Good afternoon. My name is Jessy, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Canadian Pacific’s Second Quarter 2018 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 Maeghan Albiston, AVP, Investor Relations to begin the conference.

Thank you, Jessy. Good afternoon, everyone, and thank you for joining us today. Before we begin, I want to remind you that this presentation contains forward-looking information and the actual results may differ materially. The risks, uncertainties, and other factors that could influence actual results are described on Slide 2 in our press release and in the MD&A filed with Canadian and U.S. regulators. This presentation also contains non-GAAP measures, which are outlined on Slide 3. With me here today is Keith Creel, our President and Chief Executive Officer; Nadeem Velani, Executive Vice President and Chief Financial Officer; and John Brooks, Senior Vice President and Chief Marketing Officer. The formal remarks will be followed by Q&A. And in the interest of time, we would appreciate if you could limit your questions to two. It’s now my pleasure to introduce Mr. Keith Creel.

Thanks, Maeghan. Welcome to the call today. Certainly, pleased and honored to represent our CP family and revealing these results for the second quarter, which reflects in my mind and our team’s mind a solid operational performance underpinned by some pretty solid demand across most of our business units, which we will expand upon and address in our comments. With that said, we came out of the first quarter as expected and into the second quarter creating some pretty strong operating rhythm established that coming out of the winter, but obviously not without some headwinds and without some noise, so to speak in the corner as we all know, labor was a very meaningful focus for us this quarter. We experienced two service interruptions due to labor negotiations with two of our unions during the quarter. As you can imagine, winding down the railway the start to stop, winding back up the railway certainly created some inconvenience, some disruptions and additional costs and some slowed momentum so to speak for that process that had an influence to the quarter relative to cost as well as curtailing to revenue and certainly paying experience associated with that for our customers. With that said, though, what has been a headwind, I think, and I am confident and optimistic we will become a tailwind creating some labor stability as a result of those. We’ve ratified our agreement with the IBEW, which are the employees that provide our signal systems across our network in Canada, and we’re in the process now of a ratification vote with the TCRC, which are our conductors and engineers; ladies and the women that actually operate our trains. We will get the results of that on Friday this week. Friday morning, we remain optimistic. It has been pretty solid feedback,…

All right. Thank you, Keith and good afternoon everyone. Total revenues were up 7% this quarter to CAD$1.75 billion. RTMs, as Keith said, were up 4%. Fuel was a 3% tailwind for us, but this was largely offset by foreign exchange headwinds of about 2%. I pointed out last quarter that our renewal pricing was strong and we have seen those trends certainly continue and flow through into our same-store price this quarter. Same-store price came in at the high end of our 3% to 4% targeted range. Now as a reminder, the new regulated grain pricing effective August 1 will be 2.8%. That’s going to put some pressure on our same store in Q3. However, renewal pricing, I fully expect to remain healthy and should help act to offset the regulated grain. Also, as a reminder in 2018, approximately 40% of our book were renewed, about half of these renewals are completed. We will renew the second half as we move over the course of Q3 and Q4. Mix impacts were modestly negative, driven by continued strength in our crude and potash business, which contribute dollar per RTM below our corporate average. This was partially offset by some good growth in our automotive. As Keith noted, we had some top line impact from network disruptions related to the labor negotiations, which we estimate had about approximately 250 basis point revenue impact on the quarter. But I'm very pleased to say that I see no lingering effects from these events. So, taking a closer look at the revenue performance on a currency adjusted basis, grain was up 4% this quarter, in spite of volumes being down about 3%. Over the last 4 weeks to 6 weeks we have seen – of the quarter, we have seen the Canadian grain decelerate…

Thanks John and good afternoon. As Keith and John noted, this quarter's results were impacted by network disruptions related to labor negotiations. This caused some missed revenues and some lost productivity, which impacted the top line and the operating ratio, but also as John mentioned, the strike impact is temporary and there are no ongoing impacts to the business. Rising fuel prices were also a headwind of about 180 basis points on the OR and also created a drag on earnings, due to the lag in our fuel surcharge program. The operating ratio was 64.2%, an increase of 140 basis points. Had it not been for the strike the OR likely would have been flat year-over-year. The underlying performance of the railway is solid and we continue to drive productivity and grow at high incremental margins. As such, we are confident that we will see core margin improvement in the second half of the year. Taking a closer look at a few items on the expense side, I’ll be speaking to the results on the exchange adjusted basis, which is shown in the far-right column of the slide. Comp and benefits expense was up 3% or $10 million versus last year. The increase is driven by higher volumes, incentive compensation, pension expense, training cost, and labor inflation. These increases were partially offset by productivity improvements from increased train weights. Our workforce is 5% higher than last year at nearly 12,900 as we continue to hire for increasing demand. Fuel expense was up 48%, primarily as a result of higher fuel prices and increased volumes. Fuel consumption as Keith mentioned, improved by 2%, driven by improved train utilization from higher volumes. Materials expense was $53 million, an increase of 5 million or 10%, driven by higher locomotive maintenance, and higher wheel…

