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Canadian Pacific Railway Limited (CP)

March 27, 2012 9:00 am ET

Executives

Janet Weiss - Assistant Vice-President of Investor Relations

John Edward Cleghorn - Chairman, Member of Corporate Governance & Nominating Committee and Chairman of Canadian Pacific Railway Company

Frederic J. Green - Chief Executive Officer, President, Director and Member of Safety, Operations & Environment Committee

J. Michael Franczak - Chief Operations Officer and Executive Vice President of Operations

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

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

Edmond L. Harris - Director, Member of Pension Committee and Member of Safety, Operations & Environment Committee

Donald B. Campbell - Senior Vice President of Financial Planning & Strategy

Timothy W. Faithfull - Independent Director, Chairman of Safety, Operations & Environment Committee, Member of Corporate Governance & Nominating Committee and Member of Management Resources & Compensation Committee

Michael E. J. Phelps - Independent Director, Chairman of Management Resources & Compensation Committee, Member of Corporate Governance & Nominating Committee and Member of Pension Committee

Analysts

Unknown Analyst

Janet Weiss

So good morning, and welcome. My name is Janet Weiss, and I'm the AVP of Investor Relations at Canadian Pacific. On behalf of CP's management and the board, I'd like to welcome you to our investor conference. Before beginning our formal presentation, I feel obliged to tell you that this presentation does contain forward-looking information, including, but not limited to CP's operations, anticipated financial performance, business prospects, strategies, priorities and plans. Forward-looking information is based on current expectations, estimates and projections, and actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described on the slides and in reports filed by CP from time to time with securities regulators in Canada and the United States. All dollars quoted in the presentation are Canadian, unless otherwise stated. We make reference -- we may make reference to assumptions used in our guidance, and we provide sensitivities to these assumptions in the presentation. Please read carefully as these assumptions could change throughout the year. This presentation also contains non-GAAP measures. I would encourage you to read Slides 2, 3 and 4 in the presentation deck.

And finally, you will notice on the tables in front of you index cards. Please use these cards to write out any questions you might have throughout the morning. We will be collecting these cards throughout the morning, so if you'd pass them to one of the aisles, that would be really terrific. And with that and my preamble complete, I'd like to welcome the members of the CP management team and the board to come up and join me.

[Presentation]

Janet Weiss

And it's now my pleasure to introduce Mr. John Cleghorn, the Chairman of the Board.

John Edward Cleghorn

Thank you, Janet. On behalf of the Board of Directors of Canadian Pacific, I'd like to extend a welcome to everyone joining us today for the Canadian Pacific 2012 Investor Day. We have an informative program for you. Our senior management team, including Fred Green, Mike Franczak, Jane O'Hagan and Kathryn McQuade will be presenting. I'll then be making a presentation on behalf of the board. You'll also have the opportunity to hear from Allan Kaulbach of Oliver Wyman, retained by the Board of Directors in November 2011. There will be a short 15-minute break preceding the question-and-answer section of our program. Members of the board and management will all be available to answer questions during the Q&A portion. Don Campbell, our Head of Strategy, will host the Q&A session.

With that, I'll turn it now to Fred Green, our President and CEO of Canadian Pacific.

Frederic J. Green

Well, good morning, everyone, and thanks for joining us. This morning, my team and I are going to share with you the deliverables of our Multiyear Plan. We're going to give you examples of how and why we are winning in the marketplace, details behind our record-setting operating performance, and how we have successfully dealt with the turbulent financial markets and how we are positioning CP with the financial flexibility to execute our Multiyear Plan. The Multiyear Plan, which we originally developed, is the same plan that CP is successfully executing today. This plan was specifically designed to unlock the potential of this franchise. It enables both profitable growth and efficiency, and is endorsed by an engaged and informed Board of Directors. We believe, based on our in-depth knowledge of CP's network, operations and its markets and customers that this is the right approach. It's the right plan, one that drives maximum shareholder value from this unique franchise. The key elements of the Multiyear Plan are clear. One, grow the top line through price, service and volume. We will do this through consistent, reliable service and strong customer relationships, which Jane O'Hagan will talk about today.

Two, improve the productivity and contain cost through safe, disciplined execution of the Integrated Operating Plan and the programs that enhance it. These productivity improvements will come from strategic investments, as well as through the cost containment. Mike Franczak will walk you through the programs underway to accomplish this.

And third, the third key element of the Multiyear Plan, expand our length of haul and network capacity by making capital investments, which deliver returns in excess of our cost of capital. Kathryn McQuade will present on the financial flexibility that supports investment in the railroad and the execution of the plan. Our Multiyear Plan is delivering results.

In June of 2010, we held our Investor Day, and at that time, we set out a detailed 5-year plan that would take us to a low 70s operating ratio. Earlier this year, we narrowed the targeted OR range to between 70% and 72% by 2014. We were able to do this because 2 years of hard work in executing our plan gave us the increased clarity into base traffic levels, revenue growth and how quickly we can realize the financial benefits of our ongoing productivity improvements. As we've said all along, as we achieve our goals, we will set new targets. Today, we've looked further out to 2016 and see an OR target range of between 68.5% and 70.5%, reflecting the continued successful execution of the Multiyear Plan.

Let me take a few minutes to explain some of the strategies that underpin our plan. Back when we were developing this plan, we knew that CP didn't have the network capacity that it needed to efficiently handle the potential volume growth that was going to be driven by the rapidly growing Asian economies. We knew we had to act quickly and decisively to put that capacity in place, and to give our customers the confidence that CP would continue to be their preferred partner into the future. We needed to be the enabler of their growth, not the governor of their growth engine. In 2006, we completed our major $200 million Western Corridor expansion, and in 2007, we recorded our lowest ever operating ratio, 75.6%. However, during the great recession in 2008 and 2009, we temporarily and appropriately paused the discretionary spend within our multiyear capital plan. At our Investor Day in 2010, we announced the inception of an accelerated capital plan to continue on our path of investing for both productivity and profitable growth. The result CP is posting today proves that investing in the network was the right strategy. As we look to 2006 and beyond, we are investing to grow for substantially more than just Asian growth. We are making new markets in energy, and our acquisition of the DM&E is opening up new opportunities to grow volumes, expand our North American reach and create shareholder value. The DM&E is an excellent example of CP's success in investing to expand network reach. In 2012, we will meet our goal of doubling, doubling the DM&E EBITDA within 5 years of the acquisition. Like the Delaware & Hudson, it is a key strategic asset, and it's driving value for the property. As a result of the DM&E acquisition, we have the most diversified grain franchise in North America, mitigating production volatility by expanding our geographic presence. However, the real key value of these acquisitions is length of haul and strategic gateway access to the U.S. In 2008, the DM&E was moving 385 million gallons of ethanol 400 miles. And today, we are moving 1.2 billion gallons of ethanol, much of it up to 1,300 miles, by leveraging the extended CP network.

Similarly, we talk about oil and major new volumes originating in the Bakken. If we didn't own the DM&E and its Kansas City gateway, we would have to hand it over to another railroad at Minneapolis or Chicago to get that oil to the refineries on the Gulf Coast or the East Coast. We can leverage the Kansas City gateway in other ways, as Canada and CP is an originator of an abundance of natural resources. So if you think about it, CP wants to be able to haul product originating in Canada as deep into the south as we can, and that's where the DM&E Kansas City gateway becomes critical. If we're going to Mexico with grain, we'd much rather take it all the way to Kansas City then hand it off in Minneapolis or Chicago. So the DM&E was accretive to earnings right out of the gate, will have doubled 2008 EBITDA in 2012 and has exceeded our expectations. We're growing volumes, and we're growing length of haul, and that is how you drive shareholder value.

A key to success at CP is the disciplined execution of our Integrated Operating Plan or IOP. Every railway has its own version of the IOP and its own name for it. NS has the Thoroughbred Operating Plan. CSX has the One Plan. CN has the Precision Railway. And they are all the same, a coordinated plan of cross-functional activity. Our IOP clearly sets out who is responsible and accountable, or to put it another way, how things should be done and when. The IOP explicitly defines what we expect from everyone when delivering our product in terms of both quality and cost. We don't think it's possible to deliver great results without a detailed plan. Our operating environment and our commercial marketplace are just too complex to simply rely on wishful thinking, best efforts and what might have worked on a very different property. We need to know what our targets -- we need to know that our targets are supported by appropriately detailed plans. That's who we are. That's how we lead. And that's why we insist that the whole team leads exactly this way. Our closest competitor is rightly recognized as a very productive and efficient railway. They are, of course, a natural benchmark and as you'll see today, CP's operating metrics stack up very well.

Two key elements of our forecast are improvement to CP's operating ratio or improved productivity and cost savings. Mike's going to take you through the programs in our Integrated Operating Plan in detail. The point we'd like to make is that these programs are contributing directly to the record metrics that you are seeing today. The figures reported by the AAR each week tell you that we have sustained, and in fact, gained momentum over the course of the first quarter. Year-to-date February versus our 3-year average, workload is up 15%. Train speed is up 15%. We are more fuel efficient. Car dwell is down 29%, and car miles per day is up 45%. Car miles per day is a standard by which fluidity and efficiency is measured in the railroad industry. We are setting new performance benchmarks and expect continued improvements. This is not about a soft winter and easy year-over-year comparisons. The metrics say we are becoming a more productive, more efficient railway. We are setting new records, and they reflect the foundational improvements that we have been making. Our network is stronger and more productive. Our people are rising to the challenge and the momentum has been building since 2010.

Our improved visibility into the contribution these multiyear programs will be making by 2014 account in large part for our confidence in further lowering our OR targets as we look out to 2016. Improved productivity and cost savings account for over 600 basis points of the OR improvement that we have committed to. In order to achieve these results, we have made and continue to make investments aimed at productivity improvements.

Let's talk locomotives. You'll hear more detail on fleet management from Kathryn, but the point I want to make is that CP is investing in more fuel efficient, lower maintenance and highly reliable locomotives. And these locomotives are not additive to our totals, but rather they displace older, high maintenance, low reliability and fuel inefficient locomotives. CP has a highly productive, highly efficient fleet, and it's getting better. Growth is essential to the success of the Multiyear Plan and to driving shareholder value. My strategy deals with one very important reality of our franchise. 80%, 8-0, 80% of all of the business we handle faces direct rail competition. We are surrounded by much larger competitors to the north, south and east. Our customers have alternatives. They can and they will vote with their business.

To drive increased shareholder value from CP's unique network and assets means we must be the carrier that customers want to do business with. We invest the time to understand our customer's markets, their strategies and how they measure success. We take the time to share with them how we, and our shareholders, measure success. We work hard to align our interest, define our accountabilities to each other and then do what we said we would do. We refer to this as building strong relationships. And like all successful relationships, they are mutually beneficial and built on trust. This is how CP does business.

Let me give you an example. Several years ago, I sat down with Don Lindsay of Teck, CP's largest customer, to work out a better way of doing business together. At the time, our contractual relationship was put before an independent arbitrator each and every year. Today, we have a 10-year contract, which features full price escalation. As a direct result of the stability of this long-term contractual relationship, both of our companies have invested for our mutual benefit. CP has invested $100 million to improve long siding capacity and productivity. And Teck is investing $1 billion to increase production of metallurgical coal from 21 million tonnes in 2009 to more than 30 million tonnes per year by 2013. As result of our long siding investment, we can move longer and heavier trains. We benefit from an 18% productivity improvement and the benefit of that accrues to the CP shareholders. I know Mr. Harrison said on BNN this month that relationships don't matter. But given the competitive landscape CP operates in, relationships do matter.

