Good morning. My name is Jay, and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific’s Second Quarter 2014 Conference Call. The slides accompanying today’s call are available at www.cpr.ca. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator instructions) I would now like to introduce Nadeem Velani, AVP Investor Relations to begin the conference.

Thank you, Jay. Good morning and thanks for joining us. I’m proud to have with me here today, Hunter Harrison, our CEO; Keith Creel, President and Chief Operating Officer; and Bart Demosky, our EVP and Chief Financial Officer. Before we begin, I want to remind you 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 two in the press release and in the MD&A filed with Canadian and U.S. regulators. This presentation also contains non-GAAP measures outlined on slide three. The formal remarks will be followed by Q&A. We would appreciate if you limited your questions to strategic items and if you have any modeling questions please follow-up with Investor Relations after the call. It is now my pleasure to introduce our CEO, Mr. Hunter Harrison.

Thanks, Nadeem, and thank you everyone for joining us this morning. I am going to try to be brief here. But, I guess, I could more characterize the quarter as record after record after record. Although, there are a lot of moving parts this quarter and let me just highlight a couple that you can keep in mind as we go through the presentation from Bart and Keith. First of all, we had operating ratio was pretty outstanding, I trust you have seen in press release. But I would also add on that side is that we had a pretty significant headwind about 2 points in stock based comp, which is probably a first to last problem to have and I am not sure what the impact is going further. And I would also highlight to you that this is a little bit of a complex issue, but we have changed our policy and internal philosophy as it goes to grain rate and staying under the revenue cap and so given that we saw we were going to exceed the cap, we had to back up with rates. And our rates are down or the quality of revenue for grain is down about 8% or 9% this quarter. After when the new crop year in August you will see one more month of that in July and then we will be back to full normal run rate for grain. There has been some conversation about the so-called now Southern corridor which we had some challenges with in the second quarter and we will probably have some challenges going forward, but I’ll note that Keith and his team are working very diligently to get those issues resolve and maybe resolve and they involve the continuing issue with Chicago and interchange. Is it much better than it was? Absolutely, is it where it should be now? Is it going to be continuing challenge to the industry until we work through something, yes. And now we have to experience some further delay in the Minneapolis/St. Paul corridor where we operate over another carrier and once again Keith and his team have been negotiating and working to come up with the longer term fix there. But that is all on the positive side. We continue to see good demand out the market going forward and I think we have -- we are kind of ahead of our schedule on the buyback program which Bart will talk to you in more detail. But, overall, I mean, record quarter, record metrics, record -- if you peel it back fundamental operating performance. So I am very pleased to say the least and with that let me go -- let me turn it over to Keith to talk about some of the operating results and marketing trends going forward. Keith?

Hey. Thank you, Hunter. I am pleased to highlight few points in what was overall a very strong operating quarter despite of what I’ll term the winter drag appeared over in April and to your point, Hunter, some of the headwinds we face with volume driven foreign road challenges operating both Chicago and St. Paul. In spite of these challenges, second quarter performance was strong with continued improvement in train weight fuel efficiency, which of course are all important levers that drive and improve service reducing costs, asset utilization. As noted on this chart we experienced notable improvement in each area, I will note that the fuel efficiency performance is an all time record for CP and its approaching an industry best performance. And on the safety front, the most encouraging important area of operational improvement in my view is our train accident performance. That said, to be clear, one accident or injury is too many in my mind. Our team is going to remain focused and committed to driving further improvements in all facet of safety. However, these results do provide powerful proof points that our focus to evolve our safety culture is working, couple with enhanced with our strategic investment to strengthen our physical plan. As you can see our FRA train accident ratio improved 47% over the second quarter of 2014. This performance coupled with the strong first quarter performance is produce an industry best year-to-date FRA train accident efficiency ratio of 1.0 accident per million trade mile. In summary, these operational and safety improvements are translating into revenue opportunities. So over the revenue side, solid demand strength summarizes the quarter. Total revenue was 12% higher in the second quarter ’14 versus ’13, the significant growth across the company’s business units. Leading the revenue growth was grain,…

Okay. Thank you, Keith, and good morning, everyone. This certainly has been a record Q2 for CP and I am going to cover some numbers that I think any CFO would be proud to list off. Starting with record quarterly revenues of almost $1.7 billion, operating income up just under $560 million, which is 40% and net income up 47%. Combining or resulting in diluted EPS of $2.11 and last but not least, a record operating ratio of 65.1%. That’s a 680 basis point reduction for the company and the lowest in our company’s history. Hunter covered this, but a little bit more flavor, when you count for the reduction in Canadian grain rates that Hunter spoke to and the $30 million of headwind we saw in the quarter of stock based comp. Our underlying run rate is now in the low 60s, which bodes very well for us for the rest of year and obviously for go forward. On the operating expense side, there are a couple of items, I just want to highlight. On the comp and benefits area, efficiency is generated from headcount reductions and more pension expense, which combined totaled about $35 million. More than offset the impact of the rising share price over the quarter. Fuel was up but primarily as a reflection of workflow which is a positive thing. We did have some fuel price impact as well, but that was partially offset by 5% improvement that Keith team made on the fuel efficiency front. So in the last couple of years we have gone from back-of-the-pack when it comes to that metric to near best-in-class and those benefits flow straight to the bottom line. We did see an uptick in the material expense this quarter which is a reflection of the higher input…

I will go quick, I think it’s important I provide some clarity and color on revenue growth to 12%, the price 3.5% of that, volume mix 5%, foreign exchange 4%. So that did Hunter.

I think Keith and Bart, so, Jay, we are ready to feel questions from this group.

