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Edited Transcript of CP.TO earnings conference call or presentation 23-Oct-19 8:30pm GMT

Q3 2019 Canadian Pacific Railway Ltd Earnings Call

CALGARY Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Canadian Pacific Railway Ltd earnings conference call or presentation Wednesday, October 23, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Kenneth Brooks

Canadian Pacific Railway Limited - Executive VP & CMO

* Keith E. Creel

Canadian Pacific Railway Limited - President, CEO & Director

* Maeghan Albiston

Canadian Pacific Railway Limited - Assistant VP of IR

* Nadeem S. Velani

Canadian Pacific Railway Limited - Executive VP & CFO

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Conference Call Participants

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* Allison M. Landry

Crédit Suisse AG, Research Division - Director

* Benoit Poirier

Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst

* Brandon Robert Oglenski

Barclays Bank PLC, Research Division - VP & Senior Equity Analyst

* Brian Patrick Ossenbeck

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* Christian F. Wetherbee

Citigroup Inc, Research Division - VP

* Fadi Chamoun

BMO Capital Markets Equity Research - MD & Analyst

* Jordan Robert Alliger

Goldman Sachs Group Inc., Research Division - Research Analyst

* Justin Trennon Long

Stephens Inc., Research Division - MD

* Kenneth Scott Hoexter

BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials

* Ravi Shanker

Morgan Stanley, Research Division - Executive Director

* Scott H. Group

Wolfe Research, LLC - MD & Senior Transportation Analyst

* Thomas Richard Wadewitz

UBS Investment Bank, Research Division - MD and Senior Analyst

* Walter Noel Spracklin

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Emily, and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific's Third Quarter 2019 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 and Pensions, to begin the conference.

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Maeghan Albiston, Canadian Pacific Railway Limited - Assistant VP of IR [2]

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Thank you, Emily. 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 that 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 that's filed with Canadian and U.S. regulators.

This presentation also contains non-GAAP measures outlined on Slide 3. A reconciliation of all non-GAAP measures can be found in today's press release available on our website at investor.cpr.ca.

With me here today is Keith Creel, our President and CEO; Nadeem Velani, Executive Vice President and Chief Financial Officer; and John Brooks, Executive Vice President and Chief Marketing Officer. The formal remarks will be followed by Q&A. (Operator Instructions)

It's now my pleasure to introduce Mr. Keith Creel.

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Keith E. Creel, Canadian Pacific Railway Limited - President, CEO & Director [3]

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Thanks, Maeghan. Good afternoon, and thank you, all, for joining us today.

Well, once again, I'm honored to be here with my colleagues in Calgary, representing this impressive results, over 13,000 strong family of railroaders executing our proven PSR operating model, which continues to enable our success delivered for both our customers and our shareholders in good economic times as well as more challenging times.

Through our collective efforts this quarter, we delivered record third quarter revenues of $2 billion, while producing an all-time CP record low operating ratio of 56.1% and 12% adjusted EPS growth.

As we're all aware, this vibrant environment experienced some pretty unique challenges in the back half of the quarter in the industry as well as at CP. And in spite of those micro headwinds, today's strong results are undeniable proof points of this team's skill and ability to maintain constructive tension in our day-to-day operating managing costs, adapting resources real time, which are all foundational in a true PSR culture. It's an operating model that continues to allow us to manage the peaks and the lows of all business and economic cycles.

More specifically, I'll be remiss not to commend and tip my hat to the outstanding operating performance the team produced that demonstrates essentially, there were -- always is and will always be further efficiency opportunities to be mined at CP demonstrated by their performance driving year-over-year improvements across the board: 5% network train speed; 16% improvement of terminal drill across the network, which is a third quarter all-time best at CP; 15% improvement in car miles per day; 7% improvement in locomotive productivity. Again, all-time best levels for each metric at CP, at the same time, producing trip plan compliance at 90% in the quarter for our customers. And most importantly, a strong safety performance on the safety front. Train accidents down 30% year-over-year in the quarter. Personal injuries, down 5%. And I can tell you, reducing personal injuries is an area of intense focus, care and concern within CP. We're committed to every employee going home safe every day.