Since day one, we said we wanted CP to be the safest railway in North America. Every day, everyone at CP, including the CEO, has to earn what I refer to as the social license to operate. Meeting our safety responsibilities gives us a welcome seat at the table with regulators, government bodies and customers. And that seat at the table allows us to state our case and be heard on a wide range of issues that are important to CP shareholders. We work with large moving equipment in an outdoor environment. It is inevitable over time that some incident will occur. When I'm on the property, face-to-face with our people, I make it very, very simple for them. I tell them there are 4 steps that must be followed and they must be done in this order. If there's an incident, take care of yourself, take care of the people around you, take care of the communities in which we work, and take care of the environment. And then and only then will we operate the railway. Fulfilling our safety responsibilities allows CP to forge strong relationships with the stakeholders that are so important to our future. At CP, relationships matter.

I'm going to close now by saying a few words about my team. It's essential to not only have the best plan, but also the best team for sustained success. CN's acquisition of properties like the IC, the WC and the BC Rail were changing the game for us. We knew we had to expand the reach of our network deeper into the United States and to forge stronger relationships with other Class Is. So we added Kathryn McQuade to our team to draw on her broad strategy, IT and financial experience at Norfolk Southern and her deep and varied U.S. Class I relationships. We also knew that our book of business was going to change. For a long time, we've had a great and improving Intermodal and bulk franchise. And some of the best railroaders to manage them. But merchandise was looking like a great growth opportunity, and we needed to strengthen the bench with railroaders who had learned all there is to know about best-in-class yard and terminal operations. So we recruited Ed Harris just weeks after he had fulfilled his non-compete obligation to CN and paired him up with Mike Franczak, who Tony Ingram describes as the best young COO in the industry. With regard to Ed and Mike's work, the metrics speak for themselves, and you'll see plenty of evidence today.

We're also delighted that Tony and Ed are on our board and make an active role -- have an active role in overseeing the execution of our Multiyear Plan. They are great mentors for our team. Given the importance of volume to CP, we had to find the right person to execute our growth strategy. Jane O'Hagan brings that unique blend of strategic thinking and marketing know-how. And that is critical to making us a winner in a highly competitive and dynamic marketplace. She is a tough and inspiring leader and a trusted and respected partner of our customers. At the executive level, we've added Alison Brown, a former CSX VP, who is leading the integration of our IT systems. Two years ago, we recruited Peter Edwards, the former CN VP of HR, who now leads our HR and labor relations function. We've also added staff VPs from Agrium, Suncor and FedEx to strengthen the team. Additionally, we've added over 30 railroaders from other Class I properties to build on our own expertise and to ensure the sustainability of our success. CP is a great franchise with a rich history and a bright future. We have the right plan to maximize shareholder value from our unique assets and clearly, we've got the right team. We are delivering results.

Now I'm going to turn it over to our COO, Mike Franczak, to tell you how we are accomplishing improvements in operational performance. Mike?

J. Michael Franczak

Thanks, Fred, and good morning, everyone. The disciplined execution of our multiyear programs and the Integrated Operating Plan is driving results. The needle is moving. We have a solid plan and a capable team executing it. We are generating clear, sustainable results, and we have line of sight to the improvements in productivity and cost savings that will deliver CP's Multiyear Plan. Today, I'll update you on our progress and how we will deliver further improvements. But first, I want to address a couple of issues and questions we often get these days. What's different? What's changed that's driving the operational improvements we are seeing? Is this just the outcome of some good weather? I tell you unequivocally, that these improvements we're seeing are a result of fundamental change in the way we are running this railroad. They are not a one quarter trend driven by good weather. The improvements have been taking place over the past 3 quarters and are now exceeding anything we've ever done before. The new performance levels are sustained and continue to improve. This is a different railroad than the one we were running just a couple of years ago.

Let me talk to 4 things that are driving these improvements. First, the multiyear programs we spoke to at our Investor Day have kicked in and are driving results. Many of these are large fundamental changes in how we are running the railroad. Some of these programs have been in-flight for more than a year. It takes time for these kinds of changes to build critical mass and drive results. And once we are -- our weather challenges in mid-2011, the impact of these improvements started clearly showing up in our metrics. And we have just kept improving from there.

Second, the new organization we put in place in late 2010 is now battle hardened and delivering results. The changes we made in our team and the work done to clarify accountabilities is having an impact. Third, our approach to targets and continuous improvement has changed. Targets are fleeting. Paradigms are meant to be broken. As I traveled across the network over the last 1.5 years, I was continually challenging the team on making further improvements that would drive service, asset velocity and labor productivity. While I'm pleased with the progress the team has made over these past 3 quarters, there is more to do. I'm pushing the team harder than ever not only to sustain, but to drive further improvements. Lastly, the organization is aligned around the Integrated Operating Plan. Everyone knows their role in executing and improving it, so we are all pulling in the same direction. As we clarified accountabilities, we made it crystal clear for everyone from top to bottom in the organization what it was to run the plan. The plan is sacrosanct. No one changes it, no one fools with it. I, and those accountable to me, keep a very close eye on our daily performance and trends. When something's off track, we know who to go to and immediately take action to get ourselves back on plan. Likewise, when an improvement opportunity is identified, we act on it quickly, building the idea or improvement back into the plan.

It's also important to know that the plan is more than just running trains on time. It is scheduling track maintenance. So we do not impact speed or on-time performance. It's looking at every car in the yard to ensure it's moving to its intended trip plan. It's getting engines out of the shop and building trains in time for on-time train departure. And our colleagues in the non-operations groups know how they execute and improve the plan, whether it is in defining and enforcing contract terms that support the efficient, reliable execution of the plan or in helping source needed manpower in a timely basis to support growth. Everyone aligns their efforts around executing the IOP.

I'd now like to reground everyone on what the IOP is and how we're improving it with our multiyear programs in order to drive the results that deliver to our targets. The IOP is more than just a plan. It is central to everything we do. In a network that is geographically dispersed with over 14,000 employees, the IOP is that critical piece of choreography that tells everyone what to do, when to do it and how to do it. Individual activities are defined and coordinated to deliver a reliable, safe and efficient service, driving value for shareholders and others. The IOP is our results engine. It is about scheduled operations for all aspects of the railroad, right down to the individual shipment. It is about running a scheduled 24/7 operation, driving velocity, balancing flows in the network and making the right trade-offs within the network to drive the best service and financial outcomes.

All of this is supported by a strong foundation of safety and accountability. All of the Class I railroads have their own version of an operating plan. They all contain the same elements I've just noted. CP continues to enhance and improve its Integrated Operating Plan. The multiyear programs listed on the left are driving these improvements and the results we strive for in service, asset velocity, labor productivity and of course, financial results. In the waterfall that Fred presented earlier, he showed our path to a 68.5% to 70.5% operating ratio by 2016. In that waterfall, there were over 600 basis points of operating ratio improvement attributable to productivity improvements, cost savings and bringing on new volume growth more productively by filling existing train starts. The operating team and supporting functions are accountable to deliver these financial benefits and have clear line of sight to the improvements that will do so.

Let's review the various programs that have enhanced the IOP and are delivering results. Since 2005, we have strategically invested over $350 million to reduce the cost of handling existing business and enable low-cost growth. Examples of these network investments include longer sidings, selected double tracking, terminal enhancements and other infrastructure to accommodate growth like the Bakken oil volumes. Along with a number of other key programs, this infrastructure is making for a fundamentally different railroad and helping to enable record-breaking performance in our operating metrics.

I now want to update you on the status of other key multiyear programs. I'm not going to detail each one. You've all heard us speak to these before. I will speak, however, to the results thus far and what you can expect as we move forward. Our First Mile-Last Mile program is a key weapon in our war on car dwell. We're seeing solid results. When compared against our 3-year average for the first 2 months of 2012, we saw a 26% reduction in active cars online, a 21% increase in the assessment of assessorial charges and a 29% improvement in terminal dwell, all at a time when we moved an average of 15% more gross ton miles per day. And there's more to come, including the removal of additional cars as we tighten up our delivery standards this year in Canada and complete our U.S. network rollout. Our Grain Reliability Program has been highly successful in Canada. Since August 1, we've realized a year-over-year improvement of 25% in empty order fulfillment, a 30% increase in covered hopper car miles per car day, and we are over 90% for on-time spotting performance. I expect similar improvements for the remaining 40% of our grain franchise as we expand the same plan and disciplined execution to our U.S. network this summer. Our long train strategy is a cornerstone to driving productivity, service and enabling growth. Year-to-date, we've already seen increases of 4% and 6%, respectively, to our potash and coal train lengths, with more improvement coming as we complete our capacity projects this year. And we continue our march towards reaching our target of an 11% improvement in Intermodal train lengths. And we are expanding this strategy to all segments of our business. Crude oil trains, for instance, will move from the current 80-car conventional model to a 120-car distributed power model upon completion of various terminal capacity expansions.

Fuel is our largest single expense item at nearly $1 billion a year. And we're working this very hard. We have acquired high horsepower road locomotives equipped with the latest version of fuel trip optimizer. By the end of 2012, over 1/2 of our high horsepower fleet will be equipped with this valuable fuel savings technology, providing enough coverage to achieve our goal of an FTO lead locomotive on every mainline train. Over the next 3 years, we're remanufacturing between 100 and 150 locomotives used in yard and switcher service. This will make them 25% more fuel efficient and enable us to reduce the number of locomotives needed given their improved haulage capacities. We've told you that we're expecting a 3% to 4% improvement in our fuel consumption rate in 2012 given the easier year-over-year comparisons, followed by a 1% to 2% improvement annually thereafter.

Our Locomotive Reliability Centre program is all about reducing fixed and variable cost and driving continuous improvement in fleet availability and reliability. We're consolidating major locomotive repair work from 8 older shops to 4 new super shops. During the first 2 months of this year, we've seen locomotive reliability and shop cycle time improvements of 13% and 20%, respectively. Locomotive availability has improved by 3%. This year, we will complete the final phase of our shop consolidation program. Taken together, our locomotive repair and reliability initiatives will allow us to continue to remove older, less fuel-efficient locomotives from the fleet and drive towards the targeted $15 million to $20 million in annual savings.

Canadian Pacific is the industry leader in train operations safety. And we remain on track to do so again with record performance quarter-to-date. Safety is good business and a core belief. It enables good service, drives efficiencies, protects our people, the environment and the communities we operate through. Service, safety, productivity and efficiency are mutually inclusive. Safety delivers shareholder value, and we intend to remain a leader in this area.

A good plan is nothing without people who have both clear accountabilities and an ability to deliver results. I've already noted the new organizational structure we implemented in late 2010. As Fred indicated, we ensured the best people were selected for key positions. We put in place line of sight metrics so that everyone clearly understands their accountabilities, and we continue to upgrade our training, and we aligned our performance management incentives to accountabilities and results, not simply efforts. We are committed to the principle that every supervisor and every manager must know the work, know the people and improve both. With clear accountabilities and the tools to deliver results, the team can move quickly on improvement opportunities.

Let's look at the improvements in some of our key metrics, proof positive of the momentum we've generated, with disciplined execution of our IOP and multiyear programs. The improvements are not a one quarter trend. They are sequential improvements over 3 quarters and in many cases are new records. This performance is sustained and will continue to improve.