Thank you. (Operator Instructions) And our first question comes from Fadi Chamoun with BMO. Your line is open.

Good morning, gentlemen.

Good morning, Fadi.

So, I would like to dig a little deeper into the issues in the Midwest. If you can talk specifically about what exactly there, are these things that are within your control that you can solve with capacity or is this a thing that you have to -- that you have to sort of work on with the other rails? And also, what kind of timeframe you think some of these solutions can be found?

Okay. Fadi, let me make a couple remarks then Keith can fill in the blanks. But it’s kind of all of the above. It’s obviously we have a working arrangement in Minneapolis/St. Paul, where we operate adjacent to and over BN Santa. That’s no secret. I think they have had some capacity issues and some challenges that I will let them come and I will, but as a result of that it is had impact on that quarter and slows the velocity down which we had some negative impacts on us. Now, having said that, Keith, now has been with those folks, they have been sitting down, going through agreement that they expect years from various mergers. They have been various -- looking at various operating solutions and this is something that we can deal with. It is going to be a shorter term challenge, but I think that while we are doing this Keith is doing more of a permanent fix where we will not be dependent upon another carrier and we hope that some of those things will come together. So, Keith, you might want to fill in?

Yeah. I think the key again, Fadi, to Hunter point is mitigating the impact short-term, while we work on long-term solutions. As Hunter said, we effectively co-operate with the Burlington Northern Santa Fe, now the BNSF and their leadership team are very engaged and they had a good railroad, they are focused, they have got plans to expand capacity, just takes a little bit of time to do it and specific actions that they are taking, as well as CP has specific actions that we are taking. In fact, just as of last week, a week before last, I think, start of last summer, which is going to prove very helpful for us. We powered up the switch and started to use the line that we had that takes our Westbounds off of this share territory with the Burlington Northern Santa Fe and allows us to control our destiny a little bit more. So that’s going to help the BNSF investment in its own capacity are going to help and to Hunter’s point there are some other thing that I look at it specifically strategically that will further reduce our dependence upon that piece of railroad and let us control our own destiny in St. Paul. The short-term mitigate, long-term we will solve. Now, Chicago, Chicago and Chicago, Fadi, I don’t see a big change, short of a transaction down the line. I think, it’s always going to be very fragile. I think with increase traffic growth throughout the roads. You get another winter like we had this past winter then maybe you see a similar results. I do think that on the positive side, that all the roads are working closer than they ever have trying to identify opportunities to create capacity in a very challenging environment i.e. take traffic out of the corridor that doesn’t necessarily need to be in the corridor. So long-term fix, I am not going to suggest that I have got super ball to do that, but I am encouraged if we are doing something to mitigate the impact.

Okay. That's helpful. Maybe one quick question on the crude business as well. So we have seen a couple of terminals that have come up, and one is a big one in the hardest area? Do you see visibility right now on how we think this is going to ramp up going into the second half and into 2015? Is this more of a 2015 kind of ramp-up for you guys or are you starting to see that volume move right now?

The volume has started to move, Fadi. Obviously, it’s got to ramp up. I would expect to have the potential to be at order of magnitude -- a train a day by fourth quarter. So that’s very encouraging. We expect the run rate to finish this year around 140,000 carloads, which is up from last year. You will see the mix change right now probably 54% of our origin comes out of U.S. from crude. You will see that shipped to more than 50% coming out of Canada by the end of ‘14 as we go into ‘15.

Okay and how does that impact the RPU. So is this sort of from an RPU point of view, this is ….?

It’s a positive store. We’re working hard to improve the quarter revenue on the existing Bakken crude but as we bring more this heavy Canadian crude, it will help drive that in the positive direction.

Okay. Thank you.

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

Hi, good morning. Keith, can I ask you a comment little bit further on some of the revenue trends. Because, we got a lot of moving parts as you sort of identified your opening remarks. And I think it would be helpful to kind of understands how to think about what the underlying may be organic growth rate of business is. Perhaps June is good month depending upon we have flooding. So maybe if you have a normalized sense can you, kind of share what your best guess is and kind of where the underlying organic growth rate is of the revenues?

I mean, effectively, this reinforcement we’ve set already. We’re looking at the double digit revenue growth. What we’ve seen this quarter, there are some puts and takes but overall that demand level and that performance is something we expect to see the second half driven by pretty strong demand in growth across all markets. Again grain is going to be a key driver. We see that this year. We see that next year. This international business although like I said, if we take out the business that we have lost, we’ve seen pretty significant direct initiatives of our service offering there and of course domestic is going to continue to be a winner for us. That’s something truck can’t compete with and other roads can’t compete with and we’re leveraging this franchise to continue drive profitable growth on that side. So across the broad I don’t see demand weakness. I see opportunity to continue to drive and produce that double digit revenue growth.

Okay, very helpful. Thank you. Bart, maybe I can ask you a question, just on the cash flows. So the second quarter cash flow, really good; right? If we look at the conversion of net income to free cash flow, basically 100%, even if we exclude those asset sales. So as I kind of think about what you're talking about here with the normalized OR being in the low 60s, and we've got a very good outlook for the production of the free cash flow growth from here. You've already done a run rate now in the second quarter on buybacks of $1.8 billion. I don't see any sort of logic here for thinking that slows from that pace. But there’s a lot of puts and take in cash flow I know. So can you talk a little bit about comfort level either at the broad level or at the management level for continuing this pace or accelerating it?

