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Executives

Janet Weiss - Assistant Vice President of Investor Relations

E. Hunter Harrison - Chief Executive Officer, President and Director

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

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

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

Analysts

Ken Hoexter - BofA Merrill Lynch, Research Division

Walter Spracklin - RBC Capital Markets, LLC, Research Division

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

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

Fadi Chamoun - BMO Capital Markets Canada

Cherilyn Radbourne - TD Securities Equity Research

Christian Wetherbee - Citigroup Inc, Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Brandon R. Oglenski - Barclays Capital, Research Division

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

Cameron Doerksen - National Bank Financial, Inc., Research Division

William J. Greene - Morgan Stanley, Research Division

Scott H. Group - Wolfe Trahan & Co.

Turan Quettawala - Scotiabank Global Banking and Market, Research Division

Canadian Pacific Railway Limited (CP) Q2 2012 Earnings Call July 25, 2012 1:00 PM ET

Operator

Good morning. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific's Second Quarter 2012 Conference Call. [Operator Instructions] Ms. Weiss, you may begin your conference.

Janet Weiss

Thank you, Sarah. Good morning, and thanks for joining us. Presenters today will be Hunter Harrison, our President and CEO; Jane O'Hagan, EVP and Chief Marketing Officer; Mike Franczak, EVP and Chief Operating Officer; and Kathryn McQuade, our EVP and Chief Financial Officer. Also joining us on the call today is Brian Grassby, our Senior Vice President of Finance. The slides accompanying today's teleconference are available on our website.

Before we get started, let me remind you that this presentation contains forward-looking information. Actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described on Slide 2 and 3 in the press release and in the MD&A filed with Canadian and U.S. securities regulators. Please read carefully, as these assumptions could change throughout the year. All dollars quoted in the presentation are Canadian, unless otherwise stated. This presentation also contains non-GAAP measures. Please read Slide 4.

Finally, when we do go to Q&A, in the interest of time, and in fairness to your peers, I'd ask you to limit yourself to one question. If we don't get to everyone queued up on the call here today, Investor Relations will be happy to follow up and address any outstanding questions you have.

Here then is our President and CEO, Mr. Hunter Harrison.

E. Hunter Harrison

Thanks, Sarah. Thanks, Janet. And, well, I'm back. I, as most of you know, joined the organization and was elected by the Board of Directors at the end of the second quarter. So I can't take any credit for the quarter performance, but I think it could certainly be described as a pretty hectic quarter. There were a lot of things to divert management's attention. When you're trying to run a railroad and at the same time have a proxy contest and at the same time work stoppage that presents a lot of challenges.

But the first 3 or 4 weeks here had been a lot of fun and sun in Calgary, and that was probably not going to stay that way. But I have been very -- accountants has been -- bolstered even further that -- there's a lot of talent here in this organization. It's certainly not lacking for talent. We got the ability, I think, and I feel even stronger than I did prior to arrival in Calgary that we can accomplish the type of numbers that we talked about during that proxy contest.

I do want to take a moment, if I could, this morning to -- there's a lot of you on the call that I have worked with for many years and had also worked close with me during this last 6 or 8 weeks to the proxy issue, and I appreciate the confidence that you've shown in this model that has been relatively successful, and I look forward to it, creating more success and more shareholder value at CP.

Last time, I think we've all agreed to turn the page, which we've done. This quarter's behind us. We return to, hopefully, normal times and focus on serving customers and controlling cost and creating shareholder value, and that's what this organization is equipped to do very well. So there's a lot of moving parts, but I'm sure you've seen the press release already and looked at, but as a result, Jane and Kathryn and Michael are going to best explain further some of the issues that they had to deal with.

So with that, let me turn it over to Jane.

Jane A. O’Hagan

Thank you, Hunter, and good morning, everyone. Thanks, Hunter. Our strategy for sustained, profitable growth continues to deliver value. I'm pleased with our results, especially given the 9-day strike in the quarter. We quickly returned to pre-strike levels and protected our market share. Our market initiatives are delivering growth and value. Building on the successful execution of our scheduled service in Canadian grain this crop year , we're rolling out the program on our U.S. property, effective August 1. In Intermodal, we've recovered our market share in our core segments, and we're delivering on our strategic initiatives. And in Energy, our strategy has delivered 4 consecutive quarters of double-digit revenue growth. Continuous improvements in service are translating into a more valuable product for our customers, allowing us to secure full value for our services and drive profitable revenue growth.

Now let me move to the Q2 highlights and expectations for the second half of 2012. So starting with Slide 7, CP delivered 8% revenue growth on the quarter. Price and mix accounted for 5% of the revenue gain, fuel surcharge was 1% and the FX impact was the remaining 2%. Revenue ton miles were up 1%, and carloads were flat due to the strike volume impacts. And Kathryn will talk to this in a few minutes.

For the second quarter of 2012, CP again delivered on our price renewal target of 3% to 4%, and we continue to target inflation plus pricing for the rest of 2012. For the remainder of my comments, I'll speak to currency adjusted revenues.

So moving to bulk. Starting with CP's grain franchise. Grain revenues and units were down 11% and 19% respectively over Q2 2011 due to a number of factors. While May's labor disruption impacted short-term Canadian grain volumes, the major factor was, as I spoke to last quarter, the continued weak export demand for U.S. grains and the poor U.S. spring wheat crop in North Dakota. A greater decline in short-haul movements accounted for the smaller, year-over-year decrease of revenues versus carloads.

Looking forward, the Canadian Transportation Agency announced a 9.5% increase to the maximum revenue entitlement for export grain for the coming crop year, effective August 1. Remember, this increase affects about 35% of our grain volumes. We use seasonal pricing throughout the year, and thus, you can expect our reported price to show some variation by quarter and to see the full realization of the increase by the end of the crop year.

For this coming crop year, Statistics Canada is forecasting a solid recovery in seeded acres for Western Canada, including record canola seeding for the sixth consecutive year. Weather, especially moisture levels, have been favorable to date. On the U.S. side, we've all read about the extreme heat in major production areas. Fortunately, crop-growing conditions at CP's U.S. draw territory are relatively positive. We're watching progress as we move closer to the harvest, but it's too early for me to predict the outcome of the crop at this time.

And finally, we had strong volumes, particularly in Canada, throughout all of Q3 and Q4 in 2011. This year's country grain stocks are quite low and will likely see weaker shipments until the harvest. For grain, overall, we're expecting low, single digit, year-over-year growth in the second half of the year.

