Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific’s Third Quarter 2017 Conference Call. The slides accompanying today’s call are available at www.cpr.ca. [Operator Instructions] I would now like to introduce Maeghan Albiston, AVP Investor Relations to begin the conference.

Thank you, Mike. Good afternoon, everyone, and thank you for joining us today. 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 2 in the 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, Chief Financial Officer; and John Brooks, our 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 is now my pleasure to introduce Keith Creel.

Thank you, Maeghan. Thank you for joining us, welcome to the call. I think the first order of business though before we get into reviewing the quarterly performance, I need to make an administrative announcement yet another change in our C-suite at Canadian Pacific specifically in the CFO office. I’m happy to announce that effective today, based on his leadership and his contributions to recognize that what we at CP feel and I personally feel the best CFO in the industry if not others effective today we promote our Nadeem Velani to Executive Vice President and CFO of Canadian Pacific. So congratulations, Nadeem, certainly well deserved. On to the quarter, listen, I can say, suffice to say as well, I’m extremely proud of these results. Proud because they reflect success on multiple fronts, success for our shareholders, success for our customers and success for our CP family of 12,000 railroaders that make these results possible day in and day out as they execute what actually results, produces fuels that enables these results and caught our position scheduled railroad operating model, which is at the end of day the end product is sustainable growth in a disciplined safe and cost effective manner, which are reflected in these third quarter results driving our revenues up 3% versus last year operating ratio, stepped and proven again a 100 basis points to a 56.7%. 5% increase in operating income, 6% increase in our adjusted EPS to $2.90 based again, on a solid foundation of operating performance. On the operating team side, train weight terminal dwell, car miles per day, locomotive productivity, all surpassing and setting last year’s records, of course, establishing new records for us to work against as we go into next year. Strong performance from the safety side as well, which is…

All right. Thank you, Keith, and good afternoon everyone. As Keith said, total revenues were up 3% this quarter, up to $1.6 billion. RTMs were up 4% year-over-year and foreign exchange was a 2% headwind, while fuel surcharge added 1% benefit. Pricing improved this quarter. Same-store price planned towards the high end of 2.5% to 3% range. And I can tell you we’re optimistic that pricing could present upside as we look forward. This was partially offset by negative mix as a result of stronger crude shipments, coal, potash, combined with weaker automotive volumes and fertilizer. A quick reminder as we model out the reminder of 2017. It’s fair to assume RTMs will continue to trend in positive territory. But we keep in mind, since for RTM will likely remain a headwind due to currency in the current traffic mix. So I won’t walk you through all the commodity lines today but I will highlight a few of the key drivers. The bulk commodities continue to perform well, potash volumes were up 12% driven by our strong network and strength in domestic and both – and our exports markets. Strong result especially in light of slower than expected start up of the K+S mine. Now three weeks ago, we did launch our first K+S train from legacy in the Port Moody. And we look forward to supporting K+S as they ramp up through the fourth quarter. It was two different stories on the grain front. Canadian grain volumes were up 4% for the quarter, while U.S. grain volumes were down 24% against tough comps and weak market conditions. The outlook on Canadian grain, as Keith mentioned, has improved a little bit. The Staff Canada recently came out with new predictions in the range of 66 million metric tons for this…

Thanks, John, and thanks, Keith, for the kind words in the introduction. It’s a pleasure to walk you through the highlights of our third quarter financial performance. This was another strong quarter of strong financial results and the top line growth and continued margin improved. As John already highlighted, and Keith mentioned, revenues were up 3% or 5% on an exchange-adjusted basis driven by 4% RTM growth. I’m very proud of the team’s performance this year, and how we have been able to differentiate ourselves by growing at low incremental cost, by maintaining disciplined cost control and efficiently planning resources. This balanced approach enabled incremental margins of 75% and a record third quarter operating ratio of 56.7%. As I’ve said during our previous earnings calls, yes, we want to grow, but it needs to be in a sustainable, profitable manner and the CP team is delivering on this front. As we get into the details on the expense line items, I’ll be speaking to the results on an exchange-adjusted basis, which is shown in the far right column of the slide. Operating expenses were up 3% on exchange-adjusted basis. To get into the details, comp and benefits expense was down 11% or $33 million versus last year. This was largely as a result of higher pension income, lower stock-based comp, and operating efficiencies. Partly offset by higher labor inflation, higher incentive comp and increased volumes. Like to note our workforce is still approximately 12,200, effectively flat compared to Q2. Moving to fuel. Fuel expenses up 4%, primarily as a result of higher fuel prices. Also to note the sharp increase in diesel prices in September due to hurricanes caused incremental expense of $3 million. This additional cost was not recovered during the quarter, due to the lag in our fuel…

I think we’ll just turn it up – open it up to questions. Operator, open the line and began for questions.