Yeah. Bill, great question, having the kind of cash flow generation and cash flow growth that we have is certainly a quality problem. Our focus for use of that cash to take as you’ve highlighted has been our repurchase strategy. And that the key there is we try to improve shareholder return. And the opportunity so far has been very strong. Our share price as you can image is below what we would view to be the intrinsic value of the company. So we continue to see repurchasing shares at the strong value proposition for the shareholder. We have not yet outlined plans as you know beyond our current and normal course issuer bid would be having those discussions with the board shortly. And without stealing all of our thunder, we’re going to probably provide some more clarity at our Investor Day at the 1st of October.

Maybe I could just ask one sort of comment, then, on the Board. Are they getting increasingly comfortable with the pace? Because I know last year there was a little bit of reluctance to go as far as perhaps management was willing?

Bill, this is Hunter. I think that -- I think its clear that the Board grows more confidence with the operating performance of company all the time. We certainly start to reflect in the cash flow and there is certainly and they should be concerned about taking here the needs of the company. From the capital standpoint, we presented that to them. And we see potentially something that we’re exploring that might be some other opportunities. But if you put all that in the blender, I think and you look at forward and you continue to see and buy into this operating performance, I think you will see a more aggressive buyback program all the time when we go forward.

All right. Very helpful. Thank you for the time guys.

Your next question comes from Turan Quettawala with Scotiabank. Please go ahead.

Yes. Good morning. I had a real mundane kind of question here. But on domestic intermodal yields, I'm just trying to understand that those have been down here for the last few years. Maybe Keith you can talk a little bit about why that's the case. Is it mainly a mix issue? Because obviously truck pricing has been rising, so one would expect those to go up as well?

I see a little clarity on that. You’ve got to understand its about balancing the network in domestics side. So when I say balanced network most specifically it’s trying to match that head haul with backhaul business. So the backhaul business obviously is not as profitable as the head heal business but it allows us to manage our fleet and to turn those assets and keep them balance and over all drive the profitability of the business unit.

I see; got it. Okay. So should we expect that to continue? How much more of this backhaul -- like a lot of the growth I guess is coming from the backhaul side then?

Yeah, well, no, that's not necessarily correct. For instance, head haul 101 is up 27% so that’s not the case. You will see some of that. I don’t think that you’ll you see the deterioration continue because we’ll start to price the book of business in the service with some of the customer that we have now just demand for the product. Probably might lose a seat on the train because they are not going to be able to pay the same freight that a more quality customers would. So you will see that reverse. Some of that also is driven by our increase in our Toronto-to-Montreal roadway service that we’ve got. So that’s not the most profitable business. We still make a buck on it but it’s not nearly as profitable nor do we enjoy the same margins as we would domestic head haul so to speak from Toronto to Calvary.

Okay. Thank you. That’s helpful.

Your next question comes from Thomas Kim with Goldman Sachs. Please go ahead.

Thank you very much. Keith, can I just break down the commentary on the double-digit revenue growth? And Specifically I am curious about the loadings. In the second quarter, obviously we've seen a nice little ramp here. I'm wondering if you can quantify how much loadings you think you may have lost due to congestion. And then, when do you anticipate getting back to the mid-single-digit volume growth going forward?

You know, if I had to put a number on that I would say maybe -- maybe a 1% less than 1%. I mean -- there are some puts and takes in it. There is a little bit of pick up in the second quarter from maybe some coal that we didn’t move during the first quarter because of winters. But that is muted obviously by some of these challenges we have had at St. Paul/Chicago. So again I would point back to this overall performance which you’re seeing now similar to which you can see at the balance of the year.

Okay. Great. And then, just with regard to any incremental costs associated with making sure that you're delivering what you're delivering so far. In the first quarter, you called out about $75 million due to weather. In this quarter we didn't necessarily see any comment specifically as to how much additional incremental cost incurred due to the increased resourcing required to get the network back. Do you have a number in terms of what additional cost that might have been incurred due to these network constraints?

Yeah. I would say again I’m not going to make excuses for costs. To me it’s not material. It’s not like the first quarter. So I would say nothing.

Okay. All right. Thank you very much.

Your next question comes from Allison Landry with Credit Suisse. Please go ahead.

Hi. Thank you for taking my questions. Hunter, over the past few months you’ve talked about becoming the most efficient rail in either 2Q or 3Q. And Bart, your comments that the core OR run rate in the second quarter was in the low 60%s, if you exclude the stock-based comp and the grain rate. So based on this, is it fair to infer that it's possible that we could -- or you guys could potentially see a sub-60% OR in the third quarter?

It is possible. If everything hit and we don’t have any issues or problems and everything hits and stock doesn’t go up. Are we going to see a day that we break through that barrier? Yes, I mean that’s not some what we’re trying to break through the 4-minute model. I think we’re still looking forward in the longer range outlook. We clearly have low 60s that’s in our sight that we can see. That’s good. We’ve looked at and then converged to some degree to the cash flow that Bart talked about and to more of the buybacks. The thing that it doesn’t, it’s again missing components there. It’s converging potentially at the low cost and service that Keith has talked about its potential growth. Though that’s the story, could we hit number that starts with a one day, yes, sure we can hit it on a quarter basis, I hadn’t seen yet. I don’t have in my sight that we can do a five throughout the year based with seasonality and so forth. But you’re going to see probably hopefully, if there’s no foreseen issues in the third and fourth quarter, you’re going to see some pretty good numbers there. Now, somebody is going to ask me before I get there, am I going to change my data. No, the data has been 65-ish going back to the original plan two years ago which was supposed to be four-year plan which people said you couldn’t do that -- all the experts, some of you in the room but that wasn’t doable. Well, it is doable. We’re going to -- we will produce stronger numbers than that clearly. And I think this is the case that we’re going to be moving from. It’s not as how low can you go. That’s really on the cost side but it’s the top line opportunity to convert which will then start to provide the lot of opportunities for the company that we have not had before. So we are going to see some numbers like this but we’re not going to be obsessed with that, miss the opportunity for growth on the other side.