So moving to sulfur and fertilizer on Slide 9. In total, the combined potash, fertilizer and sulfur portfolio was down 2% in revenues and flat in volumes. Canpotex saw Asian buyers enter the potash market in Q2, and we responded by moving record export potash volumes to offset the weak first quarter. The strong export demand was offset by a somewhat disappointing domestic fertilizer demand and short-term sulfur and fertilizer production outages.

I'll note that the global economic situation is translating into some uncertainty in international potash markets for the second half of 2012, and we're watching closely as weaker U.S. corn crop production may impact the need for nutrient replenishment this fall. We're modeling second half 2012 fertilizer and sulfur volumes to be slightly lower than second half of 2011. I'll remind you that going forward, that our new Canpotex contract came into effect at the first of this month, and we'll be handling a large majority of Canpotex potash shipments.

So moving to coal on Slide 10. Coal revenues and new units were up 1% versus Q2 2011. Volumes on the quarter were impacted by the strike, and we're recovering these, along with current production in the second half. CP has a strong coal franchise, dominated by high-quality, metallurgical coal destined to export markets. Teck continues to produce well, and we're modeling volumes based on their forecast. We're seeing some shifts in the mix impacting revenue per car due to the strength of our U.S. coal franchise and a higher proportion than last year of Teck volumes moving to the West Coast versus a longer haul, higher revenue per car Eastern volumes.

We continue to collaboratively improve the supply chain and are realizing the benefits of our capacity expansion program. We now have about 50% of the trains operating in the West Corridor and 152 car sets. And as I said previously, we expect to have up to 80% of the sets at the longer lengths by the end of the year. The continued weakness in the North American domestic thermal coal markets continues to provide opportunity to move PRB coal into export markets off the West Coast. We're expecting volumes to continue through the remainder of the year, but the volume levels may vary, given economic uncertainty, as this is opportunistic business. So overall, we expect second half of 2012 to deliver modest growth over 2011.

So turning to Slide 11. Intermodal revenue grew 2% on flat volume versus Q2 2011. CP's service in the first half of 2012 has remained strong, and we've rebuilt confidence with our key customers. As I mentioned last quarter, each intermodal franchise is different. We have recovered market share in our core markets, as evidenced by intermodal units trending very favorably before and after the strike. Our domestic portfolio has continued to grow, and we see strength in our key segments, and we're driving efficiencies into the supply chain. In international, strong West Coast volume was partially offset by Port of Montréal softness caused by European economic weakness.

Looking forward, we're delivering on our strategic initiatives and are on track to complete our new Regina terminal by the end of this year. We are expecting a modest fall peak, and we expect to deliver GDP plus growth in Intermodal for the second half of the year.

So moving to Merchandise on Slide 12. Merchandise delivered a fourth consecutive quarter of double-digit revenue growth, driven by energy and ongoing automotive recovery. Revenues are up 26%, and units are up 13% versus Q2 2011. So let me speak to each of these markets.

The Energy and Industrial Products segment. Revenues and units are up 28% and 18% respectively, as we continue to drive value from our crude-by-rail model and extend it to Canadian originations of mid-grade and heavy crude. Overall, our crude volumes continue to grow at a pace that exceeds our earlier expectations. As I said, we had expected to grow the crude-by-rail market from 13,000 carloads in 2011 to 70,000 carloads by 2014. But based on the momentum we have in making our markets, we now expect to reach that run rate a year earlier.

We're also developing a strong network to handle frac sand, pipe and construction materials, necessary inputs for oil and gas shale production, with a particular focus on our sand franchise. As we build our sand business, we're using the same approach as we used in crude, that of building a network of strong origins and destinations. We're leveraging the strength of our network to establish key customer production facilities on our lines and in locations that position them to provide very large volumes of high-quality sand efficiently to the key shale regions.

With the recent announcements from Unimin, U.S. Silica and Smart Sand, we are positioned to be a key supplier of frac sand to the growing energy market. Combined with our ongoing success with crude-by-rail, we now have line of sight to more than 80% of the $400 million of incremental annual revenues I mentioned at Investor Day, and we will continue to grow from there.

On Slide 13, automotive revenues were up 36% with unit growth of 14% versus Q2 2011, as we lapped the effect of last year's tsunami and benefited from the return to normal production levels of the Japanese manufacturers. The strength of our continued strong service allowed our customers to capitalize on improved buyer conditions in North America and a stronger expected sales in Q2. For 2012, we continue to model growth over 2011, in line with the $14.1 million industry auto sales estimates.

And finally, in forest products, revenues were up 2% on 11% lower volumes. Lumber volumes were up but were impacted by pulp, due to a closure of a pulp mill on our lines and weaker export pulp markets. We expect that lumber improvements will continue to be offset by pulp weakness, resulting in volumes being flat in the second half of the year versus 2011. So to recap on merchandise, we're modeling consistent with North American automotive sales for automotive, flat for forest products and continued double-digit growth in industrial products.

So as I wrap up on the markets on Slide 14, we continue to create value for our shareholders with sustained profitable growth across the portfolio. We have delivered strong revenue growth in Q2 despite the strike, and we'll continue to deliver in the second half of 2012. I'll remind you that my comments regarding second half volumes include what we expect from strike recovery volumes.

As we continue to build on our service performance and continue to create capacity for profitable growth, we're growing our core business and delivering on our strategic initiatives. We have the right team, we're visible in the marketplace, and we are making our market.

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

J. Michael Franczak

Thanks, Jane, and good morning, everyone. Q2 was a solid quarter operationally, and despite a 9-day strike of our running trades and rail traffic controllers that shut down our Canadian operations, we continued the success of improvement trend on our service and efficiency metrics that we began in mid-2011. The disciplined execution of the integrated operating plan and our multi-year programs are driving improved operational performance, and I'm more than confident that we will continue to deliver much more.

Beginning on May 23, our Canadian operation was shut down for 9 days as a result of a strike by our locomotive engineers, conductors and rail traffic controllers. While we had worked hard to get a negotiated settlement, we needed to stand firm on the need to create a long-term, competitive cost structure. We believe the offer we had presented the union was fair and reasonable. The key issue is the need for changes to the legacy pension plan to make it industry comparable. A mediation-arbitration process has been established and the Minister of Labor has appointed the arbitrator, effective July 19. This began the start of the 90 day process. Our approach will be to resolve as many issues as possible and narrow the gap on the balance. Any outstanding issues will then be arbitrated to provide a final settlement.