Thank you. [Operator Instructions] Your first question comes from Brandon Oglenski, Barclays. Please go ahead.

Hey, good afternoon, everyone, and thanks for taking my question. I don’t like to focus on the near-term stuff, but Nadeem, that was some pretty good guidance I think for the core fundamentals, taking the full year up and excluding the $45 million that we had all been modeling for land sale gain. So I’m just wondering is there momentum in other cost categories? Or is it the revenue momentum that we need to be focused on here that is driving the better outlook for the fourth quarter?

I mean, Brandon, I’d say it’s the combination of both. So as both Keith and John highlighted, the momentum on the top line continues to build our RTMs inflected positive quiet while starting in September when the grain crops started to come in, and so we have better visibility on the top line. At the same time, I mean, if there’s one takeaway, we’ve said many times so far in the first 15 minutes here, the operating leverage and the power of incremental margins. And I think that’s the way we’ve been raised, and this model works, and bringing that growth to the bottom line.

Okay, I appreciate that. Congrats on the promotion. And if I can squeeze in one more for John, so can you remind investors the pretty significant port expansion projects that are underway in Vancouver and how you guys can benefit from that, and how that helps the longer-term outlook for the Intermodal business. And maybe just put that in the context of – if we go back the past few years, CP did see some market share and some contracts go to your competitors. So how do you think about expansion and growth going forward from the West Coast?

Well, look, certainly Vancouver is our bellwether. And as it relates to the Intermodal terminal there, specifically, it’s going to be critically important for our growth to leverage those routes not only into Eastern Canada but in the U.S. So I can tell you the team is closely working not only from a sales and marketing perspective but from an operating perspective, on building those relationships and improving that fluidity out of those ports. But I can tell you that Vancouver, it’s not just an Intermodal story to – we’ve done a ton on the operating side on the South Shore to change the fluidity in those terminals there, and we’ve got a number of aggressive expansion projects underway with our grain customers that only build out momentum there to.

I appreciate it. Thank you.

Thanks, Brandon.

Your next question comes from Fadi Chamoun, BMO Capital Market. Please go ahead.

Yes, good evening. So, I mean, it seems like having sort of available capacity in the rail network here in Canada can get you some good conversation started with your customers, especially I guess on the Intermodal side. So I want to circle back on that. So, and maybe you can help us sort of size up the kind of growth opportunity that you see in the Intermodal, especially International going into the next few quarters. And maybe John can give us how did International, Intermodal do when you exclude Yang Ming this quarter?

I’d say, Fadi, a couple of things here. Look, we made a conscious effort here at the last eight, 12 months and changed our product and developed ways through listening and talking to our customers and what we need to do to enhance our International product. It started with changing the team and getting the right players in place. But then it’s also about leveraging our network strength as Keith has talked and I’ve talked about. So we’re – it’s part of the story that’s enhancing the product, but the other piece is certainly we think we’re poised to begin certainly going after some of these contracts if they come available. And so we’re optimistic that next year we’re going to put ourselves in a position on those. I don’t have the – Maeghan, do we have the International growth?

It’s down about 2%.

It’s down about 2%, Fadi, in the International space, which actually represents a pretty good job despite still sort of the Yang Ming headwinds that we still continue to battle on a contract loss.

Okay. And, I mean, your volume you have to-date are up like 5%, and I think in this third quarter we’re up 3.6% or 3.7% on RTM basis. Is this sort of kind of momentum you see going into the fourth quarter or you see this sort of getting really stronger?

Let me add a little color this. Fadi, this is Keith. Feedback out of the Yang Ming loss, which you actually see in the International Intermodal with our existing customers is growth. So, yes, that is something we see going forward because the value of the service. We’ve said this before, it’s an absolute fact. And someday people will understand the story, and it’s becoming more topical and more important now and more of a story of value creation. And, yes, those customer discussions are easier to have because here’s the reality. We’re becoming known rightfully so for very service oriented business, then what we say we’re going to do is a service offering, that’s the value creation that the operating team gives John to go out and avert the marketplace. And in this specific space, this specific franchise has capacity. Think about the way we used to run the railway, think about the levels of volume that we have in the railway, the additional capacity we’ve created, think about our footprint, think about transload strategy in Vancouver, it makes Vancouver economics both import and export very compelling for a steamship line. Think about the capacity we have at our facility and want to expand on existing footprint, think about the capacity we have to expand in Seville in Chicago. Same story as we look forward growing into Edmonton and building a new facility. So what you’re coming away with it at the end of the day is a very compelling value proposition for a customer that value service, for a customer that value service reliability. And if we’re going to go compete for business, we’re at right size, we’re running an efficient railway, we’ve got an available capacity to expand into with a very powerful footprint in the markets we serve that service reliable. The service is only as good as connecting the port to the rail to the end-line terminal. It’s the total service offering that you take to the marketplace that drives value creating, compelling value creating conversations. We’re armed with that ability to do that. And when you add on the Detroit service, you add on extended reach into the Ohio Valley. Again, when you look at our footprint in the markets that we serve in that we have strengthened and we should be converting that value, we’re in a good position to be able to do that, how much of the business we win that’s to be decided, but rest assured, it’s going to be very compelling in those discussions.