Okay thanks for the comments John and Nadeem, and I’ll wrap up by reiterating the obvious. This team remains focused on creating shareholder value through delivering our service plan persistent scheduled railroad and creating a value product in the marketplace, the capacity we have on this railway to drive profitable sustainable growth. We have got strong momentum heading into the second half. We will continue to see tremendous opportunities for this franchise over the next several years, which we are approaching in a very disciplined and thoughtful manner. Finally, I look forward to see many of you, hope you can join us in our campus in Calgary four October Investor Day, so you can meet the team and gain a deeper appreciation for some big starting opportunities that lie ahead for this company. With that said, I’ll open it up for Q&A. Thank you.

Thank you. [Operator Instructions] Your first question comes from Fadi Chamoun with BMO Capital Markets. Your line is open.

Thank you, good evening. On the growth and the demand outlook, I mean, so far, you've been kind of guiding us to mid-single digit RTM growth year-to-date you are at the single digit. And it feels from your comments today and the momentum going into the second half that you have an opportunity here to do a little bit better, can you give us some guidance into the second half? What do you think that RTM will look like?

Well, you made some good points Fadi, I'm not going to suggest you haven't. The back half of the year definitely looks promising, but at the same time there's still a lot of uncertainty out there. We think our current guidance is prudent. Given those uncertainties, we have outlined a lot of those at the start of the year. Some of the question marks which have really played out for us trade uncertainty, currency volatility, the size of the next grain crop, you know things do look promising. Things do look optimistic, but I think a prudent approach is to wait. Let's get a little closer into the third quarter and let's see what the grain crop is going to do from a harvest and what we think those projections are and if we're in a position that we can raise guidance or change guidance, obviously according to what may or may not happen, when we get close to that timeframe, we'll certainly do that.

Okay, it is fair. Kind of follow up along the same lines, I think – I mean, we sense from the shippers' community that capacity is fairly tight in the Canadian transportation and in the rail even more specifically. And ultimately, this would prove to be a good currency if you have the capacity and the right kind of market or freight corridor then – and I just wanted to kind of get your thought on where do you think you have some kind of favorable positioning to leverage this demand environment if you want to talk about it in terms of specific commodity or overall.

You've got a very good read. Obviously, I don't need to tell you that, but certainly as demand has increased and as the competitive landscape has played out across Canada and coming into the U.S., this transformation this company has gone through since 2012 has created and identified quite a bit of surplus capacity which is benefiting CP extremely well. Now we've got the cost base reset. We've created a very allowable service product. Strategically now we're positioned regardless – I can make a case for several of the commodities and very strategic locations to grow with our customers. The key is to take a disciplined and a thoughtful approach to that. We can't be everything to everyone. I'm not going to suggest that we can. This growth is out there, but at same time I feel a very, very strong obligation to my existing customers to make sure that as we layer on growth, that we pick our partners and that's the key word is partners, so that when we grow, we grow together. We don't impede our ability to provide the service that our customers today expect and also to deliver on the commitments we make with our customers as we grow forward. So strategically in Vancouver, strategically in the Chicago marketplace, strategically in Toronto, strategically in Montreal, strategically in Edmonton, strategically in Calgary; I've got a store in each location where if the fit is right, it allows us to create profitable growth and provides value for the customer. That's what creates the stickiness for this company not only today, but for the many quarters and years that lie forward. And philosophically, strategically that plays well to our franchise and that's what our strategy is and I think we're going to execute it well. So, from that standpoint, capacity is currency, we're going to spend it wisely Fadi.

Okay. Thank you.

Your next question comes from the line of Ken Hoexter with Merrill Lynch. Your line is open.

Great, good morning or good afternoon. John, you mentioned that pricing was at the high-end of your target of 3% to 4%. Just given the market strength, I'm wondering if you expect to see or why you wouldn't have seen maybe even higher pricing in the near-term.