At the commencement of the strike, we initiated both a safe and efficient shutdown of our Canadian operations and as well at the end, a quick ramp-up restoring service and efficiency metrics to pre-strike levels, once all employees had come back to work on June 1.

Finally, it's important to note that during the shut down, we took full advantage of the downtime to complete a number of major engineering projects and advanced some planned locomotive maintenance activities. With this, we have created some additional capacity to utilize, to capitalize on fall volume upside this fall.

Moving to Slide 18 in safety. As I've said many times, safety is good business. It enables good service, drives efficiencies, protects our people, the environment and the communities that we operate through. During the quarter, personal safety improved 28%, and our train operation's safety performance also improved by 15%. We intend to remain a leader in this area.

Let's turn to Slide 19. A strategy on improving both train lengths and weights continues to demonstrate results, with both of these metrics up by 1%. These are new all-time highs. We're on pace for our previously stated 1% to 2% improvement for the year, as increasing intermodal and merchandise demand is handled on existing trains, and we continue to advance a number of productivity improvements through our operating plan redesign and in our bulk operation, such as coal, which Jane has already spoken to.

Locomotive productivity was flat, but when excluding days impacted by the shut down, locomotive improved -- productivity improved 9% year-over-year. In the coming quarters, we expect to beat record locomotive productivity levels through an improved fleet mix, strong growth in the energy-related sectors and continued improvements to and execution of the IOP.

Employee productivity was down 7% in the quarter, Adjusting for the strike, this productivity was flat. However, for 2012, we're still expecting to realize a year-over-year improvement of 2% to 3%. This improvement will be driven by higher anticipated volumes, workforce attrition at catching up with our hiring program in the second half and a number of initiatives to drive improved train and yard productivity and improve crude train ratios.

Turning to Slide 20. We continue to drive improved performance on most of our key efficiency metrics. Ongoing capacity investments, execution of the IOP and improved operating conditions delivered train speed improvements of 19%. Terminal dwell improved by 10% year-over-year and is a Q2 best. Implementation of the next phase of our First Mile-Last Mile program and our aggressive storage and off-leasing of surplus rail cars will help drive further improvement over the next several quarters.

Also, with the removal of 13,000 active cars or 24% of the active fleet, car miles per car day hit a Q2 record of 194, an improvement of 26%. When adjusting for the strike, we hit an all-time record of 209 miles per car day. I expect to continue breaking records in coming quarters and translating these results into reduced equipment rents.

Finally, fuel performance was flat, as benefits from our conservation programs were offset by the inefficiencies associated with the shut down, but fuel efficiency remains a key priority for us, and I am more than confident we will hold to our 3% to 4% improvement for the year as we execute our plans.

Moving to Slide 21. As you look into the third quarter, our strong performance trends continue. Through July 15, key operating metrics, I noted, remains solid, with train speed up 13%, active cars online improved by 20%, terminal dwell improved by 12% and weekly car velocity up 29%. Again, this improvement trend began last year and our goal is not only to sustain but to continue to improve these numbers in future quarters. Rest assured, the team is working hard, remains focused and further improvement is expected.

In summary, Q2 was a solid quarter operationally, and despite the 9-day strike that shut down our Canadian operations, our improved operating trends continued, and we're quickly able to restore our service and efficiency metrics. The team's consistent execution of the IOP and multi-year programs is delivering the sustained performance improvements we've been seeing.

Stay tuned, there's more to come. Kathryn, over to you for the financials.

Kathryn B. McQuade

Thank you, Mike, and good afternoon, everyone. Let's begin with earnings on Slide 24. This quarter had a number of significant items, which reduced EPS and increased our operating ratio. I will summarize these items with you in a moment.

Revenues were up 8%, reflecting relatively flat volumes, but as Jane discussed, we had positive price and fuel surcharge revenues. Operating expenses were up 9%, and operating income was up 3%. The operating ratio came in at 82.5%. However, significant items increased our OR by more than 600 basis points. Below the line, interest expense was up $6 million or 10%. Other charges were higher by $24 million with 1/2 the increase due to proxy advisory-related costs and the remainder due to a gain recorded last year on a sale of commercial notes.

Income tax expense was higher by $3 million, with an effective tax rate of 31.8%. Included in this amount is an $11 million onetime revaluation of our deferred tax balance due to a freeze in the Ontario corporate income tax rate. For Q3 and Q4, you can still expect a tax rate between 25% and 27%. Diluted earnings per share was $0.60 in the second quarter, down 20% versus 2011 and greatly reduced by the significant items summarized on Slide 25.

First, the financial implications of the strike. We estimate the net impact to revenues was approximately $80 million to $90 million. On operating expenses, we saved $21 million, principally labor, fuel and a small amount of equipment rents.

I would note that during the work stoppage, we made productive use of our remaining workforce by advancing capital track maintenance work and locomotive repairs, accelerating some capital into this quarter. In total, we estimate that the strike had an impact of roughly $0.25 to $0.30. The CEO transition cost increased the comp and benefit line and purchase services line by $42 million.

As I just mentioned, below the line, other charges were increased $13 million due to the proxy-related cost. And tax expense increased $11 million due to the freeze in the Ontario tax rate. As a result of these items, EPS was decreased $0.55 to $0.60, and the operating ratio increased 600 to 650 basis points.

Before I move into the details of each of the expense lines, let me remind you that last year, we experienced severe flooding in the second quarter. I won't specifically speak to the flood-related variances, but you will note that a flood tailwind is included on the variance analysis on the applicable slides.

So let's start with compensation and benefit from Slide 26, which was higher by $29 million or 9% versus second quarter 2011. The strike reduced comp and benefits by $10 million. CEO transition costs were $20 million. Incentive and stock-based compensation was up $7 million, principally due to better corporate performance versus last year, where no bonus accrual was made given the operational challenges. Also, please note the sensitivity for stock-based compensation has changed this quarter. You can refer to the financial statements for additional information, but the revised sensitivity is now that for $1 change in share price, it increases or decreases compensation expense by approximately $400,000.

Volume accounted for $11 million; wage and benefit inflation, $5 million; other items netted to a favorable $5 million, including lower overtime; and FX was favorable by $4 million. We ended the quarter with about 15,100 employees, an increase of 8% over last year. I expect our average active expense employee to be flat for the remainder of the year.