That’s great. If – on the volume momentum into Q4, I mean, you clearly are suggesting that we’re going to have some acceleration going into Q4 given sort of a kind of guidance you’re giving us on a core operating income basis. Where is that sort of volume momentum coming from specifically?

Fadi, I actually I think we were looking at in RTM run rate that’s probably similar to Q3. Again, and I think it builds with a Domestic Intermodal, we certainly continue to be – expect to be strong. I think we’re watching the potash, we got certainly tougher comps. As we head into the Q4 with Canpotex, but with the enhancement of K+S and those volumes building, and we do expect to see some uptick in some of our crude volumes.

Okay. Thank you.

Thank you, Fadi.

Your next question comes from Ken Hoexter, Merrill Lynch. Please go ahead.

Hey, great. Good afternoon, congrats Nadeem, again. Keith or John, maybe you talk a little bit about the grain market, you noted by the Canadian cropped up about 66 million metric tons from about 71 million, I guess last year. Your thoughts, you mentioned that you were trending up. Would you expect that to then start to fall or do you book up early in the – I guess, to Fadi’s question, do you book up the trends early in the year given your excess capacity now and then it tails off as we move through? Maybe talk to us a little bit about that volatility as we move through the year.

Yes. I think the crop side is still a little bit of a moving target. Everything I read is it seems to tick up a little bit every day. The latest step did come in at 66 million. Typically, Ken we would be a pretty good harvest glut, I think we’re seeing that now. We’ll expect to see that run pretty hard in the December. I know our customers are communicating that their port sales are pretty much sold out through that timeline. And then we’re going to have to see how it plays out. It’s probably – you’re right, if you start to push in the Q2 of next year’s maybe where you start to have some questions on those grain volumes.

I guess on just looking at your outlook and I maybe talk a bit about your excluding now land sales from that fourth quarter still targeting double-digit, I guess maybe bring that to the Intermodal question, right. So you seem to see your competitor jammed on network capacity during the last quarter, and you weren’t able to benefit. Keith, I just want to get from your perspective, as you see some of that that the customer wins start to come back to you. Maybe talk a bit about the timeframe into winning some of that business as you move forward. So is there kind of a delay or are you able to – how long did it take the customers to see your improved service and performance before they’re actually starting to commit those volumes and switching either back or taking off the highway.

What we’re seeing today is there’s obviously some public comments out there, public discussion that have been made to shift volume to our network given that we have capacity to be able to handle it. I think that’s – if nothing else that’s a great dress rehearsal to be able to give a customer a service experience which bodes well as we go forward in the next year. But as far as, significant meaningful volume starting to shift that should they shift, it would be more of some coming on late first quarter, second quarter, third quarter of next year as far as actually seeing that number. But in the meantime, Ken, irrelevant of the market shares to market wins, growing with our own customer is something that we have laser-focused on. The people that we partner with now are very strategic partners, we’re giving them a very, very reliable compelling service offering especially in light of what may be their competitors are experiencing and their markets that they’re shipping in which again bodes well on a service standpoint and helps them win contracts and put more containers on their ships. So there is a two-sided play that we’re pretty encouraged about, but again it’s all got to play out. We’ve got a very capable competitor both in truck as well as the railroad in the East. We’re not going to be to point that we get cocky, we get arrogant, we’re going to earn our day in and day out. We know that it’s the test laid out there and we got to provide compelling value. I just feel very confident that our franchise has some very unique strengths which our assets at this point in the game so to speak that we can convert in the marketplace in a compelling way.

So if I could just follow-on on that just real quick though, is the pricing gain as you got that 3.5% is that – would you say that’s because you’re charging more for customers to test out your network or in temporarily? Or is that the core operational benefits that you’re getting?

Ken, the same-store on the quarter came in at the high end of 2.5% to 3% range. So I think you said 3.5%. And you know what? Again, I think we believe there’s some optimism and momentum gaining in that space, but we will see. This is sort of an emerging story and we’re optimistic in 2018 on how this going to play out.

Appreciate the time and insight. Thank you.

Your next question comes from Walter Spracklin, RBC. Please go ahead.