Got it. Thank you for that comprehensive answer. And just one follow-up question. Can you maybe talk a little bit about pulling the tender offer back in June? It seems like the rates that you offered were attractive. And so I was just trying to understand. Was there something related to the profile or the style of the debt holders that maybe inhibited them from rotating out of the bonds? Obviously, there are high coupon rates. Could you maybe talk a little bit about that decision?

Yeah, we changed our mind. Sometimes you do that. You get smarter the further you go along. And I think we maybe second guess ourselves when there were some other issues and we decided to withdraw now. I’ll let Bart give you more specifics. I don’t -- there is nothing material or nothing to be concerned there that was any significant issue. Bart, you want to?

Thanks Hunter and thanks Allison. The only thing I’d add to Hunter’s comment, Allison, is that we do obviously constantly look at opportunities to bring our cost down. We did identify an opportunity here but the take-up wasn’t strong. There is some impact of mix of investors than we’ve got the investors in our bond to match those holdings to duration. And so pricing is very important. We are not going to overpay on any thing if we are going to buy, get back or do other things. And so, nothing out of the ordinary here other than price wasn’t right. So we’re moving onto other opportunities.

Okay. That makes sense. I think just to your point of duration, we had heard even in some other industries longer duration investors like life insurance companies and that sort of thing. So that was just where my questions come from. But thank you so much for taking my questions.

Thanks Allison.

Your next question comes from Benoit Poirier with Desjardins Capital. Your line is open.

Good morning. My first question is on the crude by rail. Just wondering, Hunter, if you could provide more detail with respect to the new terminal that has been announced by Global Partners in Port Arthur. Just wondering, what's your selling proposition? Any advantage you're going to be selling through KCS or over CN? And probably any color on the time frame and the magnitude of this opportunity.

Well, Benoit, I can say this. We connect with -- we connect with KCS and CN then. Clearly there is an opportunity. Now there is other people that go to Kansas City. But clearly there is an opportunity for us. I’m not sure if Keith is up to speed more than I’m but there has been no discussions that I’m aware of. But anyone else has closed the door and has preempted us as far as an arrangement there. I know this is the longer term project to get that tunnel up and running. So I think given our position of the sourcing and given our opportunity and connection, direct connection over Kansas City with KCS that we will be right in there in the fight. Keith, Is there anything else that I missed?

No Hunter, I’ll just emphasize it more. This is all about the strength of this franchise. The origin source with heavy crude, the connection with KCS and Kansas City, we’re going to be players regardless who the competitor is.

With respect to the size, would there be any bottleneck on your track right now, looking at this corridor?

I don’t know.

Okay. And maybe second question for Bart. I was wondering if you could provide any update on the asset monetization, whether it's still a 2015/2016 story?

Yeah, Benoit, more it come on that when we get together at Investor Day. But we’re working through the real estate portion of the book to see what assets could be freed up. We would see this as something that’s going to happen moreover the two to three year timeframe that something that’s near term but so far it’s looking quite good in terms of the opportunities that are there.

Okay. Thanks for the time.

Thanks Benoit.

Thank you Benoit.

Your next question comes from Chris Wetherbee with Citi. Your line is open. Please go ahead.

Great. Thanks. Hey good morning guys.

Hi Chris.

Bart, maybe just if I could circle back to some of the thoughts around capital structure and you think about some of the debt profile you have. And it sounds to me like buybacks provide a pretty interesting and compelling financial return opportunity for you currently. But as you think out over the next year or two and maybe the -- could you give us, I guess maybe frame up the opportunity as you see it to potentially maybe do something on the debt side to refi or ultimately lower some of that coupon debt as you move out over the next couple of years? Just curious what maybe that opportunity looks like right now?

Yeah, Chris, we would agree with you completely that the opportunity to repurchase shares at a good value as their. Hunter touched on the point that board is getting a lot more comfortable as the operational performance continues to just get better and better. And that the cash flows are going to be there and that the balance sheet is going to remain strong. So we’re now shifting our thinking towards can we model in over the long term more buybacks if we get them obviously to the right price and if there are sustainable level of leverage that makes sense to. So if you look at where we’re at today and what the business performance improvement is going to drive going forward and that produces a lot of cash, our debt EBITDA ratio is going to continue to come down. And you know what that means in terms of leverage levels reducing and ultimately that’s not optimal for shareholders over the long term. So I think what it all points to is at a very positive situation where that we can continue to buy shares at the right price. It’s going to be material. We don’t have details on it today though Chris and that’s something we’re just working through right now. And we’ll talk more about come October. Okay.

Yes, that is definitely fair. I appreciate the color. Just a quick follow-up on that. When you think about those longer-term leverage, your comfort with longer-term leverage levels I guess, can you just give us a rough sense? I think in the past you have suggested in the neighborhood of maybe two times. I just want to get a rough sense of maybe how you think about that going forward. Has that thinking changed at all?

That would be in the zone. I think we highlighted in one of our slides last quarter that we target something less than 2.5 times. We do have a target credit rating that aligns with that metric. You want to keep some flexibility on the balance sheet too and add some shock absorber abilities. So probably something in that two, two plus but below 2.5, makes a good sense.

Okay. That's very helpful. Thanks for the time. I appreciate it.

Thanks Chris.

The next question comes from Walter Spracklin with RBC. Please go ahead.