Ken, actually our renewals in the quarter were pretty solid. So, we were more sort of north of that 4% on renewals, and certainly then, the looking back to same store kind of carried along with it and it caught that tailwind. But look, as I look into Q3 and Q4, I think we can – there's an opportunity to keep a fair amount of that momentum. It maybe not charging forward at that pace because I know we do have some headwinds as I start looking into our grain franchise, and some of that pricing in the markets that we shift to is pretty competitive, but certainly there's an opportunity to sort of carry a fair amount of that momentum as we look into Q3 and Q4.

That [indiscernible] we are facing with the regulated grain increase being less than that mid-level number certainly is a sizable and one we've got to make sure that we take into account and the model should as well.

Fair point. And then, Nadeem, if I can maybe follow-up on your – you said ex-strike, you would have expected the OR to be flat, but yet you expect margin improvement in the second half. Maybe you can delve into that and maybe talk about what leads that improvement and given that employees are up 4% or such, how do you offset that cost?

Well I think there is combination of – we didn't get a chance to realize our full productivity, so – both in April and in May we had to take the network down two times and that stop/start really has an impact on the overall productivity. So, we saw some gains, but we would have seen a lot more. I'd say that from a productivity from your employees. There is a long lead time to train and get people up to where they can be productive employees for the company. So, we're kind of prepaying on that investment to get a return on our labor productivity in the back half of the year that we're absorbing those costs as we speak, and we see the benefits of that later in the year. Certainly, as we see volumes accelerate here we – it's early, but we're on a very strong start in Q3. The operating leverage, the benefits from pricing, I think you get a much better weather scenario, we still had – now in April some impacts in Q2. Certainly, I would expect a lot more operating leverage and a much more productive network in Q3. So, we're hitting our sweet spot, if you look at our operating metrics and leveraging that to bring it to the bottom line is what gives us the confidence.

Yes, if you look at the role of productivity Ken and I look at – when I say role of productivity, train length, train weight, terminal dwell, train speeds; certainly, deterioration has stopped. You may have a little off – a little up, a little down week to week depending on how the network is running. But overall, this network is extremely fluid and if you take that start/stop out and you allow yourself a chance to maintain that momentum that's when this thing really works well and to Nadeem's point, right now those employees are a training investment. It's an expense item for us, but once they start operating trains and move to revenue, then that investment pays off and we don't have the same level of investment second half and a more robust demand environment that's what allows us the confidence to say that we'll get to some margin improvement overall for the year.

Great Nadeem, Keith, John, thanks. Appreciate the time.

Thanks Ken.

Your next question comes from Tom Wadewitz with UBS. Your line is open.

Good afternoon. Wanted to ask you a little bit about kind of framing the ramp in crude by rail, I think you've had some helpful comments on that, but wanted to see if that has changed? Maybe you could offer what the level was in second quarter and how that might progress in terms of crude by rail carload third quarter, fourth quarter?

So, I think I said, Tom, that we did 20,000 carloads in Q2, so roughly about 60 trains a month run rate. As I look into Q3, I think we've got an opportunity to add to that. It will incrementally come on as we sort of underpin that business with the resources we need to haul it through Q3. So, I think you can get a nice step function as we move through the balance of the year. It's interesting though the crude by rail has certainly presented us an opportunity and an opportunity that we think can span two to three to maybe upwards of five years for us. But as part of that, it also brings the unique opportunity for us to really work with a different set of customers that allow us to sort of diversify our book. So, a lot of these shippers as you know have a pretty big transportation spend that's well beyond the crude business. And ultimately this crude has allowed some of these shippers to test our service and opened up a whole lot of opportunities to – not only for crude but deepen our partnerships into the future. So, that's sort of what it looks like. I think there is a good opportunity for us to expand this here as we go into Q3 and Q4.

And Tom, if I could add to that, as we've always said, if I go back to 2013-2014, we said then that there was a certain level of business in this country that this franchise could serve best from a service standpoint. I'm talking about turning assets and velocity. The markets we serve best that we can help our customers control their cost and earn additional business is going to do well for CP, but we had to earn that opportunity. We had to work hard to create a very reputable, dependable service model. We've done that now. We've got capacity. So, as much as I appreciate crude and certainly we want to help solve that problem as much as we can, the most exciting part is the opportunity to develop perspective relationships with these customers that they see the value in this franchise and it allows us, crude or no crude, to create significant value for both the customer, as well as CP, the economy and our shareholders. That's a win-win solution to me. That's the value of low cost reliable service. That's the value precision scheduled railroading that keeps on giving.

