. We've now commissioned infrastructure in the West that gives us more meet/pass capability to handle those long trains. I spoke probably in June, to things like our cold slow protocols that we'll be implementing again this winter, which will allow us to mitigate the impact of weather on trains that have whose equipment is in good shape. And we spent a lot of time making sure that our local service operating plan in Vancouver, for example, is running like a fine-tuned watch. And it is. We also have joint scorecards in place with a number of the port terminals to make sure that we're monitoring and managing those flows very, very carefully, so that we're ahead of the curve with respect to volumes. So I would say there are a number of things along this vein, Ken, that give me great confidence that we're going to continue to improve upon and maintain a very high level of service for this product right through the winter.

Ken Hoexter - BofA Merrill Lynch, Research Division

If I can just get a follow-up on pricing, Fred, do you think that, I guess, Jane mentioned 2% to 3% in terms of same-store sales pricing. Is there a limit on that because of the service levels that you've had over the past year? Or in other words, as you -- as Mike starts to improve those service levels, can we see that pricing accelerate? Or do you think this is what the market bears now?

Frederic J. Green

Well, it's a pretty tricky question, Ken. I think we can honestly say that the -- Jane and her team has been very disciplined despite the disruption because we deemed it to be a very temporary disruption, as it's proven to be in service. We did not compromise on our pricing expectations during that period nor are we today. So when one looks at a 10- or 15-year history of performing very well with 2 bad quarters, there's no cause for us to compromise on our pricing expectations. And that's the guidance Jane had, and her team behave that way. I would suggest to you that over the course of time, if we can take our service to yet another level, over and above the standards that we had previously offered, that, that might provide some upsides. But I think it would be premature to declare victory in that regard. And always remember that whatever we do has to be compared to the competition. So if their game is elevating and ours is elevating, that's good for the customer, good for the fluidity of the railway and the industry, but it may not provide a competitive advantage. So I'm not going to declare anything with regard to elevated pricing expectations at this time.

Operator

Our next question comes from the line of Matt Troy with Susquehanna.

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

Fred, you've always been candid in your assessment of the overall economy and more astute than most actually in your read. I was just curious, we're approaching that part post-Thanksgiving where rail lines start to thin out for the year. The economic statistics are kind of going both ways at this point. I was wondering what are your customers telling you either for the next several months or into next year in terms of their outlook?

Frederic J. Green

Matt, I would probably divide the marketplaces because there are segments of the market. On the bulk side, as Jane indicated in her comments, despite all the rumblings and rumors that we hear from the media in Asia, about Asian slowdown, the demand for all of our bulk materials, grain, potash and coal, metallurgical coal, remain surprisingly strong. Good, strong, robust numbers consistent with our original expectations. I'd like to think we're astute enough to keep our finger on the pulse, so we're not declaring that that's in perpetuity. We're simply saying what we're experiencing today and the indications we're picking up in dialogue with our clients on the bulk side would be more favorable than what you would read in the media as it applies to kind of west-bound, Asian-driven commodities. With regard to the general merchandise side, which is I'll call it industrial-based, et cetera, the same old story. You've got housing in the doldrums and no evidence it's going to get better. We would certainly be consistent in that regard. We like the auto franchise because of the difficulty of the tsunami and the difficulty of a handful of the foreign builders who have transplants over here getting restarted, if I can use that phrase, gives us belief that we will see stronger and pretty consistent demand marching from 12 million back up to 15 million and that we will see some pretty good volume activity over and above just GDP in that regard. So we like that marketplace and we see some -- no signals to believe that's going to soften. With regard to the retail sector, Jane described it appropriately that as long as you've got the unemployment levels you have in the United States and the apprehension about the European, I'll call -- just call it economic or monetary issues, I think there's going to be a reticence on behalf of the general population to get too far beyond its means. So we are feeling today and in dialogue with our clients, believing that replenishment of retail trade will be modest. It will not rapidly take off at all, and we'll be fortunate if we see kind of GDP, GDP-plus a little bit in a way of growth in that regard. And then finally, on the international side, which of course, affects -- is affected by the same issues, again, we see -- we're not seeing a nice consistent role. We're kind of seeing spotty movements in that regard, which again, leads me to believe a little bit of discomfort and apprehension with retailers and others. So I hope that covers the waterfront. It's generally a good news story for this franchise which has such an Asian orientation to it. But clearly, we're very, very aware of the retail side of the business.