Thanks very much. Thanks for taking my question. I guess my first question will be on Hunter your commentary with regards to shifting a little bit of your focus from operating ratio to growth. I would like to just get some clarity in terms of where you see the key growth coming from. Either through -- is it through rail share gains? Is it through truck share gains, or through new market organic growth opportunities, either organically or through markets that we haven't seen or we were seeing fast and rapid growth in? If you could bottle -- if you could segment into those areas where you see future revenue growth, how would you kind of categorize it into those buckets?

Well, if I went across the board, I think, for example that over, if you want to look at some five year averages or what, we’re going to see some yield improvement with Canadian grain. I think there will be some shifting away from maybe commodities from wheat, the corn or what it might be. So I think there will be some pick up there which is part of the strength of the franchise. I think you see, maybe look at potash and you look at the huge investment K plus S on top of our strong franchise to begin with. You’ll see some incremental growth there. Clearly, I think you -- everybody is focused on the growth story. So there is going to be some, certainly upside opportunity on crude. And how much and over the long run, hard to predict given what happens with pipelines and other competition. And this is almost to some degree in order of how this will occur. I think clearly Keith has pointed out this morning that there has been tremendous improvement in domestic intermodal. I think that’s more that’s mostly of the highway. I think we will be focusing on other markets domestically. The old convictional wisdom of -- that you couldn’t hold something on the railroad, it had to be at least 700 or 800 mile length of haul to be able to make a buck is not true anymore. As railroads have gotten their cost down as well as us, we move that into the low 60 range. You can almost look at the linear impact of what we can do as far as competition from that standpoint. And then there will be I think some return of some lost business internationally mainly as a result of service. And then I think there’s a little bit of a longer range, just a little bit harder to make it conversion but the size to me as much as everything is that whole book of merchandise business that people tend not to focus on both internally and externally that I’m trying to be a champion of. With the all the other stuff, I think yes its sub organic, yes it’s some market share gains both from the competition, rail competition but to a small degree but mostly from the highway and when you provide -- it's a pretty simple formula. When you provide the best service, if we do that and you’re the lowest cost carrier out there, you’ve got a hell of an opportunity and all you need there is strong economy.

Okay. In your comments there, you touched on hard to predict. I guess where I would ask you is -- you certainly attack your costs with a high degree of confidence in your ability to reduce those costs given the control you have over those. How do you compare the revenue growth opportunities as you go into that next stage of value creation for shareholders? How do you consider the revenue opportunities when compared to what you did on the cost side in that kind of confidence level?

Well, I think it’s almost the flipping the coin. I think that we have seen this franchise is becoming stronger from the basic infrastructure, safer from the roadbed up, from the ballasts up, from rails and ties. And at the same time, we are doing that. I think one of the things that people happen to miss in rail is Keith and his team are working very hard in strategically placing longer sidings in, and mainline fueling facilities and things that add raw velocity and speed. So if you’re able to then convert that service, that raw speed to the customer, and Walter and I would hasten to point out as we go forward in this plan, I am talking about this year, but if we look at the four, five, six-year horizon, I don’t think you’re going to see interest rates stay where they are. I do think you will see interest rates will rise. I do think you will see carriers that are providing quality service, when people look at the carrying costs of their inventory get rewarded. So I think at a point we will become -- hopefully our goal is to become as much a revenue champion as we are cost champion.

If I could tuck in one last one, that's a fairly ambitious -- certainly ambitious and interesting opportunity. You’ve obviously had some changes now in your executive team on the sales side. I think, Keith, you are kind of shouldering the load here right now. Is that something that you expect to do just for the interim? Or is this something given the significance of the revenue opportunity that you're going to be chasing? Is that something you're going to look at sourcing some expertise from either outside or inside the company?

I would say Walter that number one I’m having a great time, I’m learning, I’ve got hands on teaching and developing a very confident marketing team and each of the business unit leaders. I have got strong shoulders. I’m not overwhelmed at all. So I don’t see any short-term change or long term. If we’re to identify the appropriate candidate be it internal, external, of course we are in the business of developing people. We will hire someone and we will do that, but right now it’s nothing that I am seized with or concerned with. I think it’s working extremely well. We will continue to do more the same.

Okay. Thank you very much.

Your next question comes from Scott Group with Wolfe Research. Please go ahead.

Hey, thanks. Good morning, guys.

Hi, Scott.

So when I look at the revenue numbers in the quarter, there is definitely some good help from mix and currency. Don't see a ton of pricing yet. And wondering, Hunter or Keith, when do you think that the pricing can really start to take off now that the service is getting better?

Well, let me take shot at that. Number one, I have said and we’ve said going into this that’s the hardest conversion number one, okay. Number two, we’ve got legacy contract that, for example if you just change policy overnight, I’m not going to change the quality of revenue. I think the quality of revenue is going to be a little bit of a lag that people see in our performance. So I don’t expect and I don’t think customers are going to come out and make a big conversion and change to us and/or give us a price increase until we deserve it and earn it and it creates value for them. So I think this same time frame I think that I would call the team kind of the year of transition where we are getting our costs close to the end of the line of wringing cost out where it’s smart. Could we go lower, yes, but maybe not smarter. And then to’15 and then as we move into ’16, I think we will see some --- certainly in certain commodity and it’s relative to the competition, but we will see the ability to increase the quality of our revenue on the individual components, because if you look at it from an overall book of business and you look at the regulated grain and some of the things that you can impact, but I think to Keith’s point earlier I think the domestic intermodal will improve. I think the crude will improve. I think you start seeing this ramp up probably really ramp up back half of ’16.

So is it fair, Hunter, to think about you guys have some visibility on some things outside of price that should kind of sustain this double-digit into next year, and price maybe picks up in ‘16 to keep the double-digit going?