Turning to Slide 27, fuel expense was up $5 million or 2% versus last year. GTMs were down 3% this quarter, reducing fuel expenses $6 million. Lower fuel price provided a benefit of $5 million as our all-in cost was $3.49 per gallon down from a $0.01 -- down $0.01 from $3.50 a year ago. Hedging created a year-over-year headwind of $5 million due to the large gain we recorded last year, when prices were rising. Other was unfavorable by $3 million. FX was unfavorable by $9 million.

We estimate strike-related inefficiencies were approximately $5 million, as we ramped down operations, repositioned locomotives and cars to ensure a smooth start up and then ramped back up. Fuel efficiency, as measured by gallons per 1,000 GTMs, was flat at 1.14. The strike did impact this metric. However, as Mike has already stated, we are still targeting our efficiency improvement of 3% to 4% for the year. Year-to-date, our improvement is on target, tracking at 3%.

Turning now to equipment rents on Slide 28. Improvements in asset velocity in both locomotives and freight cars continue to drive efficiencies, and this quarter benefited by $2 million. Offsetting this benefit was lower car hire receipts of $3 million. Leasing costs were higher by $2 million, driven by higher renewal rates.

Year-to-date, we have provided notification to return 2,100 cars. To date, we have line of sight to an additional 1,400 cars in the second half of the year. Asset velocity will continue to reduce equipment costs per shipment. However, in the near term, we will have some lease term back cost as we go through this resizing.

So let's turn to purchase services on Slide 29. Purchase services and other was up $44 million or 19%. CEO transition costs were $22 million. Casualty costs were up $7 million, largely as a result of cleanup costs related to a crossing incident. We are pursuing reimbursement from a trucking company. However, we cannot record the receivable until a recovery is assured. There was a $7 million expense associated with the early termination of a third-party locomotive service agreement, furthering our locomotive shop strategy to in source work. Track dismantling costs were higher by $3 million, resulting from the higher track maintenance performed during the strike. And locomotive overhauls were higher by $2 million and should remain higher year-over-year as both the number of units and cost per unit are higher this year. Other contains many puts and takes, with the majority being in inflation. FX was unfavorable by $3 million. And finally, second quarter land sales were higher by $1 million versus last year.

Turning to the remaining operating expenses on Slide 30. Materials were essentially flat year-over-year. Depreciation was up $13 million on the quarter due to our accelerated capital program and the decommissioning of certain IT systems. As part of our normal depreciation reserve studies, CP is completing a depreciation study on our IT assets. As we continue to advance our IT programs and retire systems, we expect this run rate to continue for the remainder of the year.

The second quarter began with good volumes and record operating metrics. The strike was a pause in that momentum. The team was able to quickly ramp up post-strike and return fluidity to our network and service to our customers in a smooth and structured fashion. We've had a number of significant items that masked our true financial results. However, with the noise aside, we have a solid performance to build on. Our capital plan is on track, and we are seeing real volume growth in strategic areas like energy, and we continue to drive operating improvements into the network. This is a strong franchise with positive market opportunities, and we are committed to providing quality service as we drive long-term value for our shareholders.

And with that, I'll pass it back to Hunter.

E. Hunter Harrison

Well, thanks very much for those very informative presentations. And sir, with that, we'd be delighted to take any questions we already might have.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Ken Hoexter from Bank of America Merrill Lynch.

Ken Hoexter - BofA Merrill Lynch, Research Division

Hunter, what do you think about doing more with less, that you've talked about for years? What do you think the timeframe is until we should hear about that potential?

E. Hunter Harrison

Ken, I think, probably, late fall is a good timeframe that we will be able to be a little more specific than we have been with the plan going forward. So I think that we've identified a lot of things that we're looking at -- that Mike and the team are looking at, exploring from the operating side. Some terminals and some strategic issues there, and so I think we'll be able to come to you with a pretty complex explanation of the plan going forward over the next 3 to 4 years.

Ken Hoexter - BofA Merrill Lynch, Research Division

And if I could get a follow-up there, just as you went through the strike, I guess, for Mike, what was the aim ahead of the strike? What was ideal to gain? And was there a difference in the midst of negotiations as you move from presidency to Hunter in terms of how you kind of thought about it and what you are trying to accomplish?

J. Michael Franczak

No, there is no change in strategy. I mean, our approach was to try to negotiate a settlement that was mutually agreeable to both parties. We had some significant issues on the table, the one I noted primarily being pensions. This was important enough for us to nail in terms of bringing our pension structure in line with the industry, being industry-comparable, and therefore, competitive in terms of our cost structure. Unfortunately, even with mediation from the federal Minister of Labors office, we were unable to reach an agreement. The Teamsters chose to exercise their right to strike. We went into a structured shut down. We did perform the work I noted through the course of this strike and started back up after we were legislated back to work. The process that has been laid out in terms of the mediation arbitration, we believe will be a constructive one and will get us to where the parties need to be at the end of it. But this was an important issue for us. Unfortunately, we had to take the strike, but it's one that we're going to push through and see through to the end here.

Operator

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

Walter Spracklin - RBC Capital Markets, LLC, Research Division

First question for you, really, is on the customer side. And there had been, during the proxy battle, a lot of discussion about the potential impact of the change or potential change in your strategy, and how CP will be dealing with its customer base, and what impact that might have on the various customers that you deal with. Hunter, have you had a chance yet to speak to the customers? And if so, is there any in any particular areas that are voicing more concern than you would've been expecting?

E. Hunter Harrison

No, I have met with 5 or 6 of the larger customers that were kind of front and center during the proxy issues, and we had a good dialogue and a good exchange. And the tone, for whatever reason, is certainly different today than it was a month ago. And it was just -- it's been a big love-in. And all they want to know is have some assurance that the commitment that the organization had made to them previously, that I intend to carry out. I assured them that I'm here to carry out -- that the commitments that we've made, it's in our interest to see the growth. And I think it's a positive and certainly should not be viewed in any way at all as a negative. But Jane's got a little comment here.

Jane A. O’Hagan

I was just going to say, Walter, that we've been having really thorough dialogue with our customers throughout this entire process and through the leadership change. And our customers were expecting a change, and I would say that based on all of the discussion that we have with our team, is that our customers are looking forward to working with Hunter. They see the importance on the service improvement side, and I think that they all want to find ways to look at supply chain collaboration and service hand-in-hand, so they are looking forward to the change, and we're looking forward to moving forward.