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

My second question would be just relating to export coal. A lot of the focus has been on the East. You mentioned or was mentioned earlier that the new thermal exports from the PRB are moving now. I think there are 6 export facilities proposed to open up in the next couple of years. I know it will take time, but are you in discussions with any of those projects or about any of those projects and what might they mean for CP over the next 3 or 5 years?

Jane A. O’Hagan

Well, obviously, as we have said before that we look at the PRB coal situation in terms of export as being an opportunistic market, and we're currently participating via Prince Rupert in around 650,000 tons a year. Clearly, as this market develops and there's not complete clarity just how long term it is. We're obviously looking for any opportunities that we can use to diversify our footprint to access those ports. So my message to you would be is that we're continuing to look at the opportunities, we're participating in volumes today and we're going to be making the most of that as part of our plan.

Frederic J. Green

I think -- and this is Fred. I might just add a touch on Jane's comments. We are in active dialogue with a multiparty considerations of some of these opportunities. So we just don't want to be too far ahead of ourselves. Remember that the paradigm has changed, right? So somebody has said to you 3 years ago, we're going to be moving thermal coal to Asia in big volumes, it's a bit of a paradigm change. People are now stepping up with some investments, but the nature of these things are a little riskier than the traditional. And as such, we want to make sure that people are looking at commitments to investments, commitments to move. And those dialogues are not just spot moves overnight. We would do that. But rather, can we collectively engage to make this part of a longer term volume that we can all enjoy for a sustained basis as opposed to just when it happens to be opportune.

Operator

Our next question comes from the line of Scott Group with Wolfe Trahan.

Scott H. Group - Wolfe Trahan & Co.

So, Fred, you mentioned that it was really kind of a quarter of 2 halves, and I know you don't usually do it, but is there any way to think about the margin or a lower [ph] progression throughout the quarter and kind of where we finished the quarter? Or maybe if you don't feel comfortable with that, do you have any kind of visibility to -- are we at a point where we should start to see margin improvement year-over-year in the fourth quarter? Or because of the robust winter plan and extra resources, maybe we don't start to see that margin improvement until the first quarter? Any color you can give there would be great.

Frederic J. Green

Okay. Well, Scott, you're obviously going into a space we wouldn't normally go into, so I won't to talk too much other than -- on Q3, other than to say, obviously, the second, it is at fair assumption that the second half of the quarter delivered better financials than the first half given what we experienced and the momentum and fluidity that arose. I think you should feel comfortable with the knowledge that our own expectations with regard to Q4 would be that we will outperform last year's Q4. That's our aspiration. It's a function of the marketplace. But based on the early October, well, actually almost all of October operating results, where -- Mike's got double-digit improvement in car miles a day and terminal dwell. There's some very good things happening out there with a good consistent reliable products. So I aspire to. And we don't do guidance but, obviously, our aspiration is to outperform last year's Q4 and we're certainly planning to try and deliver that.

Scott H. Group - Wolfe Trahan & Co.

Just with that, is there any way to think about how the incentive comp should look like, or at least on a year-over-year basis, should look like in fourth quarter?

Kathryn B. McQuade

Let me -- Scott, this is Kathryn. You should -- of course, what I've said was half of it was stock-based and half of it was incentive comp. I give a lot of information year-over-year, so I gave what the delta was last year as well. But it's fair to say in the incentive comp, we're all not that stock-based comp world that you should still see a tailwind going into the fourth quarter, about comparable with the third quarter's.

Operator

Our next question comes from the line of Cherilyn Radbourne with TD Securities.

Cherilyn Radbourne - TD Newcrest Capital Inc., Research Division

I wanted to come back to the Intermodal business for a moment and just ask how would you rate your progress on repatriating Intermodal customers both in domestic where you didn't see a lot of losses, and in international where you did experience some consequences because of the service spews [ph]? Could you give us any sense as to the impact on international of customer losses versus for the late start of the peak season and the muted growth in the peak season that we've seen from your peers?

Jane A. O’Hagan

So, Cherilyn, where I would start is I would talk to you about the fact that, obviously, we are in discussions with our customers. We're collaborating. We're having that dialogue about the excellence of our train service around the sustainability of that and in terms of our winter planning. As I indicated as well, when you look at our domestic business, clearly, we -- as I indicated, we're seeing that business return at about the mid-single-digits. Clearly on the international side, as I indicated, we are certainly seeing key customers returning volume to us. I don't want to get into talking about a number, talking about the share, because as you look at the AAR carloadings, you can sometimes get a little bit distorted because of vessel arrivals, other things that can impact those numbers. But what I'd like you to take away is that we're seeing the domestic business return, that's up mid-single-digit, and the key customers are returning volume to us on the international side.