Yeah, I mean, that’s kind of what we said all the time in the plan. And the key to all this I would say that you can wrap a lot of this up strategically as where we are, is velocity, trying to make a definition between velocity and speed. If we can improve the physical plant and have a safer physical plant, we can move faster on it. We can lower our cost as a result. We can have greater asset turns and provide better service to the customer that all works and comes back to provide this the bottom line. We have I mean underlying to some degree. We are right now -- I think it’s safe to say well I would say it anyway we are very, very close -- very, very close to make an announcement hopefully on a breakthrough with a collective bargaining agreement in the U.S. which will be looked at very favorably I think. And there will be a Phase 1 and Phase 2 there and that on a longer-term basis once again looking at four, five years is part of the strategy of the company overall is, if we can improve the speed and if we can pay our employees and make them the top paid employees with the highest quality of revenue but overall lower our labor cost, this all fits together.

Yes, no, that makes sense. And just one last follow-up, Hunter. As we are growing -- starting to grow the volume more, when should we or should we be thinking about starting to increase headcount or CapEx again? Or do you feel like you can do this without having to add those -- any resources back?

Well, there is some dependency here. Number one, in certain areas clearly we can grow capacity if you look at our train sizes and what our capacity is, theoretical capacity you can have some rather significant growth without adding. There are few other areas that might have to be added to and for example what happens to some of the collective bargaining agreement has a significant impact. So I would say that either way where we are positioned right now, you are not going to see in the short term the next two, three, four years significant changes in the headcount up or down.

Got you. All right. Thanks a lot for the time, guys.

Your next question comes from Cherilyn Radbourne with TD Securities. Please go ahead.

Thanks very much and good morning.

Good morning.

I am just going to ask you one, and it relates to dividend policy. Clearly, with the EPS growth that you've had, the payout ratio is now well below kind of a 30% to 35% that your peers generally target. And likewise, the dividend yield on the share price is low relative to peers. So appreciate that you have been very active on share buybacks, but just curious whether dividend policy is a conversation that you are having with your Board at this point?

It is and I think I can characterize it this way. To some degree, everything what you said is exactly true. I think you have to take into consideration the mix of ownership of the company. Right now and I hope this improves significantly, but the ownership in Canada is down 20% -- 19%, 20% range. So in the U.S., it’s like 77% or 80% and then others. Well clearly from the U.S. perspective where most of the shareholders are, it is not as tax efficient as it is in Canada for example. Having said that, it’s a time for little increase in the dividend in spite of the fact that the raw numbers indicate that the share buybacks are the best returns to shareholders overall. There are few champions for dividends on the Board. So yes, they are being represented. Yes, that’s being discussed. And yes, I think you will see a little bit of a change in policy there. That’s a prediction.

Okay. Thank you. That's all for me.

Your next question comes from Ken Hoexter with Bank of America. Your line is open.

Great. Good morning. Hunter, you've mentioned velocity a lot, any thoughts on the mandate to slow down trains, particularly with respect to crude? And could that move more crude maybe back off the rail and force the building of some of the pipes to -- if that mandate continues?

Let me answer it this way. Number one, I have said this, I don’t know and I don’t know of every incident but pretty close. I don’t know of any incidents with crude that’s being caused by speed. We keep slowing down in this North American network over the years. We don’t get better with speed. We get worse. Now you can’t get growing the country for example, growing the economy, growing the population, and continue to move stuff on rail, cutting the speed back, but don’t want to add any infrastructure. That doesn’t work. That’s a timetable to disaster. So hopefully we can convince people, regulators, legislators that there is a safe, efficient, effective ways to move crude and other commodities not just focusing on crude that this industry has done for years and years. So I hope there is recognition for that. I have always said from Day 1 I am talking down and saying we shouldn’t have pipeline. Look there is perfectly appropriate places for pipelines. We are not at lobbying to get pipelines. I think there is enough for all of us to do effectively. So they got it wrong with speed, okay. You got to restrict the speed of trains, then something is going to have to happen. We’re criticized as an industry in certain markets because we had put infrastructure in to handle the growth. But then when you try to put the infrastructure in the not, not backyard the lobby kicks in and says we don’t want you here. Well, someone is going to have to figure out the way to move commerce. And I think this is all going to come to a head and there is going to be a cleansing if you will over the next two or three years and railroad is going to come out of that doing very, very well.

Thanks for that. Let me follow up with I guess the same thing on speed. Just given the Canadian grain market, a couple questions here. Your outlook in storage versus where the market pricing, if we stay low, what has to move? And just thinking about the carry into 2015. So do you have good visibility into that, 2015? And while you are talking about that maybe throw in your thoughts on the regulatory view both up in Canada on the service comments and then the STB's mandate on the service updates.

Well, I guess, Ken, my reading recently is that the recent flooding that we have experienced in Central Canada is not as significant impact on this year’s crop as I thought it might be. I think people are talking 6% to 8% range. But at the same time, there is carry from ’14. Now there has been great debate and this is one of the problems that how much it’s really carried over and how much is it phantom orders that are not really there. Having said all that, I think there is going to be plenty of demand for grain going forward for us into ’15 which will be good for us. I think it’s obvious and clear in my statements. I don’t think the revenue gap in Canada makes a lot of fit in the market. I don’t know why you choose one commodity of all the commodities effectively in North America. So here is the only one we are going to regulate that has to be western grain. What about eastern grain. This makes no sense. We come to customers say we want to pay a premium to get a better services, can we buy a premium service? We can’t charge it. We can’t serve the markets in the appropriate way. And anyone that thinks that some of this legislation, this emergency order so-called that said we and our friends in Montreal had to haul so much grain or they are going fine us everyday, could have had an impact on moving grain -- they are nuts, they don’t know anything about the infrastructure or the movement of grain, okay. So I am not a very big advocate because of that. Washington, STB has certain oversight responsibilities. But somebody who gets involved in this has got to get involved in what the solutions not compiling all the complaints or issues. And so I think that the markets are better left to the marketers than the regulators and legislators.