Let's begin with train performance. The red line represents our actual monthly performance for our transcontinental train since January of 2010, up to March 15 of this year. The dotted line represents the monthly 3-year historic average. This same convention will be true for all of the slides to follow. Our performance is in the range that we want to see, and our customers are very pleased. In fact, we are in record territory for this time of year. I would also add that other key service metrics are performing extremely well, such as cycle times, empty car order fulfillment, and our first/last mile spotting performance.

I know many of you follow train speed very closely. We've lagged our 3-year average through most of last year, but made continuous improvement through the latter part of 2011, and the records -- the results are now in record territory. We improved our dwell through the course of last year and are now in record territory as well. In fact, we are very close to best-in-class in the industry. Dwell and speed, of course, are key drivers of another very important metric, car miles per car day. Over the past year, this metric improved steadily to a record level, now at over 205 miles per car day. This level of improvement has allowed us to move 15% more gross ton miles over the first 2 months of this year with 15,000 fewer active cars when compared to the 3-year average for the same period.

With the car velocity improvements seen on the previous slide, we've been able to reduce our active car fleets, aggressively storing, off-leasing, subleasing and scrapping surplus cars, as well as accommodating increased demand without the need to acquire more. This is enabling reductions in equipment rents costs. In Q4, we improved fuel consumption by 2.5%, and we continue to break records with last month's fuel productivity breaking our previous February record. As I wind up, I want to remind you of the value generation our IOP and multiyear programs will generate, that being over 600 basis points in annual savings by 2016. The operating team and supporting functions are accountable to deliver these financial results and have clear line of sight to the improvements that will do so.

In closing, the disciplined execution of our plan is delivering results. The needle is moving. This is a different railroad than it was 2 years ago. We have a solid plan and a capable team executing it. We are generating clear, sustainable results, and we have line of sight to further improvements in productivity and cost savings that will deliver CP's Multiyear Plan. Thank you. Jane, over to you.

Jane A. O’Hagan

Thank you, Mike. You've now heard about the terrific work Mike and his team are doing to improve our operations and provide a world-class product to our customers. Delivering profitable growth is my team's primary mission and represents 900 basis points of CP's targeted OR improvement over the next 5 years. I'm confident we'll succeed. My key message is this: CP is delivering and will continue to deliver profitable growth.

Today, I will discuss how our established approach leverages the strength of our franchise and our unique assets. Our team's proven strategy and track record of delivered initiatives, and our $1 billion pipeline of opportunities. And most importantly, how we are translating growth opportunities into value for our shareholders in line with the Multiyear Plan.

Let me set the stage by describing our approach to creating value for our customers and our shareholders. CP has a reputation for strong relationships with our customers based on trust, service, aligned investments and supply chain collaboration. It is an approach based on value creation for both CP and our customers. It is who we are and it's how we work.

The foundation of our approach is franchise strength. The first component of that is competitive and reliable service. The second component is network capability. Our franchise is unique, and we understand its strengths. We have strong originations, access to world-class export outlets, excellent north-south connections, and we are building network capacity to more efficiently carry additional volume.

Our goal in every relationship is to go beyond a shipper-supplier relationship and to establish CP as an essential part of the customer supply chain. The approach is about collaborating to develop common interests, a deep understanding of markets and supply chains, alignment of capabilities and establishing mutual accountabilities. This approach enables us to sustain and develop markets, focus on total value, not just the rate, and collaborating on planning execution for reliability and efficiency, a true integrated view of the supply chain.

To leverage CP's franchise footprint and to address our competitive and regulatory environment, CP selectively utilizes long-term contracts to de-risk the business. These agreements deliver volume and density, responsive fuel recovery, committed pricing with productivity, accruing to CP to grow margin. Long-term contracts also enable mutual investment for both capacity and productivity. Commitments by customers to production and port capabilities and by CP in network and mobile resources. We have recently announced new long-term contracts with Teck, Canpotex and Canadian Tire. These are prime examples of how we're de-risking the business for superior shareholder returns. We are taking our collaborative approach to the next level to make integrated supply chains a reality and to deliver improved service, enhance productivity and a capacity for growth.

So let's talk about growth. At our investor conference in June 2010, I spoke to Asian trade, energy and recovery in the North American economy as the basis of our growth strategy. I have also discussed our $1 billion pipeline of opportunities. We have seen success in driving growth on this basis, delivering 70% growth in energy since 2009 and 20% from Asian trade opportunities. And in North America, we expect to see growth rates to continue to improve going forward. These areas will continue to be central to our strategy over the next 5 years. We are focused on 3 methods of delivering sustained profitable growth. First, recover CP's share that was temporary lost in 2011. CP's continuously improving service performance is the basis for this recovery. Second, grow in tandem with our customers and existing markets. And third, strategic initiatives create new sources of volume and revenue by leveraging our core competencies and network advantages in both existing and in new markets.

Growth from recovery through disciplined execution is the first method. So for example, in our grain business, we have recovered our full Canadian market share. In fact, for the 2011-2012 crop year to-date, we exceeded the 5-year average volume by 16%. In Intermodal, volumes are up in domestic markets and 100% of the shipping lines and all their lanes are back. We have received strong customer support for our progress, and we expect further growth as we continue to demonstrate a track record of service execution.

Growing in tandem with our customers through continued economic recovery and real organic growth is the second method. Much of the growth our customers experience is rooted in global population and standards of living in emerging economies. This progress continues to drive demand for commodities, from metallurgical coal, to grains and oilseeds, to fertilizers. Canada is rich in these resources and the world will continue to look to us as a key supplier. We maintain strong relationships with our customers by delivering on our service offering and demonstrating flexibility and skill to meet their evolving demands. 80% of our portfolio is directly rail competitive and capturing our full share of this organic growth can't be taken for granted.

I'll highlight 2 specific examples of growth from core businesses and strategic customers. Bulk makes up a substantial portion of our business and will always be essential to success. Our recently announced long-term agreements with Teck and Canpotex not only cement our relationships, but enable investment for mutual productivity and growth. For Teck, CP will benefit from productivity gains as we provide increased capacity. Teck is investing to grow by 30% over 2010 volumes to more than 30 million metric tons, primarily from CP served mines in southeast BC. Our long train strategy for coal utilizes 152 car trains, which means CP can move 2/3 of Teck's growth with no additional train starts. For Canpotex, we expect to see meaningful growth in shipments as the owners expand capacity by over 10 million metric tons by 2020, most of which we will expect to move for export. CP is simultaneously handling increased volume, enhancing our productivity through shorter route miles, our drop and lift operating model, and our bulk long train strategy, in this case, 170 cars. Within the 5-year horizon, these 2 strategic customers alone are expected to deliver an additional $150 million per year in additional revenue.

Strategic initiatives are the third method. We will create and capture growth by extending our core competencies to new markets and building new capabilities to make our markets, including emerging markets. Beginning with core competencies, CP has proven models in key areas. CP's grain franchise is uniquely positioned in North America for both Canadian and U.S. origination. In 2011, we reinvigorated our Canadian product delivery and order management processes through hub models and an efficient and responsive order request system. We will do the same in the U.S. for the upcoming crop year. These improvements are helping to position CP to fully participate in new and expanded trade flows in a post-Canadian Wheat Board market and from expanded U.S. corn acreage. Within just the past 12 months alone, we have successfully worked with customers to establish new access or to expand capacity at 12 facilities and to capture new volumes. And we have 15 new projects that we expect to close this year.

With regard to moving bulk potash, CP has a history of innovation and leadership. This expertise and proven capability is being leveraged for future growth with Canpotex, but also new market entrants, such as BHP, which has the potential to represent over 4 million metric tons annually of new business. In Intermodal, we have a well established and proven model based on co-location. Customers such as Consolidated Fastfrate, Loblaws, Sears and Canadian Tire are excellent examples. We also expect to deliver growth from new market leaders in the retail space. The synergies of co-location reduce both customer and CP costs and enhance service reliability to attract more volume through our combined networks. We will continue to build on our co-location model. New developments include our new terminal in Regina opening this year, our new Edmonton terminal, which has just received regulatory approval and a Calgary expansion to accommodate large retail distribution developments. Making our markets refer to capturing and accelerating new areas of growth from emerging markets or markets that are new to CP.

One example of making our markets is in the development of our canola crush business.

Excellent agronomics for canola production in Canada are enhanced by the growing demand for healthy cooking oils. This demand is not only resulting in expanded acreage for seed exports, but also in the development of new and expanding domestic crush capacity. As we've done in the past when we captured 60% of the competitive new high-throughput elevators, we wanted to get the majority of volumes from the new crush plants. We were able to leverage our strong relationships with key players such as Cargill, Richardson, Bunge and Louis Dreyfus to collaborate on the opportunities to tap into this growing market. The outcome has been we've successfully influenced key plant locations to be open to CP competitive service within what was a traditional CN-draw territory.

We worked with our clients from initial concept to market assessment, the planning of track infrastructure, designs for both carload and unit train offerings and service startup. Our early involvement enabled us to influence and enhance CP's infrastructure and operating in plants in concert with plant development. This foresight in identifying the market and our commitment to collaborative customer relationships won the day in canola, as CP secured equal or majority market share under multiyear agreements. We are working on further expansion and growth plans with key customers in this segment.

Currently, our largest opportunity is in energy. Speaking on oil first, let me state the proof of concept is complete. I'll take you through a brief case study here. So we're looking at new markets, we ask the question where can rail provide unique solutions? In the case of the Bakken, we determined that the market in North Dakota was underserved and our proximity offered the opportunity to build a unique solution. Our team initiated early dialogue with key players to determine the options for moving crude oil by rail. We built operational and economic models to determine logistics and associated costs. We tested these methodologies with our partners and enhanced them based on feedback. Our goal was to develop and prove a model that would provide reliable, sustainable service for the long term. We started small, and once the trial movements proved successful, we scaled up.

We now move large volumes of crude reliably into the Gulf, the Midwest, the U.S. Northeast, Eastern Canada and the West Coast. We handled 13,000 carloads in 2011 and expect this to grow by 70,000 carloads by 2014. We will continue to grow in this rapidly expanding market throughout the multiyear horizon.

A key partner, U.S. Development, is investing further in the crude-by-rail model by developing and building one of North America's largest rail-loading facilities on CP's network in North Dakota. This facility will ship approximately 65,000 barrels per day once it's fully developed.

The rapid development of the Bakken shale area created an opportunity for us to demonstrate that crude-by-rail is a product that works, and we've done just that. The unique flexibility of rail through speed to market, optionality in origins and destinations and term commitments makes CP's offering a key and permanent component of the North American energy market. We are now applying our crude-by-rail model to Canadian originations of mid-grade and heavy crude. We have announced new transload operations in Canada with the first heavy crude movements out of Lloydminster, Saskatchewan.

Growth from crude will create enormous value for CP. Recently, the U.S. announced it will approve the southern leg of the Keystone pipeline. Even if the whole pipeline project goes ahead, it won't change the opportunity for CP. Rail will never replace pipelines, it's complementary. Rail has existing capacity, flexibility and reaches markets that pipelines don't.

But there's more to the energy story than oil. On the input side, there are a wide range of supplies required for energy development, including pipe and frac sand. We are approaching the frac sand market in the same way we came at the crude market, leveraging our network, building partnerships to design high throughput operations and providing a range of options in destination markets.