Frederic J. Green

And Cherilyn, it's Fred. I'd just add a little more color to tell you that I spent the week before last, I've spent time in the East, visiting with the C level decision-makers and our critical domestic customers, and nothing but positive feedback with regard to the job that our team is doing. So I'm very comfortable, as Jane says, that as they have success, whatever that form -- whatever form that takes, we'll be the beneficiaries of that as well.

Cherilyn Radbourne - TD Newcrest Capital Inc., Research Division

So are we sort of in the early days of this or did you make meaningful progress in repatriating during Q3?

Frederic J. Green

Well, I think, obviously, you just have to look at the car loadings to see that the international side or the Intermodal side remains below the run rates that we would traditionally have and that we expect in the future. So we are migrating back. Because obviously we're not sprinting back. But I would put in context for you, Cherilyn, that when we had this conversation the last quarter, we anticipated that the shipper community would want to see performance, not just in our peak period, which is obviously October, and we've proven that and delivered some great results, but also at least in the early indications of the different weather. And so everything that we're experiencing is very consistent with our own expectations about the migration, timing of business back to us. And they'll want us to see go through some difficult weather and deliver some great results, which we expect to. And we would hope that, that would cement the deal and start the more rapid repatriation.

Operator

Our next question comes from the line of Walter Spracklin with RBC Capital Markets.

Walter Spracklin - RBC Capital Markets, LLC, Research Division

So, Fred, just on your commentary with your discussions over in Asia with your customers, I mean, if I were to put myself in the shoes of your customer and see that you have -- they have kind of migrated the service over, you're asking them now we have a better plan, come back to us and test it out. Is that an opportunity? For me, I would think that, that might be an opportunity for them to push you on price. Do you get that sense that they're saying, "Okay, we will come back over but we want an incentive to come back"?

Frederic J. Green

Well, let me deal with it this way, Walter. I have yet to meet a customer who doesn't always bring price to the table when you have a discussion. So I would be surprised if somebody didn't ask the question. But I think, as I indicated in earlier comment about the guidance that we gave to Jane and her team and that Jane has taken to the marketplace, when you deliver the caliber of service and deep relationships and the infrastructure that we have consistently for 15 years and then you have a bad quarter, there is no reason that we should have to compromise because of the blip in the radar screen with regard to the fundamental values that we have. So it's not part of the game plan. We hope that the customers would respect 15 years of great performance and would allow us to earn back the volumes without anything in that regard and certainly it's not in the game plan.

Walter Spracklin - RBC Capital Markets, LLC, Research Division

So you're not intending to move on price to incentive back, is what your saying?

Frederic J. Green

Don't need to, would be my idea.

Walter Spracklin - RBC Capital Markets, LLC, Research Division

Okay. So just on the potash side, just to move -- change gears a little bit here. Jane, there's a lot of focus in on whether you're going to keep whatever portion of the Canpotex business. I know you really can't talk to that. Perhaps what you can do instead is clarify and give us a little bit of a historical context of how big that market is now that it has return to the historical norms? And is there any indication from Canpotex that they're going to dust off that capacity production or capacity expansion plan that they have talked extensively about back, and I believe it was '07, '08, and to what extent that could be additive to the current production levels?

Jane A. O’Hagan

Well, Walter, I think where I would start is, is to say that when I refer to the Canpotex volumes and talk about the export volume back at the 9 million metric ton level at the historic levels, clearly, we're seeing that. If you look at our Q3 and Q4 run rate, we would see some modest growth on a go-forward basis into 2012 if you use that as the basis for your modeling. If you look as well at certainly the plans that the companies, Mosaic, Agrium and PCS have about expanding their capacity, clearly, we've been very focused on understanding what the benefit of that growth will be because you could see this between 15 million to 18 million metric tons by, say, 2015, 2016. Clearly, our focus is to participate in that share. In addition, when you look at this market, we also talk about the greenfield development sites. And I'll remind you that we signed an MOU with BHP to move their volumes from the Jansen line to Vancouver, Washington. So we're looking at all the opportunities we can in this market. We feel the demand fundamentals are there. We've got a great product. We have a great logistics system. We have the know-how to move it, so we're going to capture the most of those opportunities.

Operator

Our next question comes from the line of Bill Greene with Morgan Stanley.