We've got a lot of work left to do on this journey, but at the same time, I'm proud today to publicly recognize pockets of excellence we have at CP like the Toronto locomotive shop. We celebrate in 3 injury -- 3 years of injury-free work performance today. This kind performance takes bold leadership and partnership across the collective team, be they company officers like locomotive superintendent [Brian Compton] there in Toronto; Health and Safety rep, [James Dawson]; mechanic, [Christopher Purchase]. All there in Toronto, working with all the great men and women in their work group. Locations of safety excellence like this demonstrates that the Toronto diesel shop illustrates a true safety culture, in my mind, which is a key word. To some, culture may be just a word or an aspiration. At CP, our culture of accountability, execution and the importance of constructive tension in all we do is our true success enabler.

I'd also like to point out this quarter, we announced the return of Robert Johnson and Tony Marquis. Their contributions over the last number of years have been instrumental in CP's transformational journey from industry laggard to industry leader, which included, while they were here, cultivating in partnership with myself and others, developing a strong bench of operating leaders for now and in the future. This focus in the work allowed a seamless transition in the space.

On September 1, Mark Redd, who many of you have had a chance to meet, was appointed to our EVP of Operations. Reporting to Mark are 2 seasoned and talented operating leaders, which are seized with not just sustaining what they've inherited but further improving the work that's been done before them. Tracy Miller, our Senior Vice President, runs the Eastern region; and Greg Squires, Vice President, runs the Western region.

At the end of the day, our true ability to create and most importantly, sustain success at CP or for that matter, in my mind, at any great company, it comes down to people, which is why developing the people and cultivating a deep bench of railroader leaders across the company in all departments continues to be my personal and our team's ongoing focus and priority.

So with that, I'll keep my comments short. I'll hand it over to John to provide some color on the markets, and then turn it over to Nadeem to elaborate more on the numbers.

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John Kenneth Brooks, Canadian Pacific Railway Limited - Executive VP & CMO [4]

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All right. Thank you, Keith, and good afternoon, everyone.

The total revenues were up 4% this quarter to $2 billion. RTMs were down 1%. FX was flat, while fuel was negative 1%. And as expected, our pricing landed in the targeted 3% to 4% range while mix was positive.

Despite our book of business and frankly, particularly, our bulk franchise facing some unanticipated headwinds in the quarter, the CP team is closely aligned as we continue to deliver industry-leading growth built on the strength of our service product and the execution of our surgical growth strategies. We view these bulk headwinds largely as episodic. Looking ahead, the fundamentals for grain and potash and coal look good.

Grain volumes were down 1%, while revenues were up 6%. Wet weather delayed the Canadian grain harvest significantly in the quarter with weekly volumes averaging about 1,000 cars per week less compared to our prior years. More recently, these volumes have begun to pick up, and we are confident that any volumes not moved this fall will move in 2020.

Currently, in Canada, the latest stat show we're about 70% harvested versus our 3-year average closer to 85%. The crop size will look similar to last year, and we continue to watch closely the impacts of quality, resulting from this late harvest. In the U.S., although recent weather events have also taken their toll in the upper Midwest and have slowed shipping in that territory, we've seen an increase most recently in our export soybean program as more positive news emerges around U.S. trade settlements and talks with China.

On the potash front, volumes were down 15% and revenues decreased 10%. After all-time record volumes over the past year, the ongoing delay with international contract resolutions have weighed heavy on our export volumes. It is our understanding that ongoing discussion between the parties remain very constructive so while we believe we'll continue to face some near-term uncertainty into Q4, the macro demand for potash remains stable for 2020 and as we look beyond.

On the coal front, revenues were up 7%, while volumes were essentially flat. Canadian coal volumes were down slightly with some supply chain challenges, however, this was offset by increased volumes of our U.S. coal into our Midwest power plants as they rebuild their inventories.

On the merchandise front, revenues and forest products were up 3% and volumes were up 1%. We continue to drive success in this space through strong service, asset utilization and utilizing our network of transloads to create optimality for our customers. With our unique terminal capacity and land available for low-cost expansion, our transload strategy is an extremely powerful tool in extending our reach.

Similar to the recent developments we've made in this space in Vancouver and Toronto, I'm excited about new development opportunities to further create multi-commodity transloads at CP terminals across Canada and the U.S.

In the MMC space, revenues declined 4% and volumes declined 2%, largely driven by lower shipments of steel, scrap steel and frac sand. Partially, these were offset by growth with our short line partners.

In the steel markets, we have seen reduced volumes to and from our steel mills, resulting from lower market prices, high finished product inventories and the need for less inbound scrap.