We recently announced our partnership with Unimin, who is building its largest and most efficient frac sand facility with 2 million tons of annual production on CP at Tunnel City Wisconsin, and there's more to come.

Our approach across the energy sector has been to build and test the model then invest with our partners to deliver value over the long term. We made our investments of $90 million to $100 million over the last 2 years to support these supply chains, and our customers are investing $400 million to $600 million in production and terminal facilities. In the energy space, our initiatives in crude oil and frac sand will provide up to $400 million in annual new revenues over the next 3 to 4 years.

So to sum up growth, I'm very confident in our ability to deliver profitable growth results from realizing full value in the economy through CP's improving service performance, growing in tandem with our customers in existing markets and through strategic initiatives, creating new sources of volume and revenue by leveraging our core competencies and our network advantages in both existing and new markets.

When I talked to you in 2010, we had $1 billion in our opportunity pipeline and we have secured $700 million in opportunities. With our approach to the market, we have replenished that pipeline with over $1 billion in opportunities that will continue to drive profitable growth over the next 5 years.

I will now turn to how we're translating growth into shareholder value. And as I said at the beginning of my presentation, delivering value from the marketplace represents approximately 900 basis points of our targeted OR improvement by 2016. So we translate growth into shareholder value in 4 ways: volume, density and length of haul; pricing and fuel coverage; selling into the IOP; and productivity.

First, railways thrive on density. We are focused on delivering the projected volumes from existing and new markets. In addition to our base commitments, the growth I described earlier will deliver both volume and extended hauls. Second is securing full value for each of the services we provide through disciplined market-based pricing. We have delivered solid results on renewal throughout the recessionary period, including real price increases in every quarter of 2011. In addition to achieving inflation plus increases at renewal, we embed effective pricing mechanisms within multiyear agreements.

The next pricing component is effective fuel recovery. We have best-in-class coverage that is fully responsive on approximately 80% of our business. Where a lag exists, for example in regulated grain, Kathryn's team mitigates volatility through hedging.

And finally, a competitively priced and applied suite of supplemental services complements base pricing. An independent review of our program and charges confirmed we are at or above competitive benchmarks for demurrage and other fees. Our clear terms support efficient execution of the IOP.

The third and fourth drivers are disciplined execution of our integrated operating plan and productivity. I will simply highlight here that disciplined selling to the plan ensures we keep our promises and efficiently deliver to the commitments and we are converting productivity into enhanced margins.

So I'll wrap up here by asking you to remember this: CP is delivering and we'll continue to deliver profitable growth and value from the marketplace. Our team has a proven track record of delivered initiatives, and we see further opportunities for growth. Our approach to the marketplace leverages the strengths of our unique franchise, and most importantly, we are translating growth into value for our shareholders.

And with that, I'll turn it over to Kathryn McQuade.

Kathryn B. McQuade

Thank you, Jane, and good morning, everyone. Disciplined execution of our IOP and our multiyear programs is delivering excellent operating metrics and improved service reliability. We have de-risked the plan with valuable long-term contracts with key customers, and we have the confidence in the sustainability of productivity and operational efficiencies, which will deliver our OR targets.

Today, I will review the status of our plan, provide an update on pensions, our multiyear capital programs and our liquidity and cash flow priorities.

Last year, we provided you these key operating metrics to track our progress. Clearly, we are seeing sustained, record-breaking operating metrics driving asset velocity and improved service offering. Terminal dwell is down. Car miles per car day, train speed, train weights and locomotive availability, all up and fuel consumption improved. Operating metrics are leading indicators of financial performance. These improvements show up first in fuel expense, with improved fuel consumption; equipment rents, with fewer foreign cars online; compensation and benefits, with reduced overtime and recrews. We will continue to see equipment rents decrease as leases expire, fuel efficiency improve as we continue to roll out our multiyear programs, labor productivity improve as we execute on our IOP and lower materials and purchase services associated with fewer mobile assets.

CP's operating expense per RTM, or revenue ton mile, adjusted for differences with the pension plan is comparable to CN's. Our Multiyear Plan delivers efficiencies at a rate that not only offsets inflation but also reduces our cost per RTM over the multiyear period as our productivity continues to improve.

Continuous improvement is targeted to offset inflation in the out-years where we have a line of sight from ongoing programs. Technologies and the Digital Railway provide further upside in the future.

CP has a legacy-defined benefit pension plan that can create potential volatility for cash flow and income statement. Both expense recognition and cash contributions are significantly affected by outside economic forces such as volatile equity markets and historically low interest rates. These economic forces are occurring during a time the company is experiencing a dramatic demographic shift in our employee base. Our pension plan has been around for decades, and the legal and union environment in place in Canada does not allow for simple solutions. We have developed a multifaceted strategy to reduce volatility and costs through advocacy efforts, asset management, voluntary prepayments, plan design changes where possible and current union negotiations.

I'd like to take some time today to walk you through the realities of our legacy pension plan, contributions, both voluntary and required, pension expense and the steps we've taken to create an environment where we can successfully execute our Multiyear Plan.

CP has aggressively managed contribution volatility and secured cash flow certainty by leading our advocacy efforts and continuing discussions with regulators for further temporary relief. We have closed the pension plan's DB option to new, nonunion hires and have made some plan design changes where possible. We are currently in conciliation with our largest unions representing our train crews and train dispatchers.

From an asset management perspective, we've introduced 60% asset liability interest rate matching to reduce the impact of declines in long bond rates. We've reduced our public equity exposure and increased allocations to less volatile infrastructure and real estate investments. And over the course of 2009, '10 and '11, we made $1.75 billion in voluntary pension prepayments. To fund these prepayments, we took advantage of our cash balances and financed the rigid 5-year solvency requirements in a tax efficient transaction with long bonds at very attractive rates. This essentially eliminates contribution volatility during the Multiyear Plan period and is accretive to earnings.

As a result, we expect to fund only current service requirements ranging between $100 million and $125 million over the next few years. Our projections could fluctuate if extreme market conditions materialize and we would of course update you should that occur.

Pension expense is based upon different assumptions and recognition periods, the notes [ph] that determine our cash contribution requirements. However, at the end of the day, the results are roughly the same, higher pension costs. In the near term, we know that 2012 defined benefit pension expense will be $41 million. Assuming normal equity market returns and modest increases in bond yields in 2012, the number is expected to be approximately $125 million in 2013 and remain there or slightly higher for the remaining multiyear period. But as I mentioned we do have a multifaceted approach and we'll continue to work this headwind very hard.

Now let's turn to our multiyear capital plans, which are unchanged from what we presented last year. During 2011 we completed the first year of our accelerated capital program, and our operating metrics are benefiting from these improvements. As a quick review, we are investing in the Western Corridor on our lines west of Calgary, the North Line and our north, south routes in the U.S. Midwest. In 2012, we will complete the second year of these 3- to 4-year programs.

A lot has been said about locomotive, so I would like to clarify this capital spend. We purchased 91 new fuel-efficient locomotives in late 2011 and the first quarter of 2012. These purchases are normalized renewal and replacement program. With an active growth fleet of just under 1,000 units and a useful life of 30 years, we should, on average, replace about 30 units a year.

Let me remind everyone, we did not purchase any locomotives in 2009 or 2010. These locomotives are not incremental to our fleet, but rather replace a larger number of older, high-maintenance, less reliable and less fuel-efficient units. And will improve fleet productivity as measured by GTMs per active horse power.

Also, on the locomotive front, we will begin a program to remanufacture our older 50-plus year yard and locomotive -- yard and switcher locomotives. This program reduces the number of units required, with every 4 units replaced by only 3 through improved reliability, and allows for the interoperability with our road fleet, improving both productivity and utilization. As I mentioned, these units are over 50 years old, so these will be essentially new units with significantly lower maintenance costs and vastly improved fuel efficiency.

The timing of both the road fleet renewal and the remanufactured units is done with an eye to the onerous 2015 Tier 4 emission requirements, making these investments and the timing even more critical.

Finally, on the IT renewal, we have begun our multiyear system upgrades of our shipment management and SAP suites. These upgrades position CP to enhance labor productivity, improve asset management and provide better shipment visibility to all parties. This work is foundational for the mobility and predictive technologies which will drive further efficiencies in field technologies and reduce corporate overheads in the out-years.

We expect capital expenditures as a percentage of revenue to continue in the 17% to 20% range through 2016. As a reminder, replacement capital can typically run between 13% and 15% of revenues in any given year. The remaining capital budget is discretionary and carries high ROI hurdle rates. Future capital spend may vary during the multiyear period, somewhat depending on items such as positive train control and its corresponding timetable which is set by regulators. We expect all of our capital requirements to be funded with cash from operations.

We have taken a number of steps over the last few years to strengthen the balance sheet, reduce cash flow volatility and improve near-term liquidity in the Multiyear Plan. These include the voluntary pension prepayments I just spoke to. We have blended and extended, by tendering and refinancing, a number of debt maturities. As a result, we do not have any material refinancing requirements in the next few years. And finally, we have renegotiated our $1 billion revolving credit facility to 2015 to ensure ample liquidity should it be required.

Looking forward, our Multiyear Plan does not project the need for any new debt. We have adequate cash flow to meet our capital requirements while maintaining and increasing dividends relative to the industry and our earnings growth. We're committed to an investment grade credit rating and target moving to mid BBB investment grade as the metrics improve. We will continue to monitor markets to decrease debt in an economical way and we'll review opportunities to further return values to our shareholders.

The execution of our Multiyear Plan has allowed us to narrow our operating ratio range to 70% to 72% by 2014. We are now 2 years into the 5-year plan presented in June of 2010. Leveraging off of the foundational work in place, less risk in the markets, the completion of the first year of our capital programs and the sustained and improving operational performance, we are once again extending our projections to cover a 5-year time frame that targets to deliver an OR of 68.5% to 70.5% for 2016.

So what does this all mean from an income statement perspective? To stay consistent with my forecast last year, I will continue to use 2010 results with a 77.6% OR as a basis for comparison. On the top line, we are assuming CAGR growth in RTMs of approximately 6% through 2014 and GDP-like growth thereafter, resulting in a CAGR in the 4.5 to 5.5 percentage range through 2016 and inflation plus pricing throughout.

On the expense side, as I just mentioned, pension expense is estimated at approximately $125 million in 2013 and will remain at or slightly above, higher than that thereafter. Non-pension labor averages $0.105 per RTM, which assumes labor inflation around 3%, offset by productivity. Fuel efficiency will continue to improve at a rate of 1% to 2% a year. However, our target for 2012 is 3% to 4%. Depreciation declined slightly as a $0.01 per RTM, and all other expenses per RTM declined modestly with efficiencies more than offsetting inflation.

Our plan is balanced, leveraging the growth potential of the franchise with productivity and efficiency improvements to provide the greatest shareholder value by concurrently improving EPS and free cash flow. We de-risked the plan by reducing pension funding volatility, minimizing debt refinancing requirements, securing beneficial long-term commercial contracts with our customers and investing network capital on portions of our routes with the highest density and where we have strategic growth. Mike and the team are sustaining record-breaking operating metrics which are delivering productivity and efficiencies, measures for a lower cost.