Operator

Your next question comes from the line of Tom Wadewitz from JPMorgan.

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

You've only been there a couple of weeks, so it's kind of hard task too much detail about initial impressions, but what do you think the initial impressions are of anything different than what you had talked about in the prior 6 months about the opportunity? And also what are these kind of steps that you would think of leading up to presenting that plan in the fall. Is it getting the team in place, and then having a new train schedule? I think of those as a couple but, maybe, what some of the things are that you need to do before you kind of give us a broader public presentation, which I think you said might be in the fall.

E. Hunter Harrison

Well, Tom, I think that from -- certainly, from the presentation this morning, you can see that we're building from a pretty solid foundation. There's some strength the organization had that I didn't even appreciate. I think, from a technology standpoint, they're way ahead of the competition as far as train dynamics and handling trains over the mountains and VP applications and some of those things that this team has become the leader in, which gives a good foundation. I mean, this is not going to be a different story than what you're used to. Tom, I think that we're going to work very hard on some velocity issues. We're running some trial tests as we speak to improve transcontinentally, our intermodal operation. I want to see that tested out well. And before we take it to the market I will spend a great deal of time looking at terminals, and that's kind of one of my strengths, hopefully something that I can bring to this team. And if you look at our terminal complexes, they're basically 1950s and '60s vintage hop yards. World has changed a lot since 1960. We've got places that we're not going to be able to justify having a hump, that we ought to have a different type configuration. So we're looking at those opportunities and what they could bring to us. I think there's some creative ways to do some opportunity, some siding extensions by picking up underutilized sidings that were not using because of their length and aiding [ph] and putting them together to minimize capital cost. So there's -- I don't know if there's anything that we have not touched upon as potential opportunities, and we just need to get a little better feel for where we're going to be, that some of these things we can consistently sustain, that we can do what we say were going to do, and then we'll be ready to come, both to the market as far as the service offering to the customers, and at the same time, come to the street and say, "Look, this is -- I feel even stronger today than I did 2 or 3 months ago," about the numbers that I was going around, mid-60s in 4 years, and a lot of people have had questions about, which is fair, particularly the timing, but I think they're in for some surprises.

Operator

Your next question comes from the line of Jason Seidl from Dahlman Rose.

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

My question is going to be for Jane. Jane, you talked a little bit about pricing and mix being up 5%. Can you tell me what mix accounted for on a stand-alone basis?

Jane A. O’Hagan

Well, I would prefer that -- as we look at this overall, as I said, we have been delivering through our price strategy of 3% to 4%. As our services improve, we're continuing to realize the value that we're seeing in the product, but at this point in time, I'd like to talk specifically about price and mix being 5%. We're moving directionally in the place we need to be.

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

So you're in your 3% to 4% target range, then.

Jane A. O’Hagan

Absolutely.

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

And going forward, we have seen some weakening at least from some of the U.S. carriers that are -- of some of their pricing ability, but you don't want to argue that some of them got higher price increases in the past than some of the Canadian carriers did. And have you noticed that at all in any of the markets that you serve?

Jane A. O’Hagan

I would just say that, again, our message has been really clear. As we've seen our sustained level of service improve and we put that product into the market, we've been really clear about what our price strategy has been. I have also been clear that we've been delivering on that. So I think, again, as we see this successive improvement take place in the market, as we see that service improve, we're going to look to command that value in the market. So to your question, I think I can't comment on how other franchises are organized or how their markets are put together, but what I can say is that we've had a very clear game plan and our team has been delivering the value that we've intended.

Operator

Our next question comes from the line of Fadi Chamoun from BMO Capital Markets.

Fadi Chamoun - BMO Capital Markets Canada

I have a question on your sort of impressions as well. So we've seen some good momentum here in the operation in the past 2, 3 quarters, and I'm sure over time, you'll put your sort of handprint on how the operations are managed, but do you envision a significant shift in the way that the operation strategy is working? Or should we think that this momentum should continue, and maybe ultimately get in 1/2 at some point as you get your hands around all the details?

E. Hunter Harrison

I don't think you could describe them as significant shifts. There might be a little more emphasis placed here or there. But if you look at the values that this organization and that they've been talking about in the past, you kind of put my track record beside them, they align. We're going to talk about serving the customer, doing what we say we're going to do, controlling the costs, get the assets wet, don't get anybody hurt and recognize that all these things are done with people, and the strength and the power of people and the importance they have to organizations. And maybe I can add a little passion to that, and keep in mind that integrity is very important -- so we're taking a pretty strong foundation in base here. I've got a little bit to add, in the way of seasoning at least, so I've got a few ideas that can help. I've learned a lot in this 2 or 3 weeks. I've been away a little while and other people have teased me of having rust, but I got most of the rust off. And no, I don't think there's going to be major shifts. I think we're going to be after velocity and assets. And look, that all fits together when the assets turn quicker and velocities improve, the customer services improve, the cost is lower, and it's a pretty good formula. So no, I don't think there's going to be major shifts. I think that you might not even know the difference, except maybe the results in a year.

Operator

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

Cherilyn Radbourne - TD Securities Equity Research

The organization has been through a lot, as you alluded to in your comment. You had a proxy fight, and a strike that was ultimately ended by back-to-work legislation. So if I only get one question, maybe I can just ask Hunter and Mike to both comment separately on kind of the mood at the grassroots level within the organization.

E. Hunter Harrison

Maybe I'll go first. I don't want to influence Mike's comments. I think it's fair to say it's certainly mixed. I think there's some people out there that see me as the big bad wolf and think I'm going to walk in here. And I do things positive for the organization, and they're not real pleased about that. But at the same time, I've been pleasantly surprised, as I've been out on the property and made it to [ph] shake-ins and meet railroaders that are very encouraged by the changes that the organization not necessarily need, but that the changes that the organization is trying to make. So there's a mixed bag out there. As I've said before many times, a lot of us don't like change, and that people that don't like change are probably be at the wrong place, because there's going to be some of it. But I'm not here to tell you that everybody's having pep rallies out there, but at the same time, I think there are people that are very encouraged that -- look, I'm a railroader, I'm going to help Mike and the team here, Jane, Kathryn, and all of them and bring something to the table. And so overall, I think the climate is pretty good. Now we'll see what Mike thinks.