Frac sand, shipments into the Permian Basin continues to decline as a result of increased use of in-basin sand. As an offset, the team continues to work hard on the development of new destinations to help grow our share in the market such as the Bakken, Marcellus and into Canada. I would also note that we have our annual short line conference coming up here next week, and I'm extremely pleased with the growth initiatives we've been delivering with these key partners.

In the energy, chemicals and plastics portfolio, revenues were up 12%. Despite sequential growth in crude-by-rail volumes to over 28,000 carloads in the quarter. Crude-by-rail shipments fell short of our expectations and our contractual commitments. As a result of these shortfalls, total freight revenues did benefit by approximately 1% from liquidated damages.

I should also note, we are increasingly optimistic that the Alberta government will come to a resolution on the transfer of our crude contract, and we are supportive of the new mechanisms that allow crude production to move via rail to count as an offset against the curtailment. In anticipation of this, we've seen the spread begin to widen, and we are seeing growing interest with our shippers and expect volumes to increase sequentially into Q4.

And then automotive, despite a weak North American demand environment, revenues were up 1% and volumes grew 2%. We continue to see success driven by CP's unique inland terminal capacity across our network. This is highlighted not only by our growth at our Vancouver auto compound, which is a gift that keeps on giving, and also the new opportunities in Southern Ontario in the upper Midwest.

And finally, on the intermodal side of the business, overall revenues were flat. We saw strength in the international with volumes up 9%. And in domestic, the results were mixed with strength in the retail space and record volumes of our refrigerated products being moved, being offset by softness in the wholesale market.

So let me close my remarks by saying a couple of things. And certainly, the softer, more challenging demand environments as pressures grow for growth and cost savings, there can be a tendency for some to try to really commoditize the service we provide. We're not going to fall in that trap. I want to say rest assured that the volumes we're bringing onto this railroad are at a price that reflect the value of our service. As we've said in the past, we're not going to grow this railroad for growth's sake.

As I look ahead, we have a strong pipeline of unique opportunities to bring incremental volumes to this railroad. The sales and marketing team is collaborating closely with our operating team to ensure we are right-sized for any business environment, and we are selling to the benefits of our available capacity and our service advantages. I'm proud of the results this team delivered, and we have a high confidence level in our strategy to deliver sustainable, profitable growth.

So with that, I'll pass it on to Nadeem.

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Nadeem S. Velani, Canadian Pacific Railway Limited - Executive VP & CFO [5]

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Thanks, John, and good afternoon.

I'm proud to announce the Q3 operating ratio decrease of 220 basis points to an all-time record and industry-leading OR of 56.1%. That record OR number is the outcome of running the business the right way: tightly managing resources and adapting to changing volume environments proactively; structuring contracts that protect CP and the costs we incur to have resources in place; a disciplined approach we take to pricing, irrespective of the demand environment; and having the best team in the industry.

We continue to drive margin improvement. The railroad is running extremely well, which is a reflection of the strength of our model, the talent of our operating team and just how embedded in our DNA precision scheduled railroading is at CP.

Taking a closer look at a few items on the expense side. As usual, I'll be speaking to results on an exchange adjusted basis. Comp and benefits expense was down 3% or $11 million versus last year. The primary driver of the decrease was lower stock-based comp of $13 million resulting from a lower share price. The workforce is down 2% sequentially as we continue to adapt to a changing volume environment. At the end of 2019, I expect our end-of-year workforce to be down versus Q4 2018.

Fuel expense decreased $19 million or 8%, primarily as a result of lower fuel prices. Although slightly worse year-over-year, this was our second best all-time quarter from a fuel efficiency perspective.

Materials expense was up 6% or $3 million, primarily as a result of increased locomotive maintenance, some of which was onetime as well as some in-sourcing work. Equipment rent expense was flat year-over-year. With increased automotive and inter volume -- and intermodal volumes, you would expect this line item to increase. However, as we actively manage our car fleet through the quarter, the associated operational efficiency savings fully offset the cost of increased volumes.

Depreciation expense was $185 million, an increase of 6% as a result of a higher asset base. Purchase services was $277 million, an increase of $13 million or 5%. This line item is less volume-variable than others. The increase in the quarter was largely driven by higher support cost and higher property taxes. As we head into Q4, we expect this line item to be flat to modestly down on a sequential basis as we do not anticipate any material land sales through the remainder of the year.