We are aggressively delivering on our multiyear programs and ensuring that the training, processes and metrics are in place that will drive and sustain a culture of continuous improvement. This team -- this is the team that knows the franchise, developed this detailed plan and is now accountable to execute and deliver the results. We are committed to driving shareholder value that leverages both low-cost growth and productivity to deliver to 70% to 72% operating ratio by 2014 and further improving targets, targeting a ratio between 68.5% and 70.5% for 2016.

And with that, I'll turn it over to Fred. Thank you.

Frederic J. Green

So at the risk of repeating myself, I've got a great team. We're delivering results, we have a clear and detailed plan and we have momentum. And we are confident that we can deliver our targeted operating ratio of 68.5% to 70.5% for 2016.

This morning, you've heard my view of CP's future and my team's plans to make it a reality. We're confident that we have the right plan, one that drives maximum shareholder value from this unique franchise.

However, last month you heard a different view of CP's future, but nothing that can be described as a plan. On February 6, Pershing Square presented a series of simple charts and graphs and drew conclusions about things that might or might not deliver an operating ratio of 65% by 2015.

For example, they said CP's revenue per revenue ton mile growth had lagged its closest competitor since 2005. And they said this was due to CP's inferior service. They said CP's expense unit costs were dramatically higher than its closest competitor, and said this was CP's biggest issue. And they said CP's asset utilization was a big deficiency and due to undisciplined operations.

I don't mind criticism, but I do think it's reasonable to ask that it's based on facts. So let's talk about the facts. It's a fact that the growth of CP's freight revenue per RTM has been greater, greater than CN's since 2005. Pershing Square's analysis was flawed because they included non-rail-related revenues in their calculation. In the case of CN, this includes revenues from Great Lakes' shipping, dock and terminal operations, that have nothing to do with revenue per RTM or the quality of service. It's a fact that CP's customers are speaking out in support of the company's service offering and its approach to customers. It's a fact that CP's largest customers work jointly to define long-term contracts because they know that collaborating with CP is the best way for both parties to create shareholder value. It's a fact that with 80% of our business being directly rail-competitive, CP's approach to our customers and their markets, one of collaboration and relationships, must continue to be a strength of this company.

Shippers get to vote, too. They vote with their market share. And Claude Mongeau and CN have open arms to those customers as they transform CN to a very different model than that of its last leader.

Pershing Square said that expense unit costs are CP's biggest issue and how fixing it will deliver their promise of a 65% OR by 2015. But in doing their analysis, they overlooked, purposely or otherwise, a significant and temporary difference between CP and CN. I'm not going to explain the complex rules that determine legacy pension expense but note one important fact. In 2011, CP recorded a legacy pension expense of $46 million, while the CN recorded a credit of $80 million. That's almost 200 basis points of OR difference. This difference is temporary. CN's public guidance is that its pension expense will increase by about $120 million in 2012. Adjusted for legacy pension expense, you can see on this chart very similar expense unit costs since 2006. Temporary gaps open up in 2009 because of the larger bulk-oriented volume decline that CP experienced in the great recession and again with the network disruption caused by the 100-year weather events in early 2011, but they quickly closed. In Q4 2011, we saw them identical.

Our closest competitor is rightly recognized as a productive and efficient railway. They are, of course, a natural benchmark, and we are obviously doing a great job of keeping pace on this very important metric. It begs the question of how Pershing will get to 65% by 2015 if the unit expenses, adjusted only for pension, are virtually identical today.

Pershing Square said that CP's railcar fleet is bloated and evidence of undisciplined operations. The fact is that our 2012 railcar utilization is ahead of CN's Q4 result. With the return to normal operating conditions in the second half of 2011 and the successful implementation of CP's First Mile-Last Mile program, we have been delivering record results. And the results were on the public record on February 6 when Pershing chose to portray otherwise.

But the most important thing to know that we set our own targets and that the targets are supported by detailed plans, plans that drive benefits that we will be held accountable for.

Pershing Square claims that locomotive utilization is poor, and they've repeatedly stated that this is how they will reduce expenses and capital. Later this morning, Oliver Wyman will clearly show that CP's grades and curves are, in fact, something that matters. Yes, we have tough curves and grades, and this management team has addressed them by being the pioneer of Distributed Power train designs, the early adopter of AC locomotive technology and the innovator of sophisticated train marshaling software.

Adjusting for curves and grades clearly shows that our Integrated Operating Plan is producing results on a par with CN's Precision Railway. Curves and grades is physics, and the dismissive comments by Mr. Harrison indicates a clear lack of research or understanding or both.

Ed Harris is the only person to lead operations at both CN and CP. I know he said it best when he said it's a mistake to underestimate the differences between CN and CP franchises. It's certainly obvious that Pershing and Mr. Harrison have made that mistake.

These are just a few examples of how Pershing Square's proposal is flawed. It's based on a flawed analysis and their misreading, intentional or otherwise, of the facts on the public record. Their criticisms and their conclusions just aren't supported by the facts. Our Multiyear Plan, based on our in-depth knowledge of our franchise and endorsed by our board, is the right plan to create the most shareholder value from this unique set of assets. And this is the right team to execute it.

Thank you very much for your attention. And Janet, what are we going to do? Go to you, John.

John Edward Cleghorn

And they say he is too nice. The Board of Directors unanimously believes that we have the right plan and the right team for our unique franchise. As you've heard today, the management team is aggressively and successfully executing on our Multiyear Plan. It is the firm belief of this board that the continued successful execution of this plan will not only result in a more efficient railroad, but will certainly generate value for shareholders. The board and our Safety, Operations and Environment Committee is diligently overseeing the execution of this plan. Make no mistake, we've closely reviewed and fully endorsed this plan and we hold management accountable.

In 2011, CP's management team, under the oversight of the board, made meaningful progress under all 3 pillars of the Multiyear Plan: driving volume growth; expanding network capacity to safely and efficiently support higher volumes; and controlling costs. As a result, CP is beginning 2012 with improved operating momentum, excellent service and a stronger, more resilient rail network.

The board is pleased to see the team's hard work paying off, beginning in the fourth quarter and continuing every month into 2012, as we continuously post record operating metrics. We expect these metrics to translate into improved financial performance beginning in the first quarter of 2012.

I'll get into more detail on this in a moment, but I can state that your board has the right blend of experience and expertise to best oversee the execution of the Multiyear Plan. CP's board unanimously recommends that shareholders vote for the CP nominees, including Mr. Ackman. We strongly believe that a vote for the CP nominees is a vote for the continued, careful and focused execution of the value-generating Multiyear Plan. A vote for any of the other Pershing Square nominees is a vote for risk and a vote for uncertainty.

Our board consists of highly qualified directors with experience in diverse but very relevant fields. In addition to Class I railroads, our directors have a range of expertise including finance, public policy and the key markets that CP competes in such as agribusiness and energy. Detailed biographies of the Canadian Pacific nominees have been provided in the proxy circular, which was filed last week, and are also available on our website.

The board also undergoes continuous renewal to add new skills and experience to ensure your CP board remains best qualified to oversee the execution of the Multiyear Plan. This renewal of talent is evidenced by the additions of Rick George, Tony Ingram and Ed Harris in 2011. In fact, 60% of the board has been refreshed over the past 5 to 6 years.

Tony and Ed, who are well-known to many of you, are seasoned railroad executives who served at 4 of the 7 Class I railroads in North America and have over 80 years of experience between them. You still look young though, Ed.

Edmond L. Harris

He's got 44, I got 36.

John Edward Cleghorn

Okay. Tony and Ed joined the Safety, Operations and Environment Committee, which is responsible for monitoring the progress of the Multiyear Plan.

Last and certainly not least, we share a recognized commitment to the highest standards of corporate governance, a commitment that has been consistently demonstrated over the years and in our current engagement with Pershing Square. This board's overriding responsibility is to act in the best interests of the company. We believe that Pershing Square's repeatedly stated agenda of management change would be detrimental to the company and its shareholders. The board is always open to listening to ideas and we welcome Pershing Square as a new significant shareholder.

CP has repeated its good faith efforts and there have been subsequent discussions between members of the CP board and representatives of Pershing Square. In addition, there have been numerous discussions between CP's financial and legal advisors and advisors to Pershing Square.

On December 11, 2011, the nominating committee met with Mr. Ackman and shortly thereafter offered him a seat in the board so that constructive board-level dialogue based on all the relevant facts and information could take place. Our invitation to Mr. Ackman to join the board remains open, and CP has included him as one of the nominees recommended to CP's shareholders.

We recognize the importance of Pershing Square and Mr. Ackman as a major shareholder, but we strongly and respectively disagree with Pershing Square's assertion that CP should have and could have an operating ratio of 65% by 2015.

Given Pershing Square's very aggressive target, the absence of any detailed plan to get there and the obvious risk and uncertainty in its proposal, the board retained Oliver Wyman, highly qualified independent railway and surface transportation industry experts, to compare views of CP's future.

Oliver Wyman undertook its assignment under the direction of the board's Safety, Operations and Environment Committee. Oliver Wyman is very familiar with our industry. It has been engaged in the past by railroad senior management and boards to advise on business and operational, redesign, organizational restructuring and performance improvement. Based on a comprehensive review, Oliver Wyman confirmed CP's Multiyear Plan 2004 target range is ambitious, but reasonable and achievable. And they also concluded that Pershing Square's stated OR target is both unrealistic and unachievable by 2015.

The board believes that it's a mistake to underestimate the real differences between the CP and CN businesses. The Board of Directors believes that CP's Multiyear Plan includes ambitious but achievable targets, and when these reasonable targets are met, new targets will be set.

At this point, I would like to turn the podium over to Allan Kaulbach, partner at Oliver Wyman, to provide a summary of the firm's findings and conclusions for you.

Allan Kaulbach

Thank you, John, and good morning to everybody. I'm here this morning to provide, as John said, a summary of the assessment report that Oliver Wyman undertook to look at the feasibility of achieving a 65% OR by 2015 and also the likelihood of achieving the multiyear OR plan target of between 70% and 72% by 2014.

It may be helpful for some of you who don't know who Oliver Wyman is to understand our background and qualifications. We are an international consulting firm with industry practices with deep expertise. Among them is our surface transportation practice, which I co-lead. We have worked on many of the North American railroad -- North American Class I railroad turnarounds and indeed on large international restructuring assignments. And indeed, we've worked for many of the firms in this room in terms of providing due diligence for strategic and financial investors.

I think it's important to understand the context of our assignment. Maybe the best way of putting that context is that there was a hypothesis offered by Pershing Square Capital that CP could achieve a mid-60% operating ratio by 2015. Now a plan was in -- by the way, for shorthand, we use that at 65% just so we don't have to keep saying mid-60s, but somewhere in that range. A plan was not offered. I don't know the background of the hypothesis, but I would presume, and many of us had been engaged in these, that it was based on a desktop analysis which was premised on comparing CP with CN. I would also assume that it included assumptions offered by Mr. Harrison based at -- on his time at CN. And as a result of that, one has to acknowledge, for those of us who have done desktop analyses, that there are limitations on what you can get out of a desktop analysis. It can point you in a direction but it doesn't allow you, if you will, to get under the hood and look at what's really going on.

On the other side, CP was in the midst of its normal planning process, has developed a plan, which gets -- targets an operating ratio of between 72% and 74% -- or excuse me, 70% and 72%, pardon me, for 2014 with a detailed plan.