Thanks very much. Good afternoon, everyone. So, John, just following up on the pricing in addition you mentioned 2.5% to 3%, also Nadeem in your prepared remarks that might even improve further from the delay catch that right? And if so, where is that coming from? Is that the improving Intermodal kind of trucking dynamic or is it in some other aspects of your business?

Yes. You know what, Walter? I think it’s a little bit all the above. I was pleased, actually a little surprised than pleased on how the numbers played out for Q3. Keith and I have been just recently talked in about sort of the dynamics around the hurricane and trucking capacity, what spot truck prices are looking like now. And it just feels like there we’re gaining some momentum in that space. I’m not really sure, if I can quantify that at this point at the quarter point, half point as we move into next year, but we’re certainly going to be aggressive when we’re going to test the market, and then we’ll sort of see how that plays out.

Okay. And then my second question I guess over to you Keith is John’s been talking about some opportunities going into next year. We’ve heard talk about railroads, how they shift focus to volume and then OR is not the key focus anymore that OR might be stable while volume – an attention towards the volume. But I still always get the sense that Keith there’s still opportunity for creating more efficiencies in this railroad for you. And could we see volume growth next year with further OR improvement, is that possible?

Yes. That’s absolutely possible. I mean, Rome wasn’t built in a day. We’ve been at this for four years, got a little bit of experience in this, quite a bit of experience in this. As good as we are, we’re not anywhere near where we need to be. And if you ever think you’ve arrived that’s when the slack is going to run in, in this industry, and you’re not going to be able to maintain momentum and sustain success. So we’re early in the days of really I think taking value out on the revenue side as well as the cost side with our trip plan product that we’ve got out there. We still have work to do in our terminals. And I look at the capital plan for next year, which we’re starting to shore up. There’s going to be productivity investments in our Calgary terminal, which should become a flagship for us strategically, it’s in a great location, it’s in the right location. We’re not running it because of the physical layout of it as efficiently as we can. I look at train speeds. I look at what we’re doing right now on the operating side. I spent a lot of time in the railroad this summer celebrating Canada’s 150th. I covered a lot of ground, inspected a lot of track while I was out shaking hands and celebrating the country’s 150th birthday. And I saw a lot of opportunity. We’ve got an engineering team that too want to be best-in-class, they too are doing things now that may be from a train speed standpoint slowing the railroad down a little bit to see that a little bit in the degradation of our numbers because the work they’re doing, when you do that, you protect it with slow orders. But once you get that work done, that order goes away and you raise the track speed. So there are many moving parts out there. Rest assured, I’ve got a book of opportunities in my bottom desk drawer, and it just takes time to get through them. And as I’ve always said, once you’ve created the top 10 and you limit the M&A improve them, then the next 10 bubble back up, and it’s like playing whack-a-mole, you just keep tackling it. It’s a constant pursuit of operational excellence, and that’s the culture, that’s the mindset that precision scheduled railroading is on. You have to adjust with the times, the uptimes, the downtimes. It’s the gift in the operating model that keeps on giving. So absolutely, expect that we’re going to have margin improvement as well as top line revenue growth. As long as you protect sustainable profitable growth, that’s going to happen in some form of passion or the other.

That’s great color. I appreciate it. Thank you.

Your next question comes from Ravi Shanker, Morgan Stanley. Please go ahead.

Thanks. Good afternoon, everyone. Keith, if I could just follow-up on the margin commentary, I think next year you’re going to see your OR kind of optically jump up just given the bench regarding change. Historically, you’ve always said that it’s kind of a natural floor for OR in the mid-50s. You’re not going to be there next year or at least optically. Do you think that kind of makes it easier for you to kind of deliver some of the savings that may not have been possible earlier and get back to that mid-50s level?

It’s still – I’m thinking about same-store. So I don’t care if you call it a 56 as a 61 or a 57 as a 61. To me, the fundamentals remain the same. I’m not going to get so consumed with operating ratio that I walk away from quality earnings. There’s a balance there. So at the same time, my main focus is to make sure I remain competitive. We were at a competitive disadvantage for a long time because our cost was so high. We could not compete for business. We’ve adjusted that. We corrected that. So I’m focused on us being the best railroader as we can be and focused on continually improving the way we operate the railway, which should drive cost out. And if you sprinkle some revenue on top of that, then you should see some gains, but it all depends on the marketplace too, it depends on the market that’s around you. So with all that said, the fundamentals don’t change. We’ve always been conservative on price. We think that that’s the right approach, that’s the sustainable approach and I’m not going to try to use leverage of demand to drive a reasonable price in the good times, just like I don’t have to defend it to well in the low times. So that fundamental philosophy is not going to change. We’re still – we want to be and we’re working to be best-in-class when it comes to our cost standpoint balanced with our service, best-in-class service low-cost producer with great service is hard to compete with. That’s pretty much where we’re at. I’m not focused on a number. I’m focused on the end product, which is earnings growth, quality sustainable earnings growth. I’m not going to build a church for Easter Sunday. I’m not going to drive a bunch of unsustainable earnings over two or three quarters or even a year. I’m thinking about the long-term, the long gains that this company’s is in. It’s a 136-year-old company that provides great value to our customers. It’s critically important to this country, critically important to the commerce in North America, and that’s the responsible way to run it. That’s not going to change.