As a reminder, as you update your models, last year's fourth quarter number was quite noisy as we had a number of moving pieces, including a sizable land sale that was primarily offset by a onetime contingent claim.

Moving below the line. Interest expense decreased $2 million as a result of lower effective interest rate. Also income tax expense increased $12 million or 6%. As announced earlier in the quarter, we now expect our effective tax rates to come in closer to 25.5%.

Other expense after adjusting for the U.S. debt translation gains and losses has a headwind of $13 million, primarily driven by higher equity income in 2018. Rounding out the income statement. Adjusted income increased by 9%, and adjusted EPS grew 12%.

Taking a look at the free cash -- taking a look at free cash on the next slide. As a result of our discipline, we continue to generate strong free cash flow. Year-to-date cash from operations increased 10% and free cash flow increased 11%, in spite of increased capital spend. While CapEx is elevated slightly compared to the same point last year, we remain on target to reach our guidance of $1.6 billion. Our disciplined approach to capital investment and the strong returns we are generating are evidenced by an adjusted ROIC of 16.6% on a trailing 12-month basis.

On the shareholder return front, just today, we completed the 4% share buyback program that we launched last October. Nearly 5.7 million shares were repurchased, returning more than $1.6 billion to shareholders. Our leverage came in at 2.4x, towards the upper end of our target range of 2x to 2.5x. We plan to take a brief pause in the buyback to allow for some natural delevering before revisiting the share repurchase program in December. You can expect continued strong shareholder returns.

Precision scheduled railroading works throughout the cycle, and this quarter's results are a testament to that. I remain confident in our full year EPS guidance of double-digit growth. This will mark the third consecutive year of double-digit earnings growth. And looking forward, as we move through the fourth quarter and into 2020, I remain confident in our pipeline of growth opportunities, this team's ability to execute and ultimately, deliver for our customers and shareholders.

With that, I'll turn the call back over to Keith.

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Keith E. Creel, Canadian Pacific Railway Limited - President, CEO & Director [6]

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Okay. Thanks for your color and your comments, Nadeem and John.

Certainly, reflecting on the quarter and looking to the future, there's plenty to be proud of here today in these results, and the future remains bright for us at CP. We're confident in our ability to deliver double-digit earnings growth for the year, as Nadeem highlighted. 2019 will mark our third year, consecutive year, we've achieved double-digit earnings growth. We're on track to be the only railroad with positive volume growth in 2019. These outcomes, both as the result of our disciplined approach to sustainable, profitable growth. They're not catchwords. They're words we live and railroad by day in and day out, and we see plenty of runway ahead. We're not going to chase the short term, we're building this railroad for the long term. We're going to continue to work on our customers to leverage our network strengths and leverage our service and grow. As we head into 2020 and beyond, I'm more confident as we continue to see wins in the marketplace, which will enable us to continue to outpace the economy and our peers. And as a shareholder, as an investor, CP, this is a unique value story. CP, you've got a company with continued opportunities to outpace the industry and volumes, continued opportunities to improve our margins, reward shareholders with a consistent return and enabled by a proven team with a track record of doing exactly that. It's certainly a compelling value proposition and one that's not easily replicated.

And with that, I'll open it up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Tom Wadewitz from UBS.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [2]

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I have some questions for you on the market side and pricing as well. You do have some headwinds, I think, which are -- seem to be temporary. I mean -- I guess you look at potash and Canadian grain. At the same time, you probably have some idiosyncratic growth drivers that come in early next year. How do you think about how we offset some of the maybe cyclical weakness versus some of those things? And how you might look at volumes going into 2020? I mean not looking for guidance, but just -- you think it's reasonable to see growth? Or would you be more cautious than that looking at 2020?

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Keith E. Creel, Canadian Pacific Railway Limited - President, CEO & Director [3]

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I'll maybe make a couple of comments, Tom, and I'll let John provide a little bit of color. Bottom line, up front to your point, I'm not -- we're not prepared to give guidance at this point, but what we see is an optimistic future. What we see is a clearer path to growth driven at a micro level by our own self-help, unique initiatives where the things we talked about, things we shared, things we're not yet prepared to share across all the -- say all the different business units. Automotive is -- certainly is very compelling. Continue opportunity in intermodal and the strength of our franchise.