William J. Greene - Morgan Stanley, Research Division

If we look at kind of what you're seeing in terms of the carloading trends and what you said in terms of winning back some of the business, it seems like carloads in the fourth quarter this year should kind of end where we were in fourth quarter 2010. But given the winter plan, I've got to believe there's a fair amount of cost that are going to be associated with that. So not really much change in carloads but higher cost, no elevated pricing. So the way I sort of think about that is that's going to create some margin pressure. Fred, that sort of runs counter to what you were answering in a question earlier in the call. And my thought is this winter weather kind of continues quite some time in Canada as well, so this even has implications for 2012. So am I missing a piece here?

Frederic J. Green

Well, Bill, you've just created a model that you think will be a higher cost operation. What I would ask you to introduce into your model is that the fluidity or the lack of fluidity of a railway has a lot of direct and a lot of collateral consequences, which Kathryn referred to earlier. So if everything is running perfectly, you have a certain unit cost. If everything is not running perfectly and arguably well down the spectrum of less than perfectly, you have an awful lot of stop/start. You have an awful lot of fuel consumption waste. You have an awful lot of crew-to-train ratio. You have car higher because the cars are not moving, just as a starting point of examples. So I think the missing component that I would encourage you to think a little bit about would be, if you take the efforts we're taking, with a contingent capability to keep the fluidity as high as it is today, which is substantially better than last year in October, then I would anticipate that there's a benefit to that fluidity in the elimination of all those collateral expenses that I described that would probably change your conclusion.

William J. Greene - Morgan Stanley, Research Division

Okay, so in other words, the productivity gains from running with initially more resources should eliminate the risk of having recovery costs, assuming winter weather, is what it is?

Frederic J. Green

Yes -- well, again, I want to be careful. I don't just say, yes or no. I mean, it's a pretty complex web. The principle is, run the railway on time, keep the assets moving, avoid the congestion in the yards, avoid the re-crews, avoid the stop/start and the fuel consumption and you will deliver a lower unit cost than you would otherwise do. Remember, that as we moved into the winter months last year for the reasons I described earlier about the 17% growth, we started to experience some of those things. And as a consequence, those are opportunities for us not to experience this year.

Kathryn B. McQuade

Bill, this is Kathryn. Let me add a little bit of color. So if you look at the contingent resources that we have on hand, it's mainly additional crews. Mike has hired up more crews. So back to Fred's comment on crew-to-train ratio, if we have to use them because we start having service problems, then you have that cost. But for the most part, you have the contingent crews that aren't necessarily paid a full amount if they're not being used in operation. So it's about having smart contingencies on hand. The same with his locomotives. He has locomotives stored, the less efficient locomotives is when you have to pull them out that they end up with a higher burn rate, et cetera. So you just can't look at -- you have to look at what a service meltdown or service issues create in terms of costs and what the contingency cost just to have them on hand.

William J. Greene - Morgan Stanley, Research Division

Yes, that's fair. Is there a way to say what the investment is in the winter plan? Is that -- I don't know if that's the right way to how to describe it but...

Frederic J. Green

It's -- I'll go back to my original comments, Bill, that we are replenishing this contingent capability that we would normally have had, had we not experienced 17% growth. It's a bit of catch-up, obviously, kind of on the basis, and you're seeing that with Kathryn's comments about $25 million on training. That, like many other railroads, we are experiencing a heavy front-end load to training, and will for some period of time, due to demographics. And in our case, because of the catch up on the very rapid growth. But I don't really know how you quantify this. It's kind of business as usual through cycles. This is the best way I would describe it.

Operator

Our next question comes from the line of Tom Wadewitz with JPMorgan.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

I wanted to ask you about V1 export coal. I think you had some comments but if you could give a little more perspective on where you would see 2012 export coal shaping up? And how much of risks to volume do you think Australian production coming back, how much of a risk that would be?

Jane A. O’Hagan

This is Jane, Tom. Obviously, we model to Teck's forecast, and Teck has not provided guidance for 2012 so we're not in a position to give you full visibility for 2012. But as I've said before, the long-term industry fundamentals for met coal are strong. And Teck is investing to increase their production capability. So 2012 is really going to be dependent on sales and the market is dynamic. We do see that 9% growth in the Chinese economy but there is uncertainty in that marketplace as well. And so I really wouldn't want to speculate on what those volumes might be, this is really a story for Teck. So I think when we look at Canadian coal, we feel that Canadian coal is very well placed in the Asian market. Teck has very long and strong and established relationships with customers in the seaborne market and they really don't represent swing tonnage to Australian volumes. So I would say that when you look at Q4, we'd see that looking a lot like Q3. But at this time, my visibility into 2012 is limited. And again, that's due to the fact that Teck hasn't provided public guidance for 2012.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Okay, that's fair enough. And then, one question on resources for 2012, if you're kind of over-resourcing the railroad this year, perhaps, if you want to look at it that way, after maybe under-resourcing last year, what would 2012 look like in terms of what you can do on headcount if volume ends up being flat?