Right, okay. That makes sense. What do you think about the competitive dynamic? I think CN had obviously had some big [indiscernible] issues for a period and it seems like their – if you look at their volumes and metrics and so forth they've bounced back probably quicker than I would have anticipated. I guess it's hard to have granularity on how much demand they're not handling that maybe is out there. Do you think the competitive dynamic has changed as a result of them improving or would you say it's still kind of pretty favorable for you in terms of winning some new business and growing the book and everything?

Listen, I would say this Tom, I'm a bit biased. I've got a bit of a knowledge on both networks. Number one, I've always said this, whether I was on that team or since I've join this team, there is enough business in this country and in these two networks for both railways to do well. CN obviously is a very talented, very deep company. They've got great stretch. They reach market sometimes that we don't reach. But as I've said earlier, this franchise has its own set of unique strengths too. The key markets in Canada, Vancouver to Chicago, Toronto to Vancouver, Montreal to Vancouver. If you look at the network, in our best day versus our competitors’ best day in those key markets, if we're doing our jobs, we should be able to win business to drive profitable, sustainable growth on this railway, which is exactly what we're going to do. So, CN is a great company. They'll come back. Canada, in my mind – again I'm a bit biased, Canada enjoys what I feel are two of the best run railways in the world, not just in North America. It's a good problem to have. They'll come back and when they do Tom, we're going to compete just like we always have. And again, the markets they sever best, they've got a head start on us; the market we serve best, we got a head start on them. But as I've started, I'll close saying there's enough out there for us both to do well; two well-run operations, two well-run railways. We provide value for our customers and maintain discipline to run the operation and growing, and I think we all do well.

Okay, great. Thank you for the time.

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

Hi, thanks. Good afternoon guys. Just wanted to get a sense of – come back to what your thoughts are around earnings performances this year? Yes, I still feel comfortable with the double digits. Obviously, the first half of the year has been at that pace. Sounds like things get better in the back half. Just kind of want to frame up how you think about the earnings growth potential these franchises here?

Well, we're confident in our guidance at this point. I would say that for certain. And as I've said earlier, we're choosing to take a more prudent approach. I don't want to get ahead of ourselves, to get ahead of our skis. I don't know yet what the grain crop is going to do. I certainly don't know what this trade uncertainty may or may not do. I've got my own personal views, but a prudent approach is, I think, the right approach. You might call it conservative, but I call it prudent. I think it's the right thing to do and as we get a little more clarity that things are on a positive side of some of those positions, then we may be in a position to change this. But it's just not time yet. We don't have clear line of sight and I don't think it'd be the responsible thing to do at this time.

And then just thinking – coming back to the crude-by-rail opportunity, it sounds like there's been some customer wins there and maybe it sort of broadens that portfolio business with those customers, which is great. When you think about specific crude contracts, are there more incremental customers to go after as you sort of take that 20,000 carloads and move it higher. Just want to get a sense of if all of the contracting has already been done or if there is sort of incremental business left to win and sort of what you think the competitive landscape is on that business?

Yes, we're still having discussions, absolutely, we're always going to have discussions and keep an open mind. But again, from a capacity standpoint, the most important thing we've got to remind ourselves of, as much as the revenue, it looks great and I'd love to be the solution for everyone, I've got to protect those existing customers. If I bring on additional business I've got to make sure that I got the capacity to reliably control the cost and provide the service that I say I'm going to commit to. And then at the end of the day too, the business case has got to be there to justify the capital expense for the investments in the locomotives, as well as the investments in hiring and training people. So yes, there are still ongoing discussions. Are we a bit constrained naturally and I think responsibly from locomotive and people standpoint? And is there a timeline and commitments associated with it? The answer would be yes to that as well. So, we're just going to take them one by one. Again, try to protect all those principles and do what we say we've always say we're going to do and provide a fair return for our shareholder and a good service for our customer.

That’s great. Thank you very much.

Thank you.

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

Good afternoon and congrats for the good quarter. Sorry, but to come back on crude-by-rail, could you talk a little bit Keith, you mentioned the importance to serve the current customers, but on the other side when we look at the outlook, it remains pretty strong with some good expectation on the grain crop. So, what is your ability in terms of moving crude-by-rail? And maybe 2019, what type of maximum carloads we could see in the CP network over time?