To your point, if I look at the year-over-year compare, even at CP, we had an atrocious first quarter last year. We had some things occur at this railway that I hope I retire, never in my life have to experience again. And I hope that for our CP family that had not only a huge emotional profound impact on us but also an impact to our business and actually, the amount of freight that we're able to move in our Western corridor. That aside, unless mother nature humbles us and brings us to our knees, from a compare standpoint as some of those micro issues clear up, which we believe they will on grain as well as potash, apples-to-apples, we see an opportunity to move more freight and obviously, drive more earnings and drive more revenue growth.

And on the second half of the year, Tom, what's became our drivers in the first half that let us be countercyclical to the industry has sort of became our headwinds in the second half. Again, if those micro issues disappear, and we believe they will, that represents upside as well, short of things I can't control like a drought or something like that.

So long answer to your question, we're very optimistic. We see positive RTM growth and obviously, revenue growth and strength and ability to drive industry-leading earnings again in 2020.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [4]

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Okay. Yes. That's great. That's really helpful. Maybe the second question just would be in competitive dynamic and how you think about pricing against a more challenging cyclical backdrop. Competition can heat up a little bit. And I just wanted to see how we should think about pricing next year and headwind from increased competition.

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Keith E. Creel, Canadian Pacific Railway Limited - President, CEO & Director [5]

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You should expect more of the same from CP. We're very disciplined when it comes to price, we're not going to allow ourselves to be commoditized. From a price standpoint, if you want to put a number on it, we've always said 2 to 4 is the range. Historically, down market's closer to 2, up market's closer to 4. Who knows what 2020's going to be? There's so much volatility that has the potential to clear itself up in 2020.

But I can tell you this, there's always been competition. We're not afraid of competition. We've got a very unique franchise that has its own very unique strength. It's blessed with capacity and the best operating team in the industry, and I'll take that into any competitive dynamic and provide a value proposition for my customer that price can't replicate. The market sets the rate. We've got one of the best, if not the best, cost structures in the market. If we want to play and it makes sense for our network, we can compete for business. If the market goes to a place or our competitive options go to a place that's not healthy for this railway, we've shown and we'll show again that we have the discipline, we're not going to get in a race to the bottom. It's not a race if you're not in it. We know where our bottom is, we know what our bottom line is. And again, I'll finish where I started, we're not going to allow this railway or this team or the value that we represent and present to all of our customers to be commoditized.

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Nadeem S. Velani, Canadian Pacific Railway Limited - Executive VP & CFO [6]

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Tom, I can't add anything more to that. That was pretty good.

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Operator [7]

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

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Fadi Chamoun, BMO Capital Markets Equity Research - MD & Analyst [8]

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Maybe, John, quickly, what would you consider to be kind of the right spread for crude-by-rail for the volume to kind of ramp up sequentially like you've indicated given the liquidated damage and what that boils out?

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John Kenneth Brooks, Canadian Pacific Railway Limited - Executive VP & CMO [9]

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Yes, so it's interesting, Fadi. Like right now, spreads have moved up into that $16, $17 range, and that's starting to hit the sweet spot. I think it is indicative of, I think, the momentum and I think people feeling more and more comfortable that these contracts are going to get resolved and that there actually might be a -- what they're calling a spa program as offsetting against the curtailment to move barrels by rail. I just -- I'm looking specifically at the -- our contracts, what we did in Q3 and what we have line of sight to with our customers here for Q4. And I expect the -- that uptick, 2,000 or 3,000 additional loads up to that 30,000 level to be realistic.

Now look, it's been a dynamic -- that crude space has been a -- the dynamic area, there's no doubt about it. We're not counting on it. But certainly, I view more optimism right now than not.

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Fadi Chamoun, BMO Capital Markets Equity Research - MD & Analyst [10]

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Okay. And maybe ask Tom's question a little differently. Like in the past, you've had a lot of success, obviously, converting traffic to your network from trucking, from rail, and so on. Now we have a little bit of softer environment, maybe a little bit more capacity in the market. Is that opportunity diminished versus what you see in the last 2, 3 years? It sounds like you feel good about what's ahead of you. If you can just help us understand kind of what the next year or 2 may look like compared to what had been occurring the last couple of years.

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John Kenneth Brooks, Canadian Pacific Railway Limited - Executive VP & CMO [11]

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Yes. So maybe I'd characterize it like this. We've got -- given the strength of our bulk franchise, that, number one, Fadi, gives me some comfort. Because at the end of the day, again, that grain called potash, I think those fundamentals look strong. And each of those, frankly, give us a tailwind as I look into 2020 and beyond. Some of the other areas, I think certainly the merchandise and some of the industrial sectors given some of the challenges. In terms of broad-based volumes, there's some question marks that remain in there, certainly, frac sand, as I look forward.