Got it. That’s helpful. I had another follow-up on crude. You briefly mentioned that as who are of the drivers of the RTM growth and to your end, potentially in 2018. Can you just give us a little more color there on what you’re seeing in terms of the crude barrel opportunity coming out of the Canadian Oil Sands? Any kind of size, dimension would be great.

Well, certainly. The activity level with our customers and the opportunities have grown through the quarter. I think we’re going to end up – we ended up Q3 with about 7,700 units moved, which was pretty similar to what we did in Q2. We’re optimistic that with these opportunities, there’s going to be an uptick as we move into Q4. But I can tell you, as Keith said, we’ve been burned in this area a few times. So it’s a month-to-month basis. We’re going to watch it. We’re not going to – we’re going to price it right, and we’ll hold what is available based on our capacity. But it’s going to be on a month-to-month basis.

Can you share what’s in your guidance for the year?

You know what? I would expect just a slight uptick to the run rate. And certainly, as we see how this plays out through the quarter, it will give us a better sense of what we can expect in the 2018.

Rest assured, Ravi, we’re not going to tie our guidance to crude volumes.

Great. Thank you.

Thanks, Ravi.

Your next question comes from Steve Hansen, Raymond James. Please go ahead.

Yes. Hey, guys. Just a quick one from me. How should we think about the Ohio Valley opportunity in terms of sort of the market opportunity that you see there? It strikes me as a unique new option for you – new dot in the map as you call it, but how should we think about that in terms of the volume expectation you have going into something like that? Just trying to understand the thought process around adding the dot relative to the cost and incremental sort of steps that you’ve made here.

I’d tell you, Steve, we’ve got work to do in terms of – I’m not going to give you a container expectation or revenue amount, but part of the story here is, as I said, in building our product, in speaking to our customers and really determining where they need to go, a big part of this is needing to create more export opportunities. So we’ve got to bring a product that will enable our customers to fill those boxes back and create that value and that synergy. Looking at the Ohio Valley market, they’re a strong soybean producer down in that neck of the world. They produce a lot of non-GMO products. And you know what? It’s ready-made in that area with that production. So we’re going to target that export demand, but I’m not going to give you a number of containers at this point.

Got it.

Steve, it’s just – I would add. It’s part of the overall value proposition, which I’ve talked about that’s so compelling. It’s just more reach, more optionality, service reliability with a career that can help you lower your cost at the same time load in the East and back load at West, takes new steamship line cost down and drives their bottom lines at the same time. So it’s just another one of those pieces of value in the puzzle that we’re creating to convert our customers.

I appreciate that. Just to stick with the green theme for a moment, there’s a lot of comments over the past 6 to 12 months around the market share, pushing and pulling between the two Canadian carriers. And you suggested earlier that you’re moving record volumes here in the recent months. Is this to suggest that ultimately you think you can continue to maintain share within the broader market? Is that still in the last quarter?

Absolutely yes.

Okay. Very good. Thank you.

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

Yes. Good afternoon, and congrats on a good quarter here and the guidance. I guess I wanted to just also talk a little bit the Ohio Valley, maybe that sounds like a really interesting opportunity. Just wondering if there are other opportunities that maybe you’re pursuing that you can maybe highlight or talk about a little bit in terms of other wins here that potentially could come in the near-term?

Yes. So, look, this is all about sort of reestablishing and building that international product. So as part of that whether it’d be in down into the Eastern U.S. going even further east or down into Iowa network or setting up additional grain transloads for export like the Ohio Valley is going to provide in the Twin Cities, we’re looking at all options. So again, I would tell you we’re going to add to that optionality because it creates value for our customers. If we can create that value, we feel pretty confident that we can attract more international business or domestic transload business to our network.

Great, thank you. And I guess maybe, Nadeem, just one quickly in terms of obviously a good problem to have better cash flow maybe going into next year. Can you talk a little bit about if anything changed as far as the balance sheet is concerned and your thoughts on how to distribute the cash?

I’d say no at this time, Turan. I mean, we talked about getting our leverage back to that 2 to 2.5 times debt to EBITDA. Certainly, we’re close to that as we speak now and should be close to that by the end of the year. I’d just reiterate that we want to have a balanced approach. We still have room in our current NCIB, which we’ll utilize. I mean, we haven’t announced buyback that we don’t complete. So we’ll continue with that buying back the stock, and we’ve been pretty consistent the last several years of increasing our dividend, so you can expect that to also be a factor. So I’d say more of the same, obviously, we’ll go before our board and get their thoughts and their feedbacks, but I would expect a recommendation for management would be more of the same.