Thanks.

If you think I don’t feel strongly about that, then ask me another question.

Thanks for the thoughts.

Your next question comes from Daniel Chew with Raymond James. Please go ahead.

Hey, good morning, everyone. Just a quick question here on the domestic intermodal business. First, product uptake has been really strong on the new service. And I believe you mentioned that you've sold out quite quickly. Just wondering here, how much more capacity do you guys intend to open up in network to accommodate this incremental business? And what the total opportunity might be for domestic intermodal for the next two to three years? Thank you.

Well, I would say that as long as there is the profitable demand there, we’ll match the capacity of the demand. So we still can grow in the train that we’ve got now running across the network. I would say there is probably 10%, 15% more opportunity on that before I have got to worry about adding another train start. Long term, I’d still see strong, say probably double-digit growth over domestic intermodal side as we go forward over the next couple of years. There’s still a lot of opportunity. There are still some customers to Hunter’s point that are profitable, reputable customers that once we continue to prove and do what we say we’re going to. We’re going to get an opportunity to be rewarded with their freight. So I think more to come and it's all positive on the domestic intermodal side. This franchise is strong. We’ve grown a lot and optimized Toronto-to-Calgary. There is still more to do Calgary-to-Vancouver. There is still more to do Vancouver back the other way as well, even down to the states from the international side. So I feel very bullish overall about intermodal growth.

Great. Thank you.

Your next question comes from Brandon Oglenski with Barclays. Your line is open. Please go ahead.

Yes. Good morning, everyone, and thanks for taking our question. Hunter, at the risk of asking another question on regulation, I think it was pretty clear with the first answer. But I did want to come back to a comment you made earlier regarding capital and speaking to the Board. You did say you were looking at some other opportunities as well. Should we be thinking with the markets that you're looking at increased CapEx going forward to achieve some of these growth ambitions? Or are there certain places in the network that you think could be operating better, especially with all the service issues that we've seen in the last half year?

Well, we’re always going to be looking for other opportunities or things we missed that might be taking place. And the point I’m trying to make there is this, we’re not going to get locked into buy strategy and overlook opportunities to improve the company’s infrastructure that has a longer range impact, whether it’s through the safe roadbed or whether it's through increasing velocity or whatever it might be. So there is some important thing. There are questions that come up about the relationship in maintaining railroad between capital and maintenance. And there is cases to be made if you spend the right amount of capital with the right timing, it dramatically, dramatically cuts operating expense from out-years. Not unlike you buying a car, I mean you got to buy a new car and expect it work a long time with just some simple little preventive maintenance or you’re going to buy some clock that you buy a whole lot cheaper but you got to pay a lot of operating expense to keep it running. So there is real questions about on the timing issue on a catch-up of capital and what it would do as a relationship to operating expense. So I just want to make the point that the Board’s view is this. The first call for capital is the company needs internally to run the railroad in an efficient, safer manner, that’s number one. And we got to look as three ways. We look at obviously replacement capital, which is too high the rail industry, that’s basically 50%, round number if you’re going to get into. We look at productivity capital and we look at potentially expansion capital. Now if we don’t see those things internally, it can give us the appropriate returns relative to other opportunities of buying back or rewarding customers through dividends, then we will not do that, but we will -- do I see something bubble out there that you should be looking for, no. I just want to be sure that everybody understands that these are a lot of moving parts in these decisions, but we’re flexible and the Board has been very flexible with us. And that really has -- we could not have done some of the things we’ve done without their confidence that they have shown us.

Well, appreciate it. Thank you.

Your next question comes from Jason Seidl with Cowen & Company. Please go ahead. My apology for the quality of that line. Our next question comes from David Tyerman with Canaccord Genuity. Please go ahead.

Yes, good morning; or I guess it's afternoon now in the East. I just wanted to ask about the comment you just made, Hunter, about the CapEx. Did you suggest that you thought the long-run ratio should be something like 15% of sales? And if so, you're not at that level right now; when would you expect to see heading toward that level?

We’re not -- I mean, I think that those kind of numbers have been kind of guidance in the past to use. We’re not trying to shoot for a number that spends that much of revenue. I’m just trying to make the point that we have a first class issue here that we have a lot of cash that the company is throwing off. And we have opportunity to sit back and look at all the opportunities that managements have to decide where we might deploy that capital. And so we’re very flexible there and we’re going to do appropriate things.

So I am not clear where you think the long-run level would be, because that makes a fair difference on the amount of free cash you're going to generate.

Well, I think that we have -- our guidance before has been that we’ve been in the 1.2 billion to 1.3 billion range.

Right.

I said over this next four, five years so that - because we see that go to [3 billion or 4 billion] (ph). Yes. Should something come along that we’re not aware of today, a new technology or what, are we in position to take advantage of that? We certainly will, but if you’re trying to look at the run rate with everything we noted today I think 1.2 billion to 1.4 billion is kind of where we’re going to fall.

Okay. That's very helpful. Thank you. And just the other question I had was on the pension. There's been quite a good headwind this year from the OR. I was wondering and this is probably for Bart, if you think this is sustainable, whether you can continue to generate income from this or whether we should be something -- thinking of something different in the longer term?