As John mentioned, we were retained by the board. Our objective was to do 3 things. First of all, test the hypothesis that was offered by Pershing Square. Second, test the robustness of the plan that was offered by CP management. And third, provide a quantification of our conclusions with respect to both of those elements. So we therefore focused on the achievability of reaching a 65% OR by 2015 and by looking at the reasonableness of the Multiyear Plan.

As John mentioned, we work directly for the board's Safety, Operations and Environment Committee that was chaired by Tim Faithful to my left, members of that committee included Ed Harris and Tony Ingram.

Probably, it would be helpful for you to understand the type of work that we did. What we recommended to the board is that, in essence, we undertake a reverse due diligence. If we were going in and we were doing a due diligence for an investor group, how would we do it? And that's the approach we took, and I'll get into the details in a minute. It was a 4-month assignment. We started, as John mentioned, in late November and are just finishing up our work. The team was led by myself in collaboration with 4 other senior partners, 2 of them are in the room, Hugh Randall, who headed the operations side of the analysis and Jeff Elliott, who headed the market side of the analysis.

We used a fair amount of publicly available information to check things that we wouldn't otherwise know in doing the comparison of CN. We had unrestricted access to all of CP's financial, operating and commercial data. We conducted interviews across the entire company and all management levels, including engineering, mechanical, transportation, surface design, major terminal, yard operating staff, all of the commercial line of business owners and then of course the leaders and managers in finance, accounting, HR and IT. In the end, what we produced was a 245-page detailed report with supporting appendices. So there's a fair amount of chapter and verse that supports the conclusions that I'm delivering to you.

Now what was our methodology? And as I said, it was primarily based on a reverse due diligence approach. First of all, we took a look at industry improvement experience and Hugh, Jeff and myself have both been involved in North America Class I turnarounds previously, so we have first-hand experience in this area. The next thing that we did, given the emphasis on the comparison between CP and CN in the Pershing hypothesis, is we took a look at differences in network and infrastructure between CP and CN, understanding the market franchise and then implications of pension and labor. Based on that grounding, we moved over to the MYP and took a detailed look at revenue, including volume, price and fuel cost recovery; operations, with a complete functional assessment; the capital program; and then risks in terms of market, productivity and systems.

If we go over to the next slide, the hypothesis in the first instance about achieving a 65% OR by 2015 is clearly refuted by industry experience. The turnaround contemplated under the Pershing hypothesis, as I said, is clearly not supported. It becomes more difficult and time-consuming, if you look at history, to achieve an OR below 80%. For those of us who are constantly trying to lose weight, the last 5 pounds are always the hardest. So if you take a look at CN's, even its second turnaround, it occurred at a rate averaging 2.5 points a year from 1997 to 2001 and then slowed down to about 1.2 points after 2001. NS, CSX and UP had improvement rates between 1 and 3 points a year on average. Of all of the Class Is, only CN achieved an operating ratio below 70%. Other Class Is have gotten there but have not been able to sustain it for a full year.

I think it's important to emphasize and that the management team went over kind of the components of the Multiyear Plan, and that's what we reviewed, too. But the components represent the agents of change that were experienced at other railroads. First of all, around scheduled or Precision Railroading present in the MYP to the IOP, around strategic capacity expansion and then around achieving operational improvements. For any of the turnaround plans, those were key ingredients.

So if you look at the -- if we could back to the preceding slide, I'm sorry -- if you look at the highlights there, as I said, for all the other turnarounds, there was always a plan, not a hypothesis. And the time frame was never achieved in the time frame that is offered under the Pershing hypothesis.

So the next element that we looked at was moving on to benchmarking, to looking at the realities that exist between the 2 railroads. And we took the hypothetical target of 65% and then took a look at some of the real differences. First, around network and infrastructure, which adds 670 basis points to that base OR. Then we made adjustments around the market franchise, particularly around the fact that CP on a RTM basis is primarily a bulk railroad. Then we looked at labor and pension differences. And what we come up with, once again, 245-page detailed report, lots of analysis behind that, is that the best potential for CP in terms of a realistic OR target is 70.6%. Not that you can't get below that, but to do it by 2015, the differences cannot be mitigated in that time frame.

Now let's go over to some of the differences. First of all, around curves and grades, clearly, more severe than CN's. CP needs 50% more locomotives than CN to move the same amount of tonnage due to CP's more severe curves and grades, and that's where we came up with that number of 203 locomotives based on that analysis. CP's yards are older, geographically constrained and have poorer layouts than CN's yards. And we looked Alyth, Coquitlam, Winnipeg, Toronto. There's no room to easily expand in those major yards.

CP has shorter arrival, departure tracks that increases handling costs and the time to process trains. Then we took a look at the fact that CP has shorter and less frequent sightings that constrains train length. It increases train starts and crew costs. If you look at the major carters, and we looked on a comparable basis between CN and CP, where the preponderance of gross ton miles are 80%, CN has an advantage in 4 major corridors: Vancouver to Alberta; Alberta to Winnipeg; Montréal to Chicago; and Moose Jaw, Winnipeg to Chicago.

Now going over to the next slide, you see an awful lot of detail there. But this provided the analysis that I just gave you. It's a representative type of analysis that we did around these major building blocks, one of them being around curves and grades, which show -- which illustrates the detail that I gave you around these points.

Now if we move over to the next slide, we discussed that CP does have a market franchise advantage versus CN. CP's book of business is more heavily weighted towards bulk than CN on a revenue ton mile basis. This means that bulk traffic generally has lower unit cost due to scale loading and reduced handling costs, and it also tends to move in large blocks, improving asset utilization. However, one has to understand that, again, I come back to the point that relative to CN, CP has to move this traffic over a structurally disadvantaged network, hence, that 670 basis points disadvantage. And on westbound movements, the disadvantage from Winnipeg to Vancouver, covering most of the bulk traffic, is quite limiting. So for this territory in loaded westbound moves, CP needs more than twice the haulage capacity over its geometry than CN has over its. So there is an advantage, but it's severely limited.

Let's move on to the impact of labor and pension differences. First of all, there's a difference in terms of legacy plan design. There's also a major difference in terms of labor agreements. CP has gained share incentive provisions, CN does not. CP running trade work limitations outweigh CN's and require sometimes more employees. Why? Once again, because of topography, slower train speeds and also because of legacy crew districts that were established at the time that CP was set up. And that CP is now in the process of trying to change, as Mike was alluding to.

Let's move on to the next slide in terms of the assessment of the plan. Now what I'd like to emphasize here is in the fall of 2011, management had in place its normal multiyear planning update process. We were asked to come in and assess the reasonableness and achievability of that Multiyear Plan. We evaluated the key drivers of the plan in terms of revenue growth, as I mentioned before, both in terms of volume, price and fuel cost adjustments; productivity improvements around fuel savings, mechanical, field operations, freight cars and other.

And then by the time we were completing that analysis in January, the fourth quarter had been completed. There were now established new trends in terms of performance, and the plan was updated. We looked at the elements of the plan update in terms of proof of concept around additional market opportunities, favorable costs of capital ruling by regulators on index space contracts, the improved run rate on many network assumptions that were in place that were now being achieved and then the pension expense updated to reflect the most recent discount rates. So the evaluation that we provided is for 70% to 72% OR by 2014.

If we go over to the next pages, and as I said, I won't take you through all the detail, there's a lot, but we -- looking at all those categories, on the revenue side we found that, overall, line of business targets were supported by market growth and identified opportunities. Price was supported by market base pricing and new long-term contracts in place, and fuel cost recovery was supported by improved contract coverage, as well as terms.

On the productivity side, we found a reasonable increase in costs, with volume increases, but they were offset by many of the improvements that were discussed in management's presentation by Mike. And we found overall cost to be reasonable and achievable in terms of the productivity targets that have been set.

Going over to the next slide in terms of risks and opportunities. Are there risks? As with any plan, there are. We found them to be understood by management and manageable. On the revenue side, we found that risk-adjusted pipeline of identified opportunities had not been included in the plan yet, but that there was a distinct upside awaiting proof of concept, which Jane outlined is a normal process. We believe the plan is achievable for 2014 if the current trajectory of improvement continues and, as outlined by management, there's continued disciplined execution of the plan.

So what are our overall conclusions? CP's MYP OR target range of 70% to 72% for 2015 is ambitious but reasonable and achievable, and I bring you back once again to the history of other turnarounds. It's consistent with the other Class I turnarounds. Second point, the risk-adjusted pipeline of identified opportunities not yet included in the MYP are there, are a distinct upside and will probably be realized once proof of concept is put in place.

The risks are manageable. The OR target is achievable dependent on current trajectory and continued disciplined execution and most importantly, achieving a 65% OR just is not possible by 2015. Does that mean it can never be achieved? No. And we are not saying that it can never be achieved. But I go back, and I'll just close with a slide I gave you around the history of turnaround, it's never been done the way the Pershing hypothesis offers it in terms of industry experience. And it certainly has never been done in the absence of a plan. There is a plan, we've evaluated it. We believe it's reasonable and achievable.

Thank you very much.

John Edward Cleghorn

Thank you, Allan. The Canadian Pacific Board unanimously supports the Multiyear Plan and our great management team. This management team has developed a comprehensive plan based on its intimate knowledge of CP's unique assets, its lines of business and its new opportunities. The plan was designed to reinvent this railroad ahead of fundamental changes that are reshaping our industry. You've heard about the need for change at CP. In fact, CP has changed and is continuing to change in a very positive and sustainable way.

Today, you've heard about how essential volume growth is to maximizing the value of Canadian Pacific railroad. This growth will be driven by management's positive and innovative relationships with customers, other railroads, particularly CN, and also governments and communities at all levels in North America. We do not take these relationships for granted, and the board has been further encouraged by the many serious messages of support that we and the management team have received. The CP management team has the full confidence and support of your board, and we strongly believe that this is the right team to lead the unique CP Railway franchise into the future.

The continued execution of CP's comprehensive Multiyear Plan is the clear path to shareholder value creation. The board absolutely believes that Fred Green and his great team are best suited to execute the Multiyear Plan. They have an in-depth knowledge of our industry, our franchise and our business at all levels. They are veterans of the great recession, an unprecedented winter and more severe spring and have brought our customers back and put our operations on track.

CP is delivering record operating metrics, a solid leading indicator of improved financial results. CP's approach to its customers and their markets is a proven success, and it promises achievable, continued growth. We don't want to throw away all that good work and positive momentum.

The Canadian Pacific board has the right blend of experience and expertise to best oversee the successful execution of the Multiyear Plan. CP's reinvention of itself is the right change for this company. The right change does not and should not include changing the Chief Executive, his team or the plan when they're succeeding. That is simply the wrong thing for CP to do at exactly the wrong time.

On behalf of the Board of Directors, I want to thank all of you for your attention and your careful consideration of the real facts at CP as we approach the Annual Meeting on May 17.

Now before we break, I just want to introduce the other members of our panel here. You've heard from Allan. We have Ed Harris. These are board members, we've got Tim Faithful, who chairs our Safety Operations and Environment Committee, and Mike Phelps, who chairs our Compensation Committee. And through this process of engaging with shareholders since early January, we've had 8 of our 14 outside directors actively engaged in discussions with shareholders. And we have 4 of us here today for the question-and-answer period.

So we're going to take a 15-minute break before the Q&A session. And if you would turn in your Q&A index cards to a CP representative as they leave the room -- as you leave the room out there for the break or over here. Thank you. 15 minutes.