Great. Thank you very much.

Thanks, Turan.

Your next question comes from Tom Wadewitz, UBS. Please go ahead.

Yes, good afternoon. I wanted to see if you could offer some thoughts on how the total Intermodal volume outlook might be. What kind of a growth rate can you get when you don’t have market share loss in international to contend with? Are you – if you look at 2018 perhaps, can you grow it mid-single digits? Is that kind of the right type of outlook that you might see? Is it higher than that? Just kind of how you look at the growth potential, assuming that we stay at a decently constructive economy?

Tom, I think mid-single-digit sounds about right to me.

Okay. Great. And Nadeem, I don’t know if – I apologize if I missed this, but it seems like on the CapEx side, you have a better gross outlook, sometimes you spend a little more money. Is that a fair assessment for next year? Are there places you might to spend a bit more? And also perhaps on technology, maybe some thoughts on how you’re spending on technology or is the CapEx stable even as the growth outlook improves?

Yes, I mean, the mix of technology spend will change, but I’d say the overall level should remain relatively flat. I’d say that we do have some unique opportunities on our network. And we talked last quarter about the covered hoppers that we’re excited about that potential investment opportunity. We will likely increase our CapEx to take advantage of some of these longer-term return opportunities. I’d say that we talked of our capacity being sufficient. It’s more about investing and taking advantage of strong returns that are available to us. So likely an uptick though in CapEx to take advantage of those opportunities.

And Tom, I’d like to add to that and I’ll point this out. The way I see the capital spend, it’s not to do with the growth that we see in the near future. It has everything to do with running the business better. It has to do with margin improvement. It has to do with productivity, specifically speaking about this grain hopper cars, it has to do it service reliability, all the key ingredients of this precision scheduled railroad operating model. It’s not to play catch-up or try to pursue growth that we’ve already or that we’re trying to put in into our business mix today.

Right. Okay. Great. That makes sense. Thank you for the time.

Thanks, Tom.

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

Hey, thanks. Good afternoon, guys.

Hey, Scott.

Hi, there.

So assuming no land sales, Keith, do you have a view on the operating ratio for the fourth quarter? And then, Nadeem, do you have maybe an early look at land sales and pension expense for 2018 on land sales? Should we just assume that what didn’t happen this year gets pushed into 2018 and 2018 could be a pretty big year?

On the operating ratio side, yes, Scott. Mid-50’s is a very reachable number ex-land scales. And as far as the land sales itself, I’ll let Nadeem may counter this. We’re not pessimistic on making the land sales we’re just being disciplined on the land sales. The tri-party deal, we know what our part is worth. We certainly see line of sight to get in over the finish line. It’s just a little bit complicated, given that there’s three parties involved in this. There’s not a lack of desire, a lack of demand, so to speak, or a lack of path to the finish line. It’s just a timing. We’re going to be disciplined about it. We’re not going to leave money on the table. We think it’s a very compelling value in this partnership and in this agreement. And if it means, we got to wait to the first quarter to realize at 2018 or the second quarter even to realize that’s what we’re going to do.

And Scott, just in the pension side, I mean, we’ll obviously – we won’t know until January. But if you look at where rates have been doing, again, that’s being supportive of our pension income. And I would expect our return on assets to be very strong and continue to be very strong. So I would expect it to be a continued tailwind and likely an incremental tailwind to 2017 numbers.

So just to clarify a couple of things there. So it sounds like the land sales, it’s just a timing issue so you should get that $45 million, give or take, in 2018. And then any sort of normal annual land sales that you typically get in the year should also come in 2018. And then, Nadeem, just to be clear on pension, are you suggesting that it could be a bigger tailwind in 2018 than it was in 2017?

That’s correct. I’d say the land sales – obviously, we’ll give our guidance in January, but I wouldn’t get to – I wouldn’t go too much above beyond the $45 million that you’re assuming on land sales. And even that, as Keith mentioned, when you’re dealing with municipalities and various parties and trying to get that together, it could be very difficult. I’d temper your enthusiasm on the land sales for next year. I take the under.

Okay. Fair enough. And then, if I can just ask one last thing, on the crude by rail business. So now that we sort of know this is, for lack of a better word, a boom or bust business, can you price it differently? Or better said, can you price it even better so whatever volume you get, you have better leverage to it this time around that you did last time around?