[Operator Instructions]

Okay, any questions on that explanation Benoit?

Yes sir. Sorry, you weren't there, I was just wondering if you could provide some color on your ability to ramp up. You mentioned some color about making sure to serve current customers. So, is there a maximum in terms of volume you could handle? I mean, if we look back at the previous peak, you were at 110,000 carloads. So, how far could you ramp up the crude-by-rail and what could be the maximum level you could handle at CP?

Number one, we apologize for the phone there, it dropped the line on us, so our apologies for that. Benoit, I wouldn't want to commit to a potential number at this point, that old number. What I think about now and think the real constraint that we deal with is, as we make a decision to grow to make the right decision based on those principles, I've got to make sure that we have the capacity within the locomotive industry to be able to feed our need and ability to remanufacture and overhaul locomotive. So, there's a robust demand market out there for the GEs of the world, the ANDs [ph] of the world and the capacity is constrained. So again, for them to be able to ramp up I would be limited by that more so than anything else. I'll be able to hire employees that got capacity on the railway. The key is the locomotive piece. And again, that's a 30-year decision. That's not a short-term decision. So, we would be very reluctant to make significant meaningful decisions if the economics are not there to sustain it. So, that's why these discussions take a little bit of time. And when we say disciplined and deep, they're disciplined and deep discussions. They're not something that happen too quickly.

Okay. And the second question is on the volume side. Obviously, you came out of the gate in Q3 with very solid numbers. You're not willing to provide or quantify exact numbers, but when I look at potash, quarter-to-date carloads are up 56%. Anything special in those number or is the percentage kind of sustainable as we go through the third quarter and Q4, Keith?

Benoit, it's John. Yes, so the potash has been strong out of the gate. It was actually strong in the first half of the year too. Canpotex, we expect, is largely sold out through Q3. So, we think potash continues to sustain itself. K+S continues to ramp up fairly well for us. And our other domestic shipments have also sustained themselves fairly well. So, potash has definitely been a bright spot and I think it will be the second half of the year also.

Okay, thank you very much for the time gentlemen.

Thank you, Benoit.

Your next question comes from Matt Reustle with Goldman Sachs. Your line is open.

Thanks for taking the question. Just wanted to clarify one of the earlier points that I think you mentioned. Do you have enough productivity potential on the back half of the year to still show a full year margin improvement in 2018? And do you think that's, aside from seasonality, something that we'll see just sequentially improve into the end of the year?

Yes, absolutely. I mean, I think certainly we'll see sequential improvements between Q2-Q3. Q3-Q4 will be close, certainly, I said we'd have some land sales, so that will get the benefit of that in Q4. But also, from a core point of view, we still see margin improvement year-over-year. A few wildcards out there, right. So, fuel prices have hurt overall margins, haven't really impacted operating income, although in Q2 we got hurt by a bit of a lag effect. So that being said, outside of anything further on the fuel side, stock-based comp can be a headwind if the stock goes up and so forth. So, outside of Canada, those things that you can't really control. From a pure productivity point of view, I think we're well positioned from an operating leverage and from being disciplined and taking on the right business that will be very supportive for margins.

Okay, great. And then, just on pricing. In the crude business, is the business that's going to be coming online in Q3 and Q4, will that be a better pricing than what you're moving today, and can you get to a point where crude is not a negative mix impact?

Well, I don't know if we can get to a point where it's a negative mix impact, but I can tell you the existing book of business there's been opportunities to re-price and I do expect all new crude opportunities to come in at better pricing. But given the characteristics of it, whether or not it can overcome, that might be tough.

Yes, we got into the tank car business and that would be a one way, but it's not going to get a return. So that's part of the problem with part of it is the length of haul of course all well.

Got it. Okay, thank you.

Thank you.

Your next question comes from Seldon Clarke with Deutsche Bank. Your line is open.

Hi, thanks for the question. I just want to ask a longer-term question about margins. It feels like you have a lot of momentum in terms of volume and pricing and really just the right formula for operating leverage, but you've been speaking this low-60s OR in the back half of 2018 and just some quick math kind of gets you to the incremental margins in that 40% range. Are we bumping up against the floor here in terms of OR, or do you see potential kind of longer-term to bring that below 60%?