[Break]

Donald B. Campbell

I'm glad you came back. I was going to have to take all these questions on my own. Okay, welcome back, everybody. I'm Don Campbell. And as John said earlier, I'm going to be hosting the Q&A session this morning.

First of all, thanks for all of your questions. We were busy in the back room trying to arrange them by theme. We have lots of questions, I would call modeling questions. How should I think about this? How should I think about that? In the interest of time, we won't be touching on a lot of those. We're going to try and pick up on some of the other themes. We will be getting you out of here today for lunch. We will get through as many of your questions, of course, as we possibly can. If we don't get to your specific question, we do want to hear from you. And we would encourage you to contact directly Janet Weiss, and you can find her contact information on our website.

Question-and-Answer Session

Donald B. Campbell

So without further ado, question #1, to the board. Can you tell us why you have not as yet met with Mr. Harrison to hear his ideas?

John Edward Cleghorn

The board -- is this on? Okay. The board knows Mr. Harrison very well. We're well aware of his reputation. We've had numerous calls directly to the board and to management by concerned customers. And I think it's going to be important to hear from somebody on our board who has had the opportunity to work for Mr. Harrison, as well as our company. Ed, maybe you'd just give a comment.

Edmond L. Harris

Well, I think it's important to understand, with all due respect to Mr. Harrison, and I have a lot of respect for him as a railroad operator, I don't think Hunter is the best suited for the job. That being the total manager, that of a CEO. Only because we have the right man on the team today, his team that he's put together, the results that are being driven following the Multiyear Plan. That needle is already moving, folks. That's been explained once and twice and maybe again for the third time. We're comfortable with Fred and his team. Why take the risk? Why take the chance?

John Edward Cleghorn

We went through disruption in 2011, 2008, 2009. We don't want to go through any more disruption and uncertainty and risk.

Donald B. Campbell

Okay, our next question. Why did you add Mr. Ackman to your slate when you obviously disagree with his ideas?

John Edward Cleghorn

Well, we had an invitation to Mr. Ackman back in December, and we went public also that, that invitation still stands. And we welcome the opportunity to have him join our board and enter into a detailed comprehensive review of our Multiyear Plan, get to know our management better, go through an orientation like all our new directors go through, get on the property, meet our people, see what we're doing and have interchange and engagement with the other directors, many of whom have got either direct or related rail experience, transportation industry experience. And we're hoping that our slate of nominees, including Mr. Ackman, will be voted in at our Annual Meeting, and we'll get that chance to meet with him on a regular basis.

Donald B. Campbell

Okay. We have a question here for Jane. Volume growth, Jane, is obviously a big part of the company's Multiyear Plan. Does this mean that the OR target changes if the crude-by-rail business dries up?

Jane A. O’Hagan

Well, first off, I would say that rail is complementary, and that the proof of concept is in for the crude-by-rail model. Rail has the capacity. It has the flexibility, and it has ability to go where pipelines don't go. It also has the ability with the so-called term we call optionality, which means that matrix of origins and destinations, where rail can capably serve on its own basis. So it will always be a complementary part of that process. So I think that, obviously, as I said in remarks, the other thing that we see is that our volume has grown faster than what we expected. And so we see rail and the crude-by-rail model as part of the permanent landscape in the energy market.

Donald B. Campbell

All right.

Unknown Analyst

I have a question. The question is, if that dries up, does that impact OR [indiscernible]?

Jane A. O’Hagan

No, I think the answer I would say is that we don't see that part of the market drying up at all. The crude to [ph] market is here to stay, a permanent part of the energy landscape.

Donald B. Campbell

Okay. We had several questions concerning the Oliver Wyman report. Paraphrasing, but why should shareholders believe a consultant's report that was bought and paid for by the company?

Timothy W. Faithfull

Well, we chose Oliver Wyman because of their professional capability and also their professional integrity. And we made it clear from the very beginning to them that what we wanted was a fact-based review of the Pershing deck and of our Multiyear Plan. We did want a defense of the management or of the board. We wanted something that's fact-based because that's right for the company and right for shareholders. And I don't think Oliver Wyman would have taken the assignment on any other basis.

Allan Kaulbach

Yes. If I could respond to that in that initial slide that I put up on the folks that we work for, as you can see, we work virtually for most of the Class I railroads. We work for many in the financial community, as I said. One of the reasons that we're hired is because we are fact-based. We don't give people the opinions they want. We give people the opinions that we conclude are right. That was the nature of the engagement here, as I explained. We proposed to the board that it be done under a reverse due diligence basis. If we were working for an investor that we have access to management, we have access to all of the data and we'd be able to go anywhere we needed to give that objective opinion, that's what we did. We've done it in many other instances. And if we didn't do that, we wouldn't be in business for very long.

Donald B. Campbell

Okay. Question for Ed Harris. We understand that you left your full-time role at CP due to health issues. Were you also in any way impeded in your ability to implement operational change at CP? Did you have the full support of management and the board?

Edmond L. Harris

Well, that is true. I did leave because of health issues. I think the metrics that you've seen and the comments between Fred and Mike certainly show the improvement that this company has made over the last couple of years. I am proud to be part of that or at least have a initializing step into that changeover. And I'm proud of the fact that Mike's been able to carry that on from the operations side to show all-time records in train velocity, car miles per car day, dwell in an overall reduction and inventory. It doesn't come overnight but certainly, it is there.

Donald B. Campbell

And this question is for Mike. Have you made changes to align compensation plans and programs at all levels of your organization to line up with the target of 600 basis points of productivity and cost improvement?

J. Michael Franczak

Yes, we have. Everyone of our people has a performance management program that encompasses 5 key areas: service, safety, productivity and efficiency, growth in people. In those 5 areas, they have key metrics that they're accountable for. In my case, it's the metrics, many of which you have seen here today, that appear on my PMP. And as you go down through the organization, we get more granular right down to specific on-time train performance, certain safety metrics and so forth. With respect to the programs that I talked about, everyone of my vice presidents, general managers, managers, on down through the organization have specific deliverables and targets associated with delivering those programs and the associated metrics for their areas.

Donald B. Campbell

A question for the board. The board says that it unanimously support Fred. For how long? What OR targets does he have to meet in 2012?

John Edward Cleghorn

Maybe we'll start with Mike Phelps because he's been able to just enjoy the silence here.

Michael E. J. Phelps

I'm being a spectator sometimes but thanks very much. We have put out -- to answer the second part of the question first, we've put out a 3-year target, as you've seen here this morning. To the extent the board manages the compensation part of this, it won't be a quarter-by-quarter exercise. It can't be linear. I don't imagine too much volatility, particularly given the mix of bulk. It can't be back-end loaded in all likelihood. The result is a requirement from the board's perspective, and we understand the stakes here, of continuous improvement. And the volatility will make it hard to measure that day by day, but we'll know it when we see it. The expectation is of a significant, measurable, evident, continuous improvement. Or else. I can't tell you that by January 3, 2013, that's our "or else" date. But we will watch this closely. We -- as I've said, we understand the expectations from the marketplace, and we expect to see improvement. And then the "or else", I don't know exactly what it looks like today, but it's just not a question of not getting paid, I don't imagine, speaking for myself at least.

Donald B. Campbell

Okay. Here's a question of some intrigue. Who is the unnamed CN executive mentioned in the proxy circular?

John Edward Cleghorn

Well, maybe I'll comment on that. This is a private individual. I don't think it's incumbent upon us to reveal his name, and we haven't. I think that question has more appropriately put to Pershing Square.

Donald B. Campbell

Okay, we have another question for the board. Why aren't you listening to your shareholders and trying to reach a settlement?

John Edward Cleghorn

Well, we have offered a board seat to Mr. Ackman, and we have made that formal, made that public, with including him on our slate of nominees for our Annual Meeting on May 17. And we look forward to an engagement with him about our plan and as I said before, meet our management, see our property for the first time and get out there and understand what we are, our facts and so on.

Donald B. Campbell

Okay, we've got one for Fred. Fred, you say customers can vote with their market share. Realistically, how much business do you think would really move since you've got a lot of your customers on long-term contracts?

Frederic J. Green

Well, I think, the way we have to put this -- it's a pretty complex question. And it's a bit delicate, but I'll do my best to share what I can. I think that the shipper community, and I deal as you can appreciate across the breadth of our client base at a CEO level, has clearly expressed a lot of apprehension. They have had an experience in the past during the previous time of Mr. Harrison in Canada. It was not pleasant. It led to the rail service review. It led to the rail safety review. So they're expressing a lot of apprehension, and they are suggesting in very firm terms in a private environment that they will clearly have to send the signal to the shareholders if this is imposed upon them. So it's a bit delicate. But what I want to put in context for you is this, that we're one of the smartest railroads in North America. We need to grow. That's why it's a critical component of our plan, profitably grow, but we need to grow. 80% of everything we do is directly rail competitive, directly rail competitive. We need to have relationships with these clients. We need to have good working relationships so that we can mutually grow our business together. So we've got a pretty unique situation. That's our world. That's our competitive environment. And at the same time this is occurring, Claude Mongeau and his CN counterparts have been doing all they can to, I don't know what term is, de-Hunter CN. They have moved and migrated away from the style that seemed to be appropriate in that world when Mr. Harrison was there. And just listen to their Investor Day in New Orleans, it's a very clear message that they're aligning with the shippers. So on one hand, I'm sitting out there with my direct competitor who is going to be welcoming every pound of freight they can possibly get, and I'm responsible for a franchise where 80% of what I do is directly rail competitive. And what the shipper community is telling me is that the thought of imposing what they experienced for that period of time when Mr. Harrison led CN upon this franchise is not a welcome thought, and they will vote with their market share. That's what they're telling me. Now I can't reveal that information specifically. That would be inappropriate. But I can tell you because -- and there was an article that came out just yesterday, in the writer's article which said that Steve Dechka, the CEO of Canpotex, quote, said, "that if Mr. Harrison was still running CN, they would never have got the market share that they were given about a month ago when they renewed their Canpotex contract." So if Mr. Harrison is imposed upon CP, I just have to extrapolate and figure out what the risks could be as shareholders to watching shareholder or a market share shift. I can't predict it. It's up to the customers to say if they feel that. And I think Mr. Dechka has stated quite clearly from his perspective, and the rest of the shippers will have to say what they want to say if they want to say it.

John Edward Cleghorn

Speaking on behalf of the board, we've had direct communication, unsolicited, by major customers telling us exactly the same thing, that their experience at CN under Harrison was unsatisfactory, and it's a better railroad today to deal with.

Donald B. Campbell

Okay, another question for the board. Why did you drop operating ratio targets from executive compensation and then why did you bring them back? Was it Pershing?

John Edward Cleghorn

I assume that's for me. In a sense, we didn't drop it. We dropped it for the annual short-term assessment in 2008 and 2009. When we want to have recurring nightmares, we just have to remember what that looked like, particularly for CP, which its bulk mix dropped to 24% in '08 when the rest of the Class Is were dropping between 10% and 12%. So from the board's perspective, it was about uncertainty about how long this would last, how much deeper it might go, particularly given bulk export Asia, all that. And we were anxious to make fixed cost, variable cost-containment and cash preservation to short-term metrics for one year. And in fact, it stretched into 2009. Operating ratio was kept for the performance contingent options but not for the annual plan. And we've reintroduced it now. Last year, we kept it but in perhaps a different form. It's really, in a way, part -- not all of them but part of the operating income metric that we were using for bonus calculation. I mean, it's all about margin and the ratio of expense to revenue. But we've decided to reintroduce it now in the short term just to give a little added emphasis of what the market’s expectations are. Obviously, we've talked about growth, but efficiency and productivity is also part of it. You can't rely on just one of those scores. You need them both.