Yes. I think, certainly. It’s that disciplined approach that Keith spoke about. So part of my comments in terms of taking this month-to-month is exactly for that reason. So we will evaluate the opportunities, match that against our capacity and then figure out how we want to price it. And I do think there is price upside there.

And the next question is from Benoit Poirier from Desjardins Capital Markets. Please go ahead. Benoit Poirier, Your line is open.

Sorry, good afternoon, gentlemen. Keith, I was wondering if you could talk a little bit about the merger of three Japanese shippers and what could be – if there would be – if there will be some implications for CP and whether it represents an opportunity or not for CP?

Sure. Would be happy to, Benoit. Pretty topical for me. Actually, I was in Asia last week, and attending at the Transpacific Maritime Conference. We spent a little time with the marketplace there learning more about that transaction. That transaction, a combination of MOL, MIK and K Line, which will be consummated and start shipping under the new brand, formed a company called, one, will be effective April 1, 2018. When that happens, if you think about the total all three contracts together, right now, that represents rough numbers 150-ish $160 million. Obviously, we haul and handle on our turn the K-line business today, which will be a piece of that, one of the legs of the three. What I might see happening if I were to look out at this, what I think would be a good outcome and a potential outcome, I think you’re going to see diversification in this industry, in this market space I think the philosophy of putting all eggs in one basket, while there’ll be some outliers, I just think that in this country, there’s a lot of capacity out there, but that capacity to optimize capacity requires balance. I think there’s enough business for the Vancouver business reports to work well, but you’ve got to match up that capacity, again, what I said earlier and that’s called terminal capacity. And again, these two railroads are very reliable railroads. This railroad specifically has some very accessible reliable capacity out there. So I think you will see a natural rebalancing of the business, which, overall, to me bodes well for Canadian port competitive value and reliability. And it offers compelling value, specifically for this company, as well as the marketplace of our shippers. So I do expect some balancing I think that we’ll earn some of that business and I think it makes sense naturally that it plays up the strengths of our franchise and available capacity that’s out in the marketplace. So it’s something we’ll be focused on that specific customer philosophically. They don’t have aspirations to becoming the largest steamship line in the world. They want to be a key strategic player. But what I’ve heard and what I understand is a key service reliability, and that just happens to be something that is right in our wheelhouse in capacity, sustainable reliable capacity. So I look forward to those discussions. I look forward to competing for that business, which should naturally be on this railway. So more to come on that.

Okay. So basically, Keith, K-Line represent right now about $50 million out of the total of, let’s say, $160 million among this three, right?

Yes, rough numbers.

Rough numbers. Okay. That’s perfect. And my second question, if we look at Automotive, I was wondering if you could provide some color about the expectation going forward as you’ll be overlapping the tough comps?

As we overlap, I see there’s underlying fundamental softness, so to speak, from the demand standpoint in North America market, but we can’t get away from that. So with that said, I think there still remains a bit of a headwind. But again, something that I’m pretty excited about and I’m not going to be bashful talking about again, is capacity and service. It matters. It’s not a commodity. It’s a value generator. Now we’ve got a story and we’ve been criticized by this. This is public information. I’m not speaking off-size there’s a company out there called Globus. Globus handles Kia and Hyundai shipments imports that come into Canada that serve the Canadian markets. And obviously, there’s some connection to the U.S. markets. It’s a customer that early last year, we enjoyed about third of the business, and our competitor had about two-thirds of the business. Well through contract negotiations, our competitor secured 100% of the business. And I can tell you now, at that time for CT and I’m speaking of CT only, the margins for us versus what we had to compete to retain it, made it a very easy decision for our team. I’m not going to be commoditized. We’re going to affect our capacity and our service. Now let’s go forward a year, capacity matters. You’ve got the customer that came to us and asked us for some help in some capacity constraint lanes, their words not mine, and as opposed to taking an approach that, "You know what, I can help my short-term earnings by taking on this business. I would rather provide a long-term transportation solution," Again, on the strengths of this franchise of our footprint. So we took an approach that said you know what, let us look at what we can…

That’s right. Very interesting. Thank you very much for the time.

Your next question comes from Brian Ossenbeck, JPMorgan. Please go ahead.

Hey, thanks for taking my question. Just a couple of quick ones. One, if you could – John expand on the, as you mentioned AutoGate and FastPass of the Intermodal side. Can you just talk about the growing out the plan to the Intermodal side of the business? I think you said more recently that was probably happening earlier this quarter that you just wrapped up. So give us an update how it’s gone so far, customer reaction and then what you hope to leverage off of that when it’s fully operational.