Frederic J. Green

So, Tom, just for clarity, I wouldn't characterize it as under-resourcing, I would characterize it as outgrowing. We grew by 17% and planned for 4. So as a consequence, we ended up short of resourcing. We didn't plan to be short. We grew faster than we anticipated growing. With regard to going forward, I don't think we're in a position today to start putting FTE counts on. Kathryn is, I think, been very diligent almost quarterly, if not every quarter, on giving you our best estimates of FTE counts. But we have not done -- we haven't been to the board. We haven't done our 2012 formal plans, so we're not really in a position to quantify that other than to say that it will be reflective of having caught up, if I can use that phrase, with regard to the contingent capability this year, and that we do want to ensure that we are never the bottleneck with the opportunity volumes on potash, coal, et cetera. So we'll continue to hire. The pacing of that we'll quantify better when Kathryn maybe comes on in January.

Kathryn B. McQuade

Tom, let me also remind you of a couple of things that we've put in the public domain as well. Number one, we do have some very high attrition every year and it's about 1,100 people a year attrit out that we expect over the next 5 years. So we can rightsize very quickly with normal attrition. Secondly, as Fred said, when you have to hire crews, you've got 8 to 9 months lead time there. So we are assuming that where our business remains strong. And -- but certainly with our demographics, if there seems to be some other economic environment that materializes in 2012, it doesn't take a long time to start having the adjustments that are needed to be made.

Operator

Our next question comes from the line of Jeff Kauffman with Sterne Agee.

Kanchana Pinnapureddy

Kanchana Pinnapureddy in for Jeff Kauffman. Most of my questions have been answered but I wanted to know if you could maybe talk a bit about some of the longer-term levers that you have to improve margin?

Frederic J. Green

Well, I think we've probably just take everybody back to the June Investor Day. And we did talk, as you all recall, about the whole longer term or longer train strategy and how that would roll out over a number of years. We spoke about the mechanical shop rationalization and facilities and how we had the opportunity over the course of time to lay those out. We talked about the opportunity to redefine the grain gathering system and take cost out, which has already been done and we are seeing great evidence of that. We talked about fuel consumption rates being improved on a continuous basis. We talked about the adoption of lean throughout increasing numbers of facilities and areas and the early results being favorable. I'm sure I'm missing some, but that -- those are all kind of structural cost reductions with multi-year time horizons. And if I could throw one more on, I would just say the whole adoption of the Digital Railway and the technologies that we think will displace items. With that, I think we characterize much of our capital spend as opposed to being kind of primarily for capacity. We characterize as primarily for efficiency, which has the benefit of increasing capacity. So those are a list of 6 or 7 things that are structural in nature and we would -- no reason to believe that each and every one of those isn't being progressed consistent with the commitments made at the Investor Day.

Operator

Our next question comes from the line of Christian Wetherbee with Citi.

Christian Wetherbee - Citigroup Inc, Research Division

A question on the Intermodals side, you showed how you had some nice improvement on train velocity on the Intermodal side sequentially. Can you give us a sense where you stand relative to 2010 right now? And then on the international side with your customers, is there opportunity to win back share prior to kind of the new Intermodal year, the new shipping year which starts in the spring? And, Fred, to your point, you get through the winter, you see how things go and then you have that opportunity for contract -- potential contract wins before you see meaningful share come back to the business on that side?

Frederic J. Green

Chris, I would characterize -- just answering it in reverse order, I would characterize it as -- it's going to be some combination of both. I mean, as renewal opportunities arise, there's always the opportunity to pursue share. But with regard to, I'll call it former share that we'd like to repatriate, I think we've discussed that as being a program of deliver what you say you're going to deliver, illustrate it, validate it, do it through peak season, which we've done. Do it through some of the early evidence of a winter weather environments and earn back the confidence. So as I said earlier, I don't think we have the ability to predict uncertainty where the shippers, because they're not homogeneous, the shippers' confidence will return to them at different times and we'll be the beneficiaries, hopefully, of earning that back when we reach those conclusions. With regard to service, I think what Mike's team has delivered from a train performance perspective, and more importantly, a shipment performance perspective because you have the ability to go from the railhead to the ultimate shipper and improve even the train performance, has been a substantial improvement. And in fact, I would argue, we're already doing better than we were doing, I'll call it, 1 or 2 years ago before the more difficult times. So we've already recovered all of that. Now the issue is can we take it to an even more competitive performance, and that's where Mike and his team are focused.