J. Michael Franczak

No pressure. No, Cherilyn, I mean, change always brings lots of churn, lots of concern. But I've come back to something Hunter said before, and you've heard me say this before as well, that when we talk about our fundamental beliefs, our core principles, whatever you want to call them, they are not that different. We've talked about service, we've talked about safety, we've talked about productivity efficiency, cost control, what it's going to mean to grow and all of that is founded on our people. So when we sit and we talk about where we've been, where we are, where we're going, a lot of those same principles come up. We don't fundamentally disagree on any of them. To Hunter's point, there are some things that we've been doing very well, we're going to continue to do. There's a few tweaks we're going to make along the way. We might move faster on some, slower on others. It's all about pulling the right levers at the right time, but I can tell you in the morning, we're not debating whether we should go faster or slower. We're aligned, we're going faster and we're going to do it more safely, as an example, and we're going to continue to drive our unit cost down. So Hunter's getting up to speed on some of the details of what we've got in place and he's got some views of his own, and we're going to meld those together and drive forward. The team overall, Cherilyn, as Hunter said, yes, there's a bit of the mix out there, but on balance, I would say the team is looking forward to driving forward with the continued improvements, faster, better, more of them.

Operator

Your next question comes from the line of Chris Wetherbee from Citi.

Christian Wetherbee - Citigroup Inc, Research Division

I wanted to just ask a question on the energy comments, Jane, that you made in the presentation. You're pulling forward the crude-by-rail target. I just wanted to get a sense of maybe how you think about the $400 million target? Kind of what that run rate or when that run rate probably comes up? And then maybe what the longer-term kind of thought is -- or what the 2014 target is on crude-by-rail? Kind of how do you see this developing? What is the go forward beyond some of the -- what you've given us so far.

Jane A. O’Hagan

Well, I think, Chris, just to be clear, I mean, we've been in the marketplace, obviously, proving our model on crude-by-rail. And we've expanded those origins to include not only the Bakken and the light sweet crude but also to look at the mid-grade and to look at the heavy grade Canadian market. And as I've said before, we have reorganized our team, so that we are in pursuit of those opportunities, hopefully matching up origins and capabilities with customers who are investing in that supply chain. Again, it's come on much faster than what we expected. We've seen -- as I've said earlier, we've moved up that target to 70,000 carloads by the end of 2012. And again, it's really a combination that I don't really want to break down, because we're working the opportunities, as I talked about my opportunity pipeline, to really work it on all of the energy inputs. Crude-by-rail's one component, the sand's one component, we have the other on the construction materials, et cetera. And I think the key thing is, is that this market just continues to expand on a daily basis, and as we look at that item and we market against our capabilities and how we create capacity in the market and how we use and test our manifest models first and then build into the appropriate unit trains where we see the investment, it's really hard for me to give you anything more other than what I've said, is that we're going to grow at 2x GDP in those markets and continue to keep you informed, as we've been doing with our press releases to tell you how we mark our progress as we move along. So I think that, that certainly is where we want to be. As I said before, we've moved up, certainly our expectations, from a year earlier for the $400 million on the annual revenue run rate, but again, this is an area where it's going to continue to evolve, and we're going to continue to be in the marketplace and see those opportunities mature.

Kathryn B. McQuade

Chris, this Kathryn. Just to make sure, for clarity, is that the $400 million is for our entire energy portfolio that we gave some guidance around, and to her point, that she has moved it up a year. So to the extent that we can add additional color, maybe later in the year and everything, we will, but it will be inappropriate on this call for Jane to necessarily provide different guidance out there.

Christian Wetherbee - Citigroup Inc, Research Division

Okay. But it sounds like there certainly remains multiple opportunities, potentially coming up in the future. So this is a growing market, is the way we should be thinking about it?

Kathryn B. McQuade

Absolutely.

Operator

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

Christopher J. Ceraso - Crédit Suisse AG, Research Division

So Hunter, a couple of items just on your initial take here and your expectations going forward. As you've had a chance to take a look at the property, touched on this briefly, but is there any expectation that you're going to have to ramp-up capital outlays to get some of the work done that you think is important, particularly with the yards? Any kind of range? Is it going to run 18%, 19%, 20% of sales for a period until you can get some of that work done?

E. Hunter Harrison

No, once again, now, this is initial look. This is after 3 or 4 weeks. My sense is that the capital spend will probably decrease as opposed to increase. I think there's some opportunities to take some of the -- as I talked about the siding, rather having to build a new siding in some places, take underutilized sidings and put 2 of them together, and effectively, you don't have a lot of -- to capitalize the rail tiles, basically it's a labor issue. I think -- I'm, once again, forecasting here that we're probably going to see fewer terminals and maybe smaller and configured in different ways. But we have large terminals that still have hump yards that have a lot of the classification tracks. And this is a company that's got close to over 70% is units, I mean, if you look at Intermodal in the bulk, so those cars don't need to be classified. So I think we'll make some -- I think I have some ideas, hopefully, that maybe can be helpful with locomotive productivity. So if I look all in, and once again, I hadn't had a chance to spend a lot of time on this, I don't see any situations where there's going to be any bump up in capital. I think, if anything, it would go the other way. Now having said that, if there's big opportunities should come up that are compelling type of returns, we're certainly going to be in a position, hopefully, that we could take advantage of those opportunities. And that's one of the reasons to improve our free cash flow and be in a position to take advantage of those, but just what we would think of as base capital, replacement capital, and I don't see a big issue that we've got to gap some place out there.

Operator

Your next question comes from the line of Brendan Oglenski from Barclays.

Brandon R. Oglenski - Barclays Capital, Research Division

I think a lot of people are going to be pretty excited to hear you say that you're even more confident about reaching the targets that were set forward a few months ago. Can you just maybe expand upon that a little bit. How much of the economy is required to play ball with you here. If we start seeing a lot of slowing, does that jeopardize the progress that you see being made on some of these efficiency targets? Or is it really not contingent on a lot of expansion in the network.

E. Hunter Harrison

Look, this is under "normal circumstances." If we have another big drop in the economy and get in to some [indiscernible] recession and I don't have the -- look, economists can't figure out what's going to happen, how can I figure it out? That's not in the plan. I think my -- initially, due to my lack of knowledge and her greater expertise, my plan was a little more conservative from a growth standpoint. But as I've gotten here and looked at some of the projects and talked to some of the customers, I feel that I was probably too conservative on the revenue side of growth. But if we go through a "normal 4 years," I'm pretty confident -- I've been doing this a while. I know a little bit about what I'm talking about, that if things come together, and we don't have some unusual occurrences take place, that this is the -- these numbers that we've talked about are very, very doable. And so when I got here and looked, my confidence just became even stronger.