Yes. So the AutoGate technology is separate from our trip plan, growing trip plan into our Intermodal franchise. So the AutoGate, again is a technology that we’re rolling out on all our terminals, our Toronto terminal underway right now and we’re – we’ll spread it across our network, and the whole principle there is to get trucks in and out as quick as possible and – but the benefit to that then becomes downstream in terms of giving us better visibility to that trucking the end markets, the timing, tightening up the timing and the supply chain on when those deliveries need to be made. It’s sort of the next generation of that technology. As it relates the specifically to trip plan, there’s a part of it that we look at today, Brian, that’s simply ramp to ramp, but it’s really about the next evolution of trip plan that we develop a trip plan that’s door to door. And we’re not there yet, but it’s certainly part of what the view is our next generation and certainly something we can put as part of the story in 2018.

Okay, thank you. And just a quick one on the regulatory front. It looks like the C49 is coming back from the standing committee with amendments. Can you just give us a quick update on that? And is there anything you think might change on the big topic, which those seems to be the long-haul interest switching?

Yes. I mean we’ve got a letter of the law, but our view on all the things that we like, we love, and we accept on C49 remains the same. We think that we’re going to have favorable legislation that allows us to do the right thing and to make a quantum leap in safety when it comes to LVVR locomotives, voice and video recorders, and locomotives, we think that we’re going to have a favorable bifurcation with the MRE that allows us to make solid sound investment decision and a renewed grain fleet, which our customers will benefit greatly from and will benefit greatly from. And we think long-haul inter-switching, do I like it? No. Do we think it’s fair? No. I don’t know if those points scored a whole lot in Iowa. At the end of the day, here’s the way I look at it. It provides service – reliable service to my customers, and I work with my customers to make sure I get their product to market in a safe and efficient manner, and they get to enjoy the value the service offering we provide them. I’m not going to worry about anybody coming into our backyard and taking my business from me.

Okay. I leave it there. Thanks for your time.

Thanks, Brian.

Your next question comes from Chris Wetherbee, Citigroup. Please go ahead.

Thanks. Good afternoon, guys. Keith, you kind of laid out the story here in terms of the ability to keep working on the servers and have revenue ultimately come back around CP and think about some of the discrete opportunities in some of the efforts that you’ve made. When you think sort of big picture and step back and maybe you can help us get benchmarks to think about how to measure your success towards getting back to growing the business. I don’t know if it’s individual contracts or coming up over the course of the next three, six or nine months? Or if there’s sort of grain and crop in your competitiveness with the other railroad in Canada that is a good measure of that? Is there any specific item you could point us to that sort of we’re helpful to measure success in getting back to this and growing the top line?

I think all those are pieces of it, Chris, but I think the best measure to hold us accountable to is earnings growth. That’s probably the best one. We’re going to have some lands. We’re going to have some losses. We’re going to have some areas that would be surprised with, both in the negative and positive side. I can tell you this, all those areas we’re talking about, we got active initiatives focused against them. I can tell you this, as we increase our presence and increase our reliability and our credibility in the marketplace, both the financial marketplace as well as the customer marketplace, we got a very compelling value of this company an opportunity to grow organically to outpace GDP to control our cost and drive what I think are quality earnings growth over the next several years, and I’m talking three to four-year period that’s what I focused on. And I don’t lose sleep at night with this company’s ability to be able to do that. We just have to execute. We can’t take it for granted. We can’t get arrogant. We can’t forget what got us here, and that’s controlled, disciplined, sustainable growth. All those fundamentals matter. Our marketing team has got to understand that it’s not just revenue. It’s quality of revenue. Our marketing and operating team both collectively have to understand when we commit to a customer a service offering, we got to deliver it. That’s why that discipline piece is so critically important. I can’t fall in love with revenue for the sake of revenue and go dump as much as business on the physical plant that I’m not right-sized from an asset standpoint. I don’t have the right number of locomotives or people hired and trained. I’ve got to control all those areas. And if we do that in a disciplined approach, you’re going to see earnings growth, and you’re going to see success from this company. And to me, that’s the best proxy as a shareholder.

Okay. That’s helpful. Is there any reason to think that the mix that you’re talking about discipline around the revenue is not a recipe for double-digit earnings growth? And is that a way we should be thinking about it going forward, bigger picture multi-year?

We’ll provide a little more color in the first quarter for you, Chris.

Worth to share. Thank you very much. Appreciate it.

That’s the last question at this time. I’ll now turn it back over to Keith Creel.

Okay. Well, let me wrap it up. Number one, thank you for your time. Certainly, for your vote of confidence at the shareholders, you can sense the optimism at this company. We’re going to work hard. We’re going to stay humble. We’re going to earn our customers’ business, but we’re going to provide a very compelling value proposition to the marketplace as we go out and compete for business. Looking forward to 2018 and looking forward to sharing the results of our fourth quarter in January. Have a happy holiday time as well with your families, and we’ll talk to you. Those of you that I don’t see before then, we’ll talk to you then, take care.

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