Christian Wetherbee - Citigroup Inc, Research Division

Okay, that's very helpful. And I guess, just conceptually on pricing, you've talked a little bit about it today, when you think about kind of -- start to think about 2012, you obviously, probably have a piece of your book of business built-in. But how do you think the risk is to 2% to 3% same-store sales price you've been getting? I mean, given the service coming back and improvements there, is there risk to the upside or is it that the kind of run rate we should be thinking about as we go into 2012?

Jane A. O’Hagan

Well, I think that, as I told you, my expectations for renewals at 3% to 4% and same-store price 2% to 3% would extend into Q4. I would say for 2012, what my expectations would be is inflation plus pricing on renewals, but I wouldn't want to provide any guidance on this at this point on same-store price for the very reasons on what Fred talked about earlier.

Christian Wetherbee - Citigroup Inc, Research Division

Okay, but inflation plus on the renewals?

Jane A. O’Hagan

Yes.

Operator

Our next question comes from the line of Chris Ceraso with Credit Suisse.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

I wanted to follow up on the comment, I think, Kathryn made about Intermodal volumes. Some of the numbers that show up from the AAR look like volumes are down quite a bit. Is it a timing issue, you mentioned, with some of the deliveries or is it a funny comp? Is that something you expect to level off by the end of the quarter?

Jane A. O’Hagan

Chris, this is Jane. I made the comment, not Kathryn. I think on the AAR data, again, what I wanted to focus on is that it's really a snapshot in time. And that in fact, this data can get a little bit, I'm not going to say distorted, but it can lag a bit given the ship arrival bunching and a number of other components. So I think the key message that I'd want to leave you with is that we're seeing key customers return volume to us. As Fred said, we're seeing our domestic up in the mid-single digits. And again, this is really -- the other key point is we're seeing our international customers returning key volumes to us as well.

Christian Wetherbee - Citigroup Inc, Research Division

Okay. So it's a timing issue and it will look better than this as we get deeper into the quarter?

Jane A. O’Hagan

Yes.

Christian Wetherbee - Citigroup Inc, Research Division

And then just one longer term question about the operating ratio, you mentioned the pension can be volatile with the discount rate. Does your low-70s OR target require some kind of an increase in discount rates and therefore, a decline in pension expense for you to achieve that number?

Kathryn B. McQuade

What we have said about the low-70s operating ratio, it still holds. I mean, there's a lot of volatility out there so -- but we have certain assumptions over the longer term. And as we close the end of this year, we'll have better insight in terms of what our 2012 will be. But at this point, all I can do is put things under historical assumptions and we'll have to wait-and-see where the economy and where the discount rates and our equity returns end up on the year.

Christian Wetherbee - Citigroup Inc, Research Division

Have you spoken specifically to the pension as it relates to the low-70s? Do we need...

Kathryn B. McQuade

Yes, I did. When we gave the guidance at the Investor Day, we gave the assumptions and the -- the assumptions in terms of the ramp up of pension expense over the next 3 years. So I would encourage you to go out and look at that. And then we will reflect on that again when we meet with you in January.

Operator

Our next question comes from the line of David Newman with Cormark Securities.

David F. Newman - Cormark Securities Inc., Research Division

Just a quick question on the pension side once again, and I know you can't really put a pin in it at this point, but assuming the current conditions prevail by the end of the year and your solvency deficit does rise, how do you balance that out against, I guess, your CapEx plans and overall funding for 2012? And I guess, I'm just trying to get a sense of, obviously, your CapEx plans are fairly robust this year and I would assume next year. And I know you haven't given guidance for 2012 but just conceptually, how do you balance that out?

Kathryn B. McQuade

Okay. The way I would balance it out is #1 is to differentiate between my pension expense and my contribution.

David F. Newman - Cormark Securities Inc., Research Division

Contribution, more of referring to the cash?

Kathryn B. McQuade

So the cash contributions, we feel very confident with the guidance we've given for the next approximately 3 to 4 years in keeping our pension contribution between $125 million and $150 million, and that's a function of the prepayments that we made. So again, that is very different from the pension expense, which has a different sensitivity as well. So looking at cash flows, the pension prepayments have continue to provide a certainty around our contribution requirement.

David F. Newman - Cormark Securities Inc., Research Division

If I recall, Kathryn, I think you mentioned at the Analyst Day that you kept some of the prepayments in a reserve? Did you not?