But I think the differentiator for us is that we've been talking about is the unique inland capacity gives us a sales tool to our customers that no other railroad out there is able to replicate. Over the road capacity is one thing, but the ability that they have the land to attract the customers to make them sticky is something that I -- you've seen us just begin to sort of leverage with some of our transloads that we've developed with our Vancouver compound, with some of those unique opportunities that we've talked about. But the potential for that and what that looks like into 2020 and beyond is what sort of gives us this comfort. The automotive sector is an area that is -- I think by all our accords, is going to continue to face headwinds. And as, frankly, I look into 2020 and 2021, I see us significantly outpacing the industry and our peers in that space just because we have a -- the unique ability to create models and mousetraps out there in the industry that is going to bring us share or incremental opportunity in that area.

Another area that I have talked about and I mentioned here in this transload space, it is the ability for us to go into these major metropolitan hubs across Canada and the U.S. We have the land that's developable, it's at a very low cost to be able to attract these multi-commodity customers to our franchise. And a lot of that is singles and doubles and carload business, but that's high -- really high-margin, strong business for us to add on to our 7,000-foot manifest trains and build that out at low-cost.

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Operator [12]

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

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [13]

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I wanted to maybe pick back up on that crude by rail, Tom. And I think there's an expectation that you could see some better volumes as you move through 4Q and then certainly into 2020 with the government taking action here. I -- it looks like you're targeting 30,000 in the fourth quarter. What do you think your capacity is? Or what do you think you can get to on a quarterly basis without a lot of effort as we think about 2020?

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John Kenneth Brooks, Canadian Pacific Railway Limited - Executive VP & CMO [14]

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So Chris, I'm a little hesitant to call that given all the variability we've had. I look back -- we get to this 30,000 run rate level, I look back, that was sort of our peak level during the last crude-by-rail renaissance. Is there another 5,000 or so? Can you get to 35,000 run rate? Yes, I think there's the bandwidth to do there. Now look, it's not a slam dunk. This -- we still have to get over some hurdles. But in terms of the capacity, the people, the mobile resources to go to that level on a sustained rate, I think that's a pretty good number.

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Keith E. Creel, Canadian Pacific Railway Limited - President, CEO & Director [15]

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But I think it's critical to point out that, that optimism on the upside is not fueling our optimism on our potential for growth in 2020 or even in the fourth quarter.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [16]

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Okay. So that will be incremental, that's very helpful. Nadeem, you talked a little bit about headcount in the -- in 4Q. When you think out to 2020, can you give us a little bit of sense of where you think you are? Obviously, the operating ratio performance in 3Q was very, very strong. Could you give us a sense of how heads play into that when you're thinking about sort of the growth potential of 2020?

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Nadeem S. Velani, Canadian Pacific Railway Limited - Executive VP & CFO [17]

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Sure. I mean, typically, when we guided in terms of headcount, we'll -- we're not going to go 1 for 1 volumes. So without giving you a sense of volume guides for 2020, I think Keith talked to the positives and our view that we'll see volume growth into the new year, with that, I'd say, potentially, you're looking at a headcount of flat to slightly up. But again, it's a little early to get into that before we get into our full year guidance for 2020. So just rest assured that we'll be able to take on growth, the high operating leverage and take on that growth, bring it to the bottom line by adding cars to existing traffic as opposed to adding a huge amount of headcount on the non-T&E side.

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Operator [18]

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

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Walter Noel Spracklin, RBC Capital Markets, LLC, Research Division - Analyst [19]

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So first, John, if we come back to transload, you mentioned some of your inland facilities in Coquitlam and some of the success you've had there, selling into Ford. Can you update us? And I heard in your commentary, it sounded like you're looking at other opportunities for transload. Can you kind of quantify, are these Coquitlam-type size or bigger? How quickly could you see tying in customers in the same way you did that with Coquitlam in those inland facilities just to kind of benchmark the overall revenue opportunity as you roll those out? And again, can you update as to whether you've got the other half of Coquitlam sold as well?