Yeah. It has been a healthy tailwind for us. For at this year, we’ve got income being both in the kind of $50 million range. The thing about pension, we’re continuing to see strong returns out of the pension plans. But there is factor outside of our control like interest rates. They have to come down a bit this year. They remain volatile over time. But the trend for our pension is very positive in terms of its funding levels. And subject to a little bit of cooperation on the interest rate side. We should continue too see either modest income or flat to maybe a little bit of expense, but it does change over time.

Okay. Very helpful. Thank you.

Your next question comes from the line of Jason Seidl with Cowen and Company. Your line is open. Please go ahead.

Yeah. Thank you. Hopefully this is a little bit clearer this time. One quick question regarding intermodal, we saw some pretty good growth in the quarter; the outlook seems pretty positive. How much pull forward do you think you saw potentially from the worries on the West Coast ports down in the U.S.?

I think it was net new trial. I really think its material at all. We’ve seen a little bit of uptick in business but its nothing that to me is going to move the needle. We had to be careful. We had to watch that if it were to get worse and obviously it could result in revenue opportunity with same term operational challenges. There is almost so much capacity in the Port of Metro Vancouver. If it were to get a groundswell of business be at that’s where our competitor. I think it would call some challenges for us, but your question specifically, I don’t think there is a lot of pull forward.

Okay. Thank you very much for the time.

Your next question comes from Keith Schoonmaker with Morningstar. Please go ahead.

Thanks. Keith, in your earlier comments you emphasized progress on a couple of material operational aspects, both safety and fuel efficiency. Certainly these can have powerful financial impacts as well. Could you add some detail into how these were accomplished?

Well, on the safety side specifically, to Hunter's point, we’ve invested. Last year we experienced some pretty unfortunate derailments on parts of the territory where, quite frankly, the infrastructure was not to our standards. We’ve invested a quite a bit of money. The Board supported an advancement of capital of about $100 million on our North line, where a lot of this grain, potash, and crude comes from, which has proved positive for us. The other point, when you get to some of the fuel efficiency improvements, it’s about running fewer longer, heavier trains. So as you use DP power, as we reduce train starts, as we optimize the network and run longer trains, you're going to get some fuel savings as a result of that and then also reduce in locomotive counts. Fewer locomotives out there running, fewer train meets. It's just across the board. So there is no silver bullets, it’s a bunch of single and doubles, but again there is more to some. There is things that we’ve not implemented yet. I think in my previous slide, that we may have done with the throttle requirements or throttle regulations, with technologies that we haven't even equipped with locomotives with yet. So it’s something that we are pretty proud of the progress we’ve made. But as we continue to invest in the physical plant, make longer sidings, run longer trains, fewer of them, and implement some of these strategies. You’ll see some continual improvement in this year.

A quick follow-up on that. Keith, you mentioned more effective use of DP was part of the improvement. What portion of the lanes or what portion of the miles do you plan on running or would benefit from DP? And what sort of progress has been made on that so far?

Well, all of our locomotives, our mainline locomotives are equipped with DP. So its really a initiative strategy. If you got an opportunity to take train starts out, then we’re going to us DP to run longer, heavier trains. But I'm not going to just DP a train to DP a train; there's operating costs associated with that, that if you get too enamored with the thought of DP you're probably going to miss something. So right now, I would say probably half and half, but again it all depends on the opportunity as this business grows. I’ll take a look at what the opportunity is with the mix, and if it says then we need to go to 75%, we will, if it says I need to go to 40%, I will.

Thank you.

Your next question comes from Steven Paget with FirstEnergy. Please go ahead.

Thank you and good morning. Some of your strongest price increases versus second quarter ‘13 are in the old industrial and consumer products segment. Could you please comment on what’s driving those increases?

I would say it’s a focus on that proven the quality of the book of business, dropping off some of this business that, quite frankly, we were holding for practice as well as going to more tariff pricing trying to get our book of business to tariff prices as oppose to the alternatives. So, again no silver bullets here, just to focus on the quality revenue and just operating team providing service, the marketing team converting it.

Thank you, Keith. Second question, a CP Board member once noted that CP was 70% of the size of CN in terms of track and RTM, but only had 40% of the enterprise value. The railroad has now moved to having 58% of CN's EV, but that quote from a couple years ago tells me you still have a lot of running room. Would you agree?

Absolutely.

Excellent. Thank you. Those are my questions.

Your next question comes from Jeff Kauffman with Buckingham Research. Please go ahead.

Hey, everybody. Well, congratulations on overcoming the challenges this quarter. Hunter, you kind of answered what I was going to ask on CTA, so let me come at Keith. Keith, your train length is 6,800 feet right now. How much more do you think that can grow without throwing a lot of resources into the network?

Well, I guess you’ve got to define what lot is. I mean just based on what our plans on this year, we’re adding an additional 11 sidings. With that, we’re going to see some improvement. Down the line I’ve got a multiyear plan to match up against this revenue growth opportunity that we’ll see as that more siding, that we’ll see as -- and also take sometimes out, that will allow some additional improvements. So I see somewhere in the range of 10% to 15%, 20% opportunity on train length improvement as we go forward over the next several years.

So, do you think we could see 7,500, 7,600 foot trains over five years?

Over five years, yes.

Okay. Guys, thanks.

Mr. Harrison, there are no further questions.

Mr. Hunter, no other questions, over to you.

Okay. Well, thanks for joining us. Extremely positive dialog here and I hope you have direction of where this organization is headed. And we certainly look forward to seeing you October 1st and 2nd at the analyst meeting and we will have hopefully a good productive couple days together. Thanks.

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