Kathryn B. McQuade

No.

David F. Newman - Cormark Securities Inc., Research Division

To draw on -- you have something to draw on in...

Kathryn B. McQuade

No, no, no. What I was saying on that is the way that the funding rules work, we have a certain contribution requirement that would be required for 2011 and one for 2012. The prepayment is used as a drawing account so we will -- the $1.1 billion, we will have consumed some of that this year and we keep the $100 million we gave, that we contributed this year was essentially our normal costs. So it was our normal cost in all of the solvency funding was funded by the prepayment, but it certainly didn't use up the $1.1 billion. So it's a drawing account that we use over the next 3 to 4 years as the solvency funding requirements come back toward us from a regulated basis. Does that make sense?

David F. Newman - Cormark Securities Inc., Research Division

Yes, that totally make sense. And hopefully, one day, we'll actually see a reversal in these interest rates.

Kathryn B. McQuade

My god, I certainly hope so. I'm dreaming of those days.

David F. Newman - Cormark Securities Inc., Research Division

Some days, but it keeps on going down. But just one last quick one. Just on the purchase services, is there anything in 2012? Once again, I know you haven't given guidance. But is there anything in that you're seeing in the run rate this year that could potentially fall off next year that we would have a more normalized or I guess a lower purchase services?

Kathryn B. McQuade

No, and maybe we'll be able to give some color on January on that. But one thing I do like to -- we are experiencing higher IT costs. Some of it is a function of our renewal. But I also like to remind people that we have outsourced a lot of our IT as well. So where some of the other rails would experience depreciation in terms of CapEx on IT, it runs through our purchase services in IT costs. So it's not just the normal renewal, but it's also just the normal replacement of IT infrastructure as well, which comes through our line on a purchase service basis.

Operator

And our next question comes from the line of Gary Chase with Barclays Capital.

Garrett L. Chase - Barclays Capital, Research Division

I wanted to see if I could follow-up please and see if I could get a little bit more clarity on the answer to a question that, I think, Bill Greene was asking earlier. I'm just trying to get a sense of whether or not you feel right now that you are over-resourced. I mean, if I look at what the headcount guidance is for the fourth quarter compared to where you are now, it looks like a reasonably normal progression. And so I'm just wondering if you feel that there is a level of volume the network could achieve now given the resources that you're deploying, that is in excess of where you are today or whether we should think this is sort of the right balance here in terms of -- that's you're sort of appropriately sized for this volume given the service dynamics that you want to achieve?

Frederic J. Green

So, Gary, it's Fred. I would just keep going back to the point that we've consumed our contingent resources with a 17% growth rate of last year. So the run-up in resources, relative expansion of resources, has brought us back into what we would call a normal zone. I don't think that's such a perfect science. We would say it's within 0.00x%. I think it's a range that you like to operate in. We're probably slightly on the higher end of the range because of the reasons I described with our aspiration not to fail. But we're clearly in a zone or a range that would be "normal." So we are not over-resourced but we maybe at a slightly higher end of a range that people would call normal.

Garrett L. Chase - Barclays Capital, Research Division

Okay, so when you say that you still feel that things are on track for some of those longer range margin targets, are you more confident in some of the things that will come out of the CapEx, the Digital Railroad, the things that you've described as longer term opportunity that will allow you to offset some of the headwind you faced here or were you being conservative maybe in the kinds of opportunities those represented in the early going?

Frederic J. Green

Well, I think the only answer I can provide because we're not going to provide any kind of guidance, is simply to say to you that if you can take those really tough 2 quarters for the reasons we've described and just put a big circle around them and we would ask ourselves, "Has anything changed to the fundamental proposition that we originally put together?" And the answer is no. I mean, the demand at this time, particularly on the Asian side, appears strong. The adoption of these technologies and initiatives I listed 6 or 7 of progress as expected and planned. So our game plan remains intact, but obviously, the noise of the first and second quarter given the events on the heels of rapid growth took us off-track for a couple of quarters. But the principles remain the same, the aspirations remain the same.

Operator

Our next question comes from the line of Benoit Poirier with Desjardin.

Benoit Poirier - Desjardins Securities Inc., Research Division

Just with respect to your speed and dwell, they are back to better levels, we see that. However, when we look at your volume in the last 2 weeks, it remain soft versus peers. So I really understand the explanation around Intermodal. But with respect to the other commodity group, are you confident that volumes will follow your solid improvement stats? Or, again, is it more a matter of the economic environment weakening or, again, a funny comp or timing issue?