Well, just to be clear, we're talking 60-plus or minus. So, maybe not low-60s, but a little bit better than that in the back half. I would say that – and keep in mind, from a fuel point of view year-over-year that's about 200 basis points of impact. So, high-50s versus where we were a period ago, a year ago, you've got some impacts from pension accounting change and so forth. Bottom line is, no, I mean we've talked in the past that kind of getting to mid-50s is a reasonable output. But I'd say output is a key word right. So, we don't look at the business from a – and manage the business from an OR perspective. We're returns focused. We're focused on taking on business at a strong margin or strong return in a disciplined manner. And at the end of the day, the OR is what falls out of moving traffic efficiently in moving traffic for your customers with the right service and under a controlled cost environment. So, I wouldn't say that the margin story is over at CP, I'd say that we still see plenty of opportunities to improve margin over the long term.

Okay, that’s helpful. And so, I guess, should we think about incremental margins accelerating then in 2019, kind of above that 40% level?

Yes. It's tough to – we haven't had a kind of a normalized quarter right and I can understand – I mean it's been difficult first half and that's what's exiting about where we stand right now and we'll have the ability to show what this franchise and what the CP team can deliver. And as wise man said, it's a good time to be at railroad.

Okay, that’s very helpful. And then, I just want to get back to crude for a second. I think previously you're saying in 2Q you were running about 50 to 60 trains per month of crude-by-rail and you really saw the potential to double this run rate by the end of 2018 and I think you mentioned 20,000 carloads of crude in the quarter. Is this still the right way to think about that or quantify that potential?

I think the runaway into 2019 there's the potential out there to do that, yes.

Okay, alright. That’s all from me. Thanks a lot.

Your next question comes from Brian Ossenbeck with JPMorgan. Your line is open.

Hi, good evening. Thanks for taking my questions.

Hi, Brian.

Just want to go back to the second half outlook for a second, Keith. You mentioned few things that you're worried about, sounds like the grain harvest and in trade. John I was just wondering if you can give us some parameters of what volumes or revenues are exposed to cross border trade and whether it's auto, lumber, steel export market, things that you would look at and be concerned if we do get some of this increasing either call it trade tensions or some tariffs get levied, what would you be most worry about and how large do you think that could be put at risk from a CP book perspective.

Yes, I think, generally speaking, a lot of these areas, as I look at our cross-border business are fairly small as a percentage of our book so that's a good thing. I think the thing that's really sort of I watch and we talk about are more the macro concerns of the uncertainty, right. So, we've got, in our steel business, we have roughly $50 million that moves back and forth across the border. Am I concerned about $50 million, losing that business? No, I'm not. Certainly, there might be flow changes and market differences that we're working with our steel customers to sort of diversify their books and their markets. But, frankly, I'm just in certainty it concerns and drives what the consumers of these products, from a macro perspective, is really the issue that you know it could affect the rails maybe on a broader pace. Certainly, our grain business that flows to Asia and China comes to question. But flip side is, I look at our lumber business that has had a 20% tariff put on it for quite some time now where we have the capacity and demand out there to set records in our lumber business right now. So, those are the key areas that we're watching; grain, steel, lumber. But again, it's more the macro side that we're also keeping an eye on.

Okay, so no real percentage of the book that you're…

Look, our lumber and sports products, it's about 1%. Our steel business, it's about 1%. They look at soybeans to China, again that's a little bit less than 1% of our book. So, potentially, if things fell apart, death by a thousand cuts, maybe. But again, there's a lot of work. I think there's just a lot of uncertainty how that's all going unfold; number one. And number two, it's forcing our customers diversify and look at other markets and we're going to work with them on that.

I think I'd add, the only – to add a little bit more color, our largest potential exposure in our book of business is finished vehicles from Canada to the U.S. and this accounts for only 3% of our revenues. So, it's not that we're not concerned, we're paying close attention. But overall, our main concern and our primary focus and the biggest threat we think is more macroeconomic than micro for CP's book of business.

Okay, great. Thanks for all the details there. I just had one quick follow-up on the grain hopper investment maybe for Nadeem. How do you think of the return on that, the payback period? I mean it sounds like got some [indiscernible] to move it more efficiently increase productivity. So, it sounds like you've and probably lower maintenance fees or injuries and everything that go with the newer fleet. So, how do you conceptualize that sort of investment that would be made pretty big amount over the next couple of years?