Operator

Your next question comes from the line of Matt Troy from Susquehanna.

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

I just wanted to change course a little bit. We're talking about potential actions that could be additive with your presence, Hunter. I know in the past, you've shown a willingness to make tough capital decisions. As you look at the network and the network map as it exists today, might there be opportunity to change the network, divest of some properties or anything structural that says that there's opportunity in 2, 3, 4 years out, where this railroad might look different as a whole.

E. Hunter Harrison

I think we've always got responsibility to keep -- to take a look at that. And there's certain -- there's clearly the core network that we make a lot of our money there. And there's others that you got to keep a watch on from time to time and be sure they're paying their way, and it's a smart thing that still fits with the strategy -- world changes on us, shift in patterns. So we will, as I've said before, we'll take a look at all those assets, be sure they're paying their way, be sure that there's not opportunities to pursue other strategies. So that's something that is hard for me to sit here and predict today what the franchise is going to look like in 5 or 10 years. I don't know if it'll be the same size, if it'll be shrunk in certain places or if it will be expanded. I'm just not that smart yet.

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

I just meant that there's nothing structural on the short list of things on your to-do list.

E. Hunter Harrison

No, no, no. Look, you all had talked about all the issues, that you all know them as well as I do, and some of those issues will -- there'll be some tough decisions. Those decisions aren't easy. I don't think there's anything that hadn't been talked about by management before or discussed. And I think those things we'll look at. I think there's potentially some shift in the existing franchise to certain lines segments. I think there's some -- a couple of things we could do that maybe could free up and add some capacity. I think there's some trade-off we could potentially do, so there's a lot of things on the list of maybe and what if that we'll explore.

Operator

Your next question comes from the line of Cameron Doerksen from National Bank Financial.

Cameron Doerksen - National Bank Financial, Inc., Research Division

My question's on the -- I guess, the arbitration process. If I think to the case of Air Canada, where there was also a back-to-work legislation. I think part of the mandate of the arbitrator is to ensure the sustainability of their pension plan. I guess, I'm wondering if we have a similar situation at CP, where the arbitrator's kind of mandated here to make sure that your pension on a go-forward basis is sustainable. And so, I guess, my question is, no matter what the outcome and -- is here with the arbitration, is it safe to assume that we're going to get some pension relief?

J. Michael Franczak

Well, you can never say never in these things. I guess I would go back to what I said earlier on this whole issue. This is one of the biggest issues that we've been facing with our labor force over a number of years. You guys all know the numbers in terms of the impact pensions is having on the company. The Running Trades employees, in particular, represent one of the largest groups in this challenge. That's an unfortunate reality. We negotiated hard. I was personally there in the final weeks of this negotiation. I went to Ottawa. I was there right up to midnight in front of the Minister of Labor and the unions in terms of negotiating this thing. The unfortunate reality was that the union was either unable or unwilling to come further in the pension discussions we had. They -- I will give them some credit, they did make some headway in the end. Unfortunately, it was not sufficient in terms of what we needed to do to be competitive in this area. I can tell you that we, the company, we're willing to continue negotiations beyond the deadline. We were even willing to enter into an agreement with the union on a mediation or an arbitration process to avoid or avert a strike. And again, the union was unable or unwilling to do that, and they chose to go on strike. So we were put into the process, in effect, between ourselves, the unions and the Minister of Labor. We now have a mediation-arbitration process. It will look at all of the issues on the table, quite frankly. So everybody's going to get fair airtime here in terms of the issues that were on the table during the negotiations. We will have an opportunity with the tri-party panel. There's 3 mediators, arbitrators, but there is a lead, and we'll be able to walk through all of the issues in detail, including the pension and work rules and the viability of the company issue, the importance of this to us will be part of that overall was mosaic. So with that, the clock is ticking on the 90 days, and we begin that process here, actually, latter part of this week. So I might just turn it over to Kathryn here who'll have a couple of specific comments around the pensions.

Kathryn B. McQuade

Yes, Cameron. A couple of things I would like to just clarify for radio land out there. We are very -- in a very different place than Air Canada. The sustainability of our plan and the structural soundness of our plan, it's -- we have that. We have taken our responsibility to our pension plan very seriously. And while we do have a deficit, there is not any kind of risk to the plan itself, which I think is very different than the Air Canada situation. So while the pension plan is a huge issue for us in terms of a competitiveness and how it places us in the rail market and the drain that it is having on our operating expense, but by the pension expense that we have to record, as well as the cash flow basis. But the situation that was presented to the arbitrator and what the government had to do for Air Canada, we are in a very different situation than that.

Cameron Doerksen - National Bank Financial, Inc., Research Division

I do apologize for comparing you to Air Canada on that basis. Just one final thing. When -- the items that do come down to an arbitration decision, is that a final offer arbitration?

J. Michael Franczak

Well, this is -- I would say that both parties, both the union and ourselves and the Minister of Labor are -- I'll use the term satisfied with the process that we've agreed to, the tri-party panel our -- meet our panel. The way the process will largely play out, we're satisfied that all the issues will be duly heard. As I say, the process will involve a mediation upfront, which essentially means that they will work with both parties to see how close we can get on the various issues, and then they will arbitrate on the final issues that remain outstanding.

Operator

Your next question comes from the line of William Greene from Morgan Stanley.

William J. Greene - Morgan Stanley, Research Division

Hunter, I just want to sort of clarify some statements that you made here, because as you can well imagine, there are some pretty big expectations, I think, built into your arrival on the property. And obviously, you've got to get acclimated there. But what I heard you sort of say is that, listen, you're kind of here to help and a lot of the facets of the current plan are kind of moving in the right direction. So when you think about applying an idea of precision railroading, like you've done in the past, to CP, is it the kind of thing where you have to take a step backward on OR to take a giant leap forward? Or is this a process where no, it kind of starts kicking in right away and things just gradually move toward your ultimate goal, whatever that may be.