Frederic J. Green

So, Benoit, it's Fred. I'm not sure of the sources of that set of conclusions. I would -- I'll tell you what I think is happening and you can maybe reconcile or we'll take it off-line. We are doing tremendously, in the Canadian grain business, up nearly 30%. But it is being offset by, as Jane said, the U.S. grain business is down by 21%. So we're up, whatever, 4,000 carloads, we're down 3,000 carloads. We net and look like we're only up 1,000. And that's a function of U.S. grain circumstances. But that grain is in the bins. It will move. It's just not going to move in this time period. On Canadian coal, we're up by 20% month-to-date but we're down by 22% on U.S. coal for reasons that Jane has explained every quarter for the last 3 quarters with regard to elimination of the shortfall. So you may not be seeing a net, apparent net increase, but there are some very clear and discernible reasons for that. Autos are up 12%. So we've kind of got a, I think, a very clear set of evidence that in merchandise, as Jane said, we're very doing very, very well. Faster, growing equal, or faster than most people. In bulk, we've got some great stories. But they're almost bilateral stories that you've got an up and a down but they're very discernible and one is temporary and one is good long-term growth. And the Intermodal story has been well told. So I'm not seeing, to be candid with you, we are up on gross ton miles and we are up even more on revenue ton miles in October this year over last year. So we're actually performing quite well. And we wish a couple of these unique markets like the U.S. grain would be resolved. And in fact, we've seen some of that in the last 4 or 5 days with some of the Eastern grains starting to break open for us.

Benoit Poirier - Desjardins Securities Inc., Research Division

Okay. And maybe just a follow-up question with respect to the spread between carload and RTM, is it fair to say that -- or fair to assume that it will remain at a comparable level, similar level in Q4 in comparison to Q2 and Q3?

Jane A. O’Hagan

Yes, I would expect that, that would be similar in Q4. That would be due to the performance that we're seeing, as Fred indicated on the potash inside, on the export coal side, and in addition to the strength of our merchandise franchise.

Frederic J. Green

I'll just make one comment, Benoit, it is -- I mean, it's a very fair question, and Jane is giving you her best assessment. But when you see U.S. grain off by 21% or you see U.S. coal off by 22%, these are major mix issues. So be very attentive to those emerging issues as they materialize. And it will affect that ratio of RTMs, GTMs, RTM carloads. We've given you the fourth quarter but it is something that is kind of, I won't say not within our control, but it's more of a function that's a derivative of mix. And when some of these big swings occur, it can move that ratio around pretty significantly.

Operator

Our next question comes from the line of David Tyerman with Canaccord Genuity.

David Tyerman - Canaccord Genuity, Research Division

Just one quick question, on the Canpotex contract, when would you expect to have an idea of the volume and pricing on that contract that you'll be looking at?

Jane A. O’Hagan

Well, I think it would be safe to say that our focus, as we've told you from day one, is that we're focused on working with Canpotex every day, working on moving their business and I'm not really going to be in a position where I comment on any negotiations with any customers so I really can't give you any visibility.

Frederic J. Green

David, it's Fred. The only answer we can provide is that the contract runs through June of 2012. If the shipper wishes to make a decision prior to that and to communicate it, that's when we will be in a position to communicate it subject to the shipper's concurrence. And so we're kind of at the -- the shipper should and will make those types of decisions.

David Tyerman - Canaccord Genuity, Research Division

Sure, that makes sense. Is there any typical on this in that, that's the decision -- because presumably, there's a planning timeframe and all that sort of thing when this is normally done that we should be thinking about?

Frederic J. Green

David, I've -- over in my years, I've seen everything from a year lead time to a 22-minutes lead time so we really don't know. We would hope it's done in a thoughtful and organized way and they're a very professional group. So we'll just have to let that play itself out.

David Tyerman - Canaccord Genuity, Research Division

Okay. And then just one other quick question, on the guidance, the long term, low-70s goal, you've mentioned, I think it's Kathryn back in New York, mentioned the oil assumption was USD $100 a barrel. I was wondering if you could, since WTI isn't a very reliable guide to diesel anymore, if you could put that into a diesel price roughly what you're thinking?

Kathryn B. McQuade

I know crack spreads do have a bearing. I'll work with Janet. We can work up some sensitivities there. But I don't have that off the top of my head.

Operator

There are no further questions at this time. Mr. Green, please continue.

Frederic J. Green

Thank you, everybody for spending so much time with us. We appreciate it, and obviously, the markets are performing quite well and we're performing well within it. So we look forward to reporting out in January on our fourth quarter accomplishments. Bye now.

Operator

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

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