No, as you described, I mean there's the capacity, there's the asset turn, there's the overall ability to even grain business from a market share point of view to have a better product for our customer. The overall train length on what you can move just having a bit of a shorter car, increase the number of cars per train and so forth so that more efficient movement of the existing trains. And then when you look at what you can do from the future 8,500-foot model that we'll be pursuing as well and we'll speak to more at our Investor Day, it all comes into a very – gives us good visibility now as with the change in C-49 and because it's an ability to have a better product for the customer and it's a win-win situation. So, remainder, I mean, our focus as I mentioned – as we mentioned is return driven and this fits right into our strategic principles.

Okay, great. Thanks for the questions.

Thank you.

Your next question comes from Ravi Shanker with Morgan Stanley. Your line is open.

Thanks, good afternoon everyone. [indiscernible] impact of the just completed labor deals. And also, if you can just elaborate little bit more – I mean do the new deals give you the ability to do anything different with this contract that maybe you couldn't do before and maybe take you to newer levels of productivity and a war [ph]?

Yes, so the deal itself assuming it gets ratified – the one that is ratified and the one that's up for ratification follow the patterns that we've set already with our existing other agreements from a wage appreciation standpoint. The deal themselves, without getting into specifics of them, are there any quantum changes in work rules? No, are there some things in there in both agreements from a quality of life standpoint that both unions benefit from, their members or employees benefit? Yes, are there some flexibilities within the work rules that did not exist before for the company so that we get a benefit out of that as well? The answer is yes. So, at the end of the day, there's nothing material from a cost standpoint. It does not do anything to impede our cadence relative to some margin improvement. And if anything, it increases and improves quality of life for our employees, which is increases and improves our abilities to attract and retain our employees and at the same time, provides an ability for us to provide reliable service to our customers. So, I truly believe it's a win-win. And again, back to the point of a renewed positive relationship, growing with our brothers and sisters and partners of our CP family with both these unions, it's truly exciting. It's a new day for the company it's a new opportunity for the company as we grow together and I'm very, very excited about it.

Got it, that’s helpful. And just to follow-up on something that was discussed earlier, which is opportunities for growth, while at the same time, talking about a fairly tight real network in Canada. As you look forward to more volume growth over the next – second half of the year as well as into 2019, are you confident that you have the capacity to be able to take on maybe up to significant amounts of new volumes without running into operational issues that impact network fluidity?

Absolutely, conditional upon those comments I made, we just got to make sure that we hire the people, train the people and lockstep for the growth and we bring the locomotives on in lockstep with the growth and we're timing the businesses that we can do that. We've got a commitment and an obligation to our existing customers and as we go forward we're all smart enough to realize, I'm not going to promise the sun is staying in tomorrow just for the sake of growth. Decision makers and these customers make decisions to trust us with their business models, to trust us with their success delivering a product and end up falling on our face and jeopardizing them to failure, as well as this company. We worked hard to establish this reputation for our service. We've worked hard to be able to sit at the table and have these disciplined productive discussions. We certainly take that responsibility with the gravity it deserves. We're not taking those discussions likely, and we aim to do what we tell our customers we're going to do. So, we're going to be very strategic, again, and careful as we grow forward and we're doing that. We have done that in the past. We're just not going to discipline now and nothing is going to change.

Look, and I'd add to it. My sales and marketing leadership team, we're tied to the hip with the operating team. So, to Keith's point, whether it's financial decisions with my sales and marketing team working with Nadeem in the finance side or the sales and marketing folks on the ground working with the operating team. We're going to grow in a lockstep function. And that's disciplined, sustainable growth defined.

Understood. Thank you.

Your next question comes from Scott Group with Wolfe Research. Your line is open.

So, wanted to just start with one more on the operating ratio, so it looks like to get to OR improvement for the year, you need closer to like a 59% maybe even sub-59% OR in third and fourth quarter. And I think you were talking closer to a 60%, and I know it's not a big difference, but just wanted to clarify and Nadeem, you said a couple of times core margin improvement. Is there anything that you're including or excluding from that calculation when you say core margin improvement?

So, I mean, we talked a bit about the land sales right. So, we expect to have meaningful land sale in Q4. We had some land sale in Q4 as well. So, year-over-year in Q4 of 2017 – so year-over-year, there will be a benefit there. That being said, we see – don't take my numbers too literally in the sense of when I say 60, I say 60 plus or minus, so they were in that range of, you know could it be high-50s in a certain environment? Absolutely, could it be low-60s if fuel continues to go up or you get stock-based comp headwinds or you get some weather in December? Absolutely, and that's why we've been trying to be prudent with some of our guidance. So, year-over-year, do we have the potential to improve our operating ratio? Yes, and I think you'll see Q3 improve and the potential of Q4 with land sales to improve step down further.