E. Hunter Harrison

Well, it's probably somewhere in between. There's not a step back. I don't see a step back. I think things are moving positively now. I guess, I'm a -- I kind of look at myself, maybe, as being the full barrel to the carburetor. Okay, I can just speed things up a little bit, maybe. Be helpful to Mike and his operating team with some of my experience in the past. I can apply, in some areas, a sense of urgency. I've got some specific ideas. And I think that, as I've said early on, you're not going to see this needle jump next quarter of 5 or 6 points, probably. But I do think that there will be -- over time, there will be a pretty sustained improvement in the OR, if you're looking there. So this is just taking the strategy and maybe making a little fine-tuning here, a little emphasis added here, an idea here or there, and that's where it's all going to kick in. I mean, look, we've done this before. I mean, we did this at Illinois Central, we did this at my former employer. I don't know why people are so doubtful that we can accomplish it here, maybe.

William J. Greene - Morgan Stanley, Research Division

No, I don't think they're doubtful. I think they're actually the reverse, thinking it can go very, very fast. And I just wanted to make sure that, as you start to apply it, there's not a period where you don't see much improvement as the organization learns what you do before you get a big leap. That was all I was trying to -- make sure expectations are appropriate.

E. Hunter Harrison

Yes, and I think, that -- look, I think to Mike's point, that we keep making is this. This is not like throwing out the playbook and writing another book. The playbook is very similar. It's just -- it's some fine-tuning here, some emphasis added here. We might punt on third and long and CP might not, in the past, have done that. So I just think it's a pretty good match here of a lot of talented people with some pretty diverse talents that -- if I had to write myself, technology's not my highest area of expertise, but where I've spent a lot of time and energy. This company has done a lot of work in R&D, particularly, I mean, given the challenges they have with the Rockies, despite the fact that I've [indiscernible] is not a structural difference. Having said that, it was a learning curve, and so there's a lot that I'm learning about DP and about what can be done and about track-train dynamics and so forth. At the same time, I'm a pretty good fundamental basic terminal guy. That's where a lot of our expenses are. I can, I think, get the productivity up in terminals pretty drastically and bring cost down. So I think it's going to be a fun time to sit back and watch.

Operator

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

Scott H. Group - Wolfe Trahan & Co.

You mentioned a couple of times technology as one of the pleasant surprises that you've seen since you joined the railroad. I'm wondering if there's a challenge or 2 that you see now that you haven't thought about a few months ago. And then specifically, on the labor side, you've been a part of some pretty transformational labor deals in the past. Do you think there's a chance with the current deal with the conductors and engineers, getting some of the work rule changes that you want? Or is it more realistic to think about that in the next round a few years out from now?

E. Hunter Harrison

Look, my limited knowledge here, and Mike maybe wants to comment. I don't know about changes now. I do know that there are some opportunities if we're both willing to sit down with a clean sheet of paper and address the things that I hear them talking about, quality of life and time off, and at the same time the things that we're talking about. We're -- I think, we're the only rail that I know in North America that's still running basically 100 mile basic day in the short crude districts, as we call them, and do not have extended runs or inter-divisional runs. That is a huge breakthrough for us, if we could make that. Now everyone else has made it. Now -- so what can we do? We can, at the same time for them, allow them more time off and improve their quality of life. So there's opportunities there, and I really hadn't even factored in to do that. But I will tell you this. I've had some success with labor, but it's hard, the change is hard, and it takes time. It takes more time than I've ever had changing the operating ratio, change the labor agreement. I mean, we had one experience where we had -- we went to the rank-and-file 8 times, and 8 times management endorsed it and 8 times the union leadership endorsed it and 8 times it was turned down. It was turned down because it's a trust issue, it's a change issue, and those are hard things to deal with, but you're not going to get them done unless you sit down and go at it. And beside, now -- for example, from a pension standpoint, I think we all know as we look at the situation in North America with pensions, something's got to change. This whole -- a lot of organizations have some challenges here. We got to go through what I would call a cleansing. I don't know how we're going to get there exactly, but something has to be addressed, and my thought is, when it's all said and done, we'll be better not worse. Now, whether it's fast enough or it's not. But I just think, on both fronts, there's a lot of opportunities.

J. Michael Franczak

And just to follow-up, extended service runs were on the table for this last round of negotiations, and we put up forward a position that would allow us to do more of them and also assign more employees, so back to Hunter's comment about giving people more structured lifestyles and things of that nature, that was all on the table for discussion and that will form part of the mediation arbitration.

Scott H. Group - Wolfe Trahan & Co.

Hunter, do you think you need those extended service runs to get to the -- kind of the margin numbers you've talked about? Or is that incremental beyond what you've laid out?

E. Hunter Harrison

That's incremental. That's not required. Look, it is just so basic. It makes far too much sense and is far too logical for people to do it. Okay, just think about something for a moment, just follow me. The crude districts, on average, are about 120, 130 miles. We're working on a 3,800-mile cap, that they're supposed to make 3,800 miles a month. That basically is the same system from 100 years ago. It hasn't changed. So if you're going to get in, you only can do 120 or 130 miles day, you got to work 27, 28 days a month to do it. And you only get 2 or 3 days off, well, that's not good. Well look, if you go to extended runs you can go to 180, 190 miles a day for incrementally very little more time. You get your miles in, in 18 or 19 days, you get 11 days off. And that makes a lot of sense for all of us. But for some reason, it takes us awhile to get there. But that's the incremental, okay? but I'll tell you what will happen. Once we get over the hump in labor in some of these areas and develop some trust and break through with one agreement, a lot will follow.

Janet Weiss

I'm going to jump in. It's Janet. And call's running a little long. So we've got time for one more question today, and again, I'd be happy to follow-up with any of you after the call.

Operator

Your last question comes from the line of Turan Quettawala from Scotiabank.

Turan Quettawala - Scotiabank Global Banking and Market, Research Division

Just one question on the strike from me. Just trying to understand, you talked a lot about, obviously, the impact on Q2. How much, I guess, should we expect in Q3? I know there's some deferred revenue there. Could you wrap some numbers around that, either in volume or maybe revenue terms?

Kathryn B. McQuade

So, Turan -- this is Kathryn. What I gave was the Q2 strike impact. And when Jane gave her information and terms of her outlook for each one of the commodity groups, it also included any catchup that we would have from the strikes. So if you look at her commentary, that should -- that already includes what we're expecting to -- that got shoved into the third quarter as a result of the strike.

E. Hunter Harrison

Well, thanks very much for joining us. It's nice to be back, and I'll look forward to our next call and -- where we can talk about some of the results where I get to be a player. Thank you.

Operator

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

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Source: Canadian Pacific Railway Limited Management Discusses Q2 2012 Results - Earnings Call Transcript
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