Donald B. Campbell

A question for the management team. Would an economic recession of typical severity prevent you from achieving your 2014 or 2016 targets?

Kathryn B. McQuade

So I guess I'll take that one. We did outline the economic assumptions under -- underlying the plan. Certainly, if we had something like a 2009 economic recession, that would -- we clearly were very agile during that time and had to do certain things during that economic recession in order to park locomotives, lay off people, as well as meet our pension obligations. But we certainly can and will continue to meet our obligations with normal economic cycles.

Donald B. Campbell

Okay, Kathryn. A question for the board. If CP's Multiyear Plan is so good, why can't you get Hunter to execute it? Maybe the OR could be even better?

John Edward Cleghorn

Well, I'll take that. I think I've already discussed why we have not met with Mr. Harrison. But this is not just a cost-cutting program, this is a growth program. You heard from Fred that we're the smallest. We're the sixth out of the 7 Class I railroads. And this is a balanced Multiyear Plan. It's got growth because we have line of sight to our customer base and the opportunities that we're developing. We don't see market share movement to CN. A change at CEO, the one suggested, would probably result in customers going to CN because it is a much more balanced -- much more, say, balanced management, managed company today than it was just 2 to 3 years ago. They care about customers, as well as caring about shareholders, and they care about safety. So it's a much tougher competitor for CP, so CP has to be up to the game and ahead of the game to be able to compete. We have 80% of our market rail competitive, much more so than what CN has.

Donald B. Campbell

A question for Mike Franczak. Oliver Wyman highlighted several significant structural disadvantages versus CN. How much of these can be overcome through the IOP, curvature and grades are not easily eliminated?

J. Michael Franczak

Management has to play with the hand it's dealt, and that's what we're paid for. We spoke to many of the multiyear programs and our execution of the IOP that are delivering results regardless of infrastructure. We talked about First-Last mile, what we've done with dwell, miles per car day and record territory. With respect to things like grades and curves, our long train strategy, our pioneering use of AC power, the innovations we've made with respect to locotrol, allowing for multiple placement of locomotives, the marshaling software are allowing us to reduce friction, allowing us to improve fuel burn, improve locomotive productivity, run longer trains and really take a bite out of curves and grades. In effect, our plan is taking hold. We're delivering the results.

Donald B. Campbell

Another question for Ed Harris. In your opinion, does CP have the right culture to meet these OR targets?

Edmond L. Harris

Definitely. You remember that I've been associated with rail turnarounds. This is the third one, Illinois Central, Canadian National and now Canadian Pacific. That's all proven by the metrics that we've heard this morning. And that's further substantiated by the work Oliver Wyman has done as our Multiyear Plan is not only aggressive, it's ambitious and it's certainly achievable. That plan is managed by a team, Fred and his team, today, and positioned now to start taking cost out. So as the metrics improve, as the assets begin to fallout, which we've already seen, now we're going to be looking for the cash. All this being now supported by the board, being challenged by the board and certainly being monitored at least by the Operating Committee, Mr. Faithful.

Donald B. Campbell

Okay, Ed. Michael, I think this one's for you. How could you say Fred met 95% of his objectives when the financial results have been so bad?

Michael E. J. Phelps

Well, firstly, if we're talking about the annual assessment scoring, in the case of Fred, and it's the same for all of the senior executive team, 75% of it is quantitative, numeric, financial. It is what it is. 25%, the board has opted to have kind of a broader, somewhat less numerical, things that are perhaps more strategic. Safety is perhaps the first one; a continuous changing of the mix of business, customer growth would be the second one; and organizational improvement, particularly for succession and the senior team. And in that regard, in terms of safety, we're first. We continue to be first. And if I flipped down to organizational changes, you will form your own views here. But the team that Fred has assembled -- I mean, we put you -- we're all, up here, have had 25 or 30 years of hiring and firing and honing teams. That's what we do or used to do. We are -- thrilled may not be the best term, but it's close. This team has a first-class feel to us, and you've seen it this morning, and you'll form your own conclusions. But on that score, we would give Fred a very high score. So that's how we do the personal -- the 25% of the scoring. But in 2 of the last 4 years, the threshold have not been met for reasons that have been explained in terms of the financial scoring. And so we're happy to tell Fred, good job but no money. You're all used to that concept from time to time so...

John Edward Cleghorn

And the rest of the management team.

Michael E. J. Phelps

And the rest of the management team, yes.

Donald B. Campbell

Okay, question for Fred. Hunter says he will get rid of hundreds of locomotives and thousands of people. What's your take on that?

Frederic J. Green

Well, this morning, I think everybody saw pretty clearly that virtually every statement made by Mr. Harrison about this franchise has been just plain, flat wrong. And the concept of without ever having stepped foot on the property, without understanding the curves and grades, to make those types of statements is bold, but it's not based on fact. I mean, quite simply, you saw that adjusted for the curves and grades, which is physics, it's science, our productivity per locomotive is the equivalent of CN's, the place that he ran for 8 years or whatever it was. So it's a little dumbfounding to think about how an individual, never having stepped foot on the property, could make such a bold statement. But then again, there's been a lot of bold statements. So with regard to fleets, the discussion about taking out thousands of rail cars and thousands of people, you keep getting the bold statements. And then when you put the facts in, as you heard this morning, that those numbers have to come off of revenue per revenue to a ton-mile expense base that are identical between CN and CP. They have to come off of car utilization that is better at CP than CN. You have to come off of locomotive utilization that's already the equivalent of. And yet apparently, there's going to be hundreds of this and thousands of that. So I think, it's just -- it's for the shareholders to judge. If people want to believe that wishful thinking, then they're entitled to. I would encourage you, and I think it's my responsibility for the shareholders to have the facts, to have science, to understand the physics. And if people want hope for that, I guess they can hope for that. I don't know how anybody could do. We certainly have seen no evidence of any type of plan despite 5 months having gone by. I think that probably speaks to whether there is a plan or whether it's just wishful thinking.

Donald B. Campbell

A question from a couple of people in the audience. After years of poor performance, why should shareholders trust the advice of this board now?

John Edward Cleghorn

I'll start with that, and then my colleagues can come in as well. This is not a static board. This is not a board that's been asleep and sitting around. We've strengthened our board. I mentioned that in the last 5 or 6 years, 60% of our board has been refreshed, from people who have got energy backgrounds, who have got agribusiness backgrounds, Class I railroad experience. And we have plan, which is based on the future, it's a plan that was born out of adversity during the recession -- the great recession. It was born out our serious challenges of the past year, and we have the team that's gone through that. They're battle tested. And this management team is a combination of senior people that have grown up with CP and have been recruited from outside. They bring great strengths, and they work very effectively as a team. So we've learned from what's happened to us in the past. We have made some adjustments in our network so that we're not so dependent upon one line as in the South, and I'm going to get Ed to comment on that. But I think you really have to take a look at the fact that this is refreshed board, an active board, a board that's experienced and a Multiyear Plan, which is based on the facts of this franchise, it's based on the successes that we're already seeing. It wasn't just put in place to react to a new shareholder. In fact, it had its start in the summer of 2010 with the experience we had when 25%, 24% of our revenue disappeared and also faced the tough weather last year. Ed, maybe you could comment?

Edmond L. Harris

Well, just to comment on some of our capital expenditures that John was mentioning. The expense that we put into our North Line, the line between Edmonton and Winnipeg has already started to pay dividends. Number one, it shortens our route to the West Coast, a very lucrative potash move for us. Any grain collected in that area certainly will go that route versus around the horn through Regina and back across that way. It also puts us in direct competition with CN between Edmonton and Winnipeg. The improvement in that line certainly will increase our train capacity and certainly our train velocity. But it does one other thing, and this is a key to understanding railroads and opportunity to grow capacity. It becomes a redundant line for us if we do have an outage. But that also, using that North line, literally opens up the corridor. Our Transcontinental border -- corridor, between Calgary and Winnipeg, which in turn relates to more velocity, which in turn relates to more fluidity, which in turn relates to lower costs and a better operation. Just a few last comments before I pass it on to Tim. I think one thing that you all should have learned today is that 65%, put out by Pershing, is a shot in the dark. It's been validated. It's been substantiated through the Oliver Wyman work. No other Class I, even Illinois Central, even CN, was able to reduce their operating ratio in that type of time frame. I said early on, you cannot neglect the differences in infrastructure, on the properties. Do not risk a delay into a process that's already started, a process that is well underway. Do not forget the current service review and safety review in Canada. That's followed up on by Transport Canada. And finally, customer relation is something more than just running on-time trains. That's an important concept, that this railroad takes very, very seriously. Tim, you care to add?

Donald B. Campbell

Tim, maybe you could comment about the kind of change that you've seen. You've been on the board since 2003.

Timothy W. Faithfull

Yes, I think you can have confidence because change and transformation is underway in CP. And it does, as John says, date back to efforts put in plan some years ago, and we're seeing it now coming through. You can see it in the way that we said in the Safety, Operations and Environment committee, the detailed focus on the operating plan, the disciplined execution of that plan. And I think there maybe employees today watching this webcast. If you go to the yards, you will -- and talk to people, you will understand, they can attest to the impact of what Mike has talked about in relation to the application of the operating plan and the fact that it's absolutely sacrosanct. Secondly, I think what impresses me is what has been achieved in the marketing area. And I think that's, again, real transformation in terms of these new agreements that have been entered into with some customers, which -- where we have had some difficulties, but mutually beneficial long-term arrangements that enable us to exploit the opportunities in exports, but also within North America. And then finally, I think you've got an ambitious plan. It's detailed. It's supported. You got a management team led by Fred that is tested and hardened, is determined to implement, and a board that I think is very determined indeed to hold them accountable and whose ability to do that has been increased by the additions of people like Ed and Tony and others who've come on in recent years.

John Edward Cleghorn

I just -- I think I can be quite brief here, perhaps come at it from a slightly different perspective. My fellow directors have had, like everybody in this room, I suppose, from time to time, the odd bad day in business. But insofar as I know, no real association with failure, and we don't intend to start here. We know we're out there 1 million miles on this issue, and we hear from shareholders virtually everyday. And we know what's expected of us, just as it always has been in our business careers. And we simply have no intention of failing here, and the other issue for you all to consider is it can be done with less risk and certainly less risk of collateral damage. Every board meeting will be a performance monitoring opportunity as it is.

Donald B. Campbell

Okay. That concludes the question-and-answer session. I thank you for your questions. And again, if you didn't hear your specific question, I encourage you to forward it to Janet Weiss. I'll turn the podium back to John.

John Edward Cleghorn

Well, thank you, Don. On behalf of the Board of Directors and CP's management, I'd like to thank everybody for joining us today, both here in Toronto and via our live webcast. I gather there's something like over 400 people there. I trust you've found today's session valuable and informative. We believe we have the right plan and the right team for our unique railway franchise. The management team is aggressively and successfully executing on our Multiyear Plan. This is our -- and it's our firm belief that executing this ambitious but realistic plan will not only result in a more efficient railroad, but it's also going to definitely generate value for our shareholders. Thank you.

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