And then, just in terms of CapEx buyback, how should we think about CapEx in the out years relative to the 1.55 billion this year? And then, with the buyback that's now exhausted, when do you think you'll announce new one and should we start to think about more material buybacks now that you've sort of de-levered the balance sheet?

Sure. So – and certainly it will be a focal point of my remarks at the Investor Day in October. But we do have a number of significant capital opportunities that have very good returns. And right now, it's a matter of optimizing it and setting the right priorities. It's a good problem to be in. We raised it – we had talked beginning the year with 1.35 billion to 1.5 billion and now we've raised it to 1.55 billion. And like I said, currency is a bit stronger and that's hurting us there. But we're trying to remain very disciplined in how we look at our opportunities. At the same time, when we look at the business from a return on invested capital point of view, it can be some very accretive sort of returns and it's the right thing to do. We've always talked about reinvesting back in the business first and that's our number one priority from a capital deployment. From a buyback point of view, our view was to kind of tie in our buybacks, align them with the fee cash as we generate. So, a lot of this – the free cash that's generated in our business is in the second half of the year. So, you can expect us we will always have a buyback as an opportunity to reward shareholders and I would expect us in the back half of the year and most likely in the Q4 kind of timeframe. You know we'll have the opportunity to lay out our view on buybacks for the end of the year and into 2019 and I think that's the kind of timing that you'll expect from us going forward, is align our buyback decisions with the free cash that we generate towards the year and always utilize the dividend as well is another way to get back to shareholders. From a capital point of view, I mean I think that 1.55 billion, 1.6 billion levels of capital is a reasonable place to be at this exchange rate. I mean, could that come down materially if the Canadian dollar appreciates, absolutely, but given what we talked about and given where we think is we can get a very strong return, I think that that's an appropriate place to be.

Okay, very helpful. Thank you, guys.

Thank you, Scott.

The last question we have for time for today comes from Brandon Oglenski with Barclays. Your line is open.

Hi, thanks for taking my question here at the end. Just want to come back to that question around tariffs and trade. Can John or Keith speak to whether customers have actually conveyed to you that they're pulling back plans especially, on the intermodal side, as we look at all the consumer goods coming in from Asia into the U.S. Is that something that's actually caused folks to rethink capital deployment yet? I mean investors are very concerned that's happening in real time, we're not sure it is.

You know what, it's not the discussions we've had. Right now, I would say frankly it remains, as we look at this fall peak season, actually quite bullish on this cross-border opportunity in those import goods.

Brandon, I was in Toronto last week and met with several – the CEOs of our key customers in that marketplace that are served by those markets you speak of and that – obviously we all share the same concern about the overall economy, but there is no specific discussion about anything relative to what you're asking about.

Okay, appreciate that input. And then, I guess lastly John, you just speak to how the sales team is coming together. I mean, you've had a lot of new additions to the team, I think in the last year. You said, you're working really close with operations and what are some of the things that are exciting to you as you look out over the course of the next year or two?

So, I've just spent a few days talking about quite a bit my sales and marketing team, and if you saw me right now you see a big smile on my face. We've got an A-team. We've assembled an A-team and there has been a lot of change. So, it has been a fair amount of effort building the culture and the discipline and how we want to take this team going forward. But I sit here today with a leadership of three Vice Presidents that run our business units that are very strong and aggressive and understand how we want to grow this business. And as importantly, they've developed a marketing team to go with the strong sales team that are executing specific playbooks on how we want to grow this business. And I can tell you – and again it's Keith's culture, it's a culture at CP. We do it collaboratively and my sales force, my marketing force, the playbooks we execute, the leaders that run our business units and myself; we're working with Keith leadership, operating team Nadeem's team on a daily basis to grow this the right way. I'm very pleased.

Brandon, you'll be impressed when you meet them in October, I guarantee it.

Alright, look forward to it. Thank you.

Okay, with that, we'll wrap up our Q&A. Thank you again for your time. Certainly, we hope that you recognize the value in these results that we produce. We'll continue to work hard to create long-term sustainable value for shareholders and we're extremely excited about seeing those of you that can join us at our headquarters campus in Calgary in October. Safe travels, stay safe yourself and we'll see you soon. Thank you.

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