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John Kenneth Brooks, Canadian Pacific Railway Limited - Executive VP & CMO [20]

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So the other half is sold. So we're quite pleased with how Vancouver has materialized for us. Again, it's been a very strategic property for us, not only from an auto perspective, but what I see in terms of future for it in transloading, not only forest product for export but other intermodal stuffing opportunities, including plastics and grain. I think we're -- we literally have tipped the iceberg in terms of first phase of development of that property.

I think in terms of quantum, Walter, I think that is a -- sort of a good -- what we've been able to do there is sort of a good mechanism that you could use across the property. I can't give all sort of the pinpointed locations and what commodities today, but I'll -- I can tell you this. If you just look at our footprint in places like Edmonton, if you look at our footprint in places like Montreal, we've got a lot of land available to develop that is ready to go at a low cost. And in those particular areas, I think you'll see a lot of customers out there that are looking for optionality. They're looking for rail alternatives that are currently trucking today. And I think there's a number of mousetraps that -- in addition, that we can begin to consolidate operations that we have in these regions to give us not only, again, customer opportunities but also operating synergies at these locations.

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Keith E. Creel, Canadian Pacific Railway Limited - President, CEO & Director [21]

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Yes, Walter, I'd say this. We see a reasonable line of sight for 2 to 3 more of these in '20 and '21 that we're currently working on that they're not just possibilities, they're probabilities.

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Walter Noel Spracklin, RBC Capital Markets, LLC, Research Division - Analyst [22]

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So when I look at that as an example, looking to 2020, I'm seeing a lot of kind of new business coming on in tandem with the easy comps that you are mentioning. You mentioned grain and potash, which were tough in the -- in 2019 that could -- and likely will turn in 2020. Crude, you mentioned as well. Intermodal, you got Yang Ming and these transload facilities. Clearly, you're not giving guidance, but if I add all those up under even a flat environment, we're looking at 500 bps in terms of volume growth. Is there something with my math that all else equal, those don't add up to that level? Or is that generally the level that this kind of new business could potentially bring you in 2020?

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John Kenneth Brooks, Canadian Pacific Railway Limited - Executive VP & CMO [23]

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Walter, I think 500, a stretch. I'm going to lay that out to my team, and that's our goal to achieve. I think your point is right though, there is a base level. It's, I would say, more -- maybe 2%, that -- 2%, 2.5% that gives me comfort in terms of initiatives that we've delivered as we look into 2020. But don't push me any further in the guidance as we look into next year quite yet.

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Operator [24]

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Our next question comes from the line of Scott Groove -- sorry, Group from Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [25]

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Can you give us just a bit of a more granular look at how you're thinking about fourth quarter from an RTM, OR standpoint? And then maybe specifically, help us on comp per employee that was down in the third?

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Keith E. Creel, Canadian Pacific Railway Limited - President, CEO & Director [26]

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Well, I'll let Nadeem speak to comp per employee. But looking at the fourth quarter, Scott, what I expect and what we see line of sight to is the quarter's sort of the reverse of the third quarter. October, obviously, has started out soft. We've got a little bit of a hole to climb out of, but we see line of sight to some of those fundamentals, green shoots of optimism in November and December. Be it grain, be it potash, be it other initiatives that we've got ongoing that will land us, I believe, in an RTM basis, flattish. Is there a potential for a little bit of upside? Yes. A little bit less? Yes. But we think that's a very prudent and probable outcome. And from an OR standpoint, working against a very tough comp last year with that land sale, I would not expect OR improvement but certainly, I would not expect OR deterioration, which bottom line it for the year, brings us to a place where I see the art of the possible being in around -- at 6-0 or maybe a little better, depending on what stock-based comp does for us in the fourth quarter.

Nadeem, you want to provide some color on the productivity number?

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Nadeem S. Velani, Canadian Pacific Railway Limited - Executive VP & CFO [27]

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Yes. Scott, just on comp per employee. Obviously, this quarter is the first quarter that our stock price had gone down during the quarter, and so that benefited our overall EPS by about $0.08. Incentive comp year-over-year was down slightly, that helps about $0.02. So that overall helps the comp per employee year-over-year.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [28]

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And Keith, that sort of recovery in November, December that you see, do you think that's specific to you? Or would you expect something broadly like that for the industry?

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Keith E. Creel, Canadian Pacific Railway Limited - President, CEO & Director [29]

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No, I'd say, that's micro to CP. Obviously, we're experiencing some of the same challenges the industry experienced. What's unique to us, again, we see sequential growth. We're optimistic we'll get growth on the crude side versus third quarter to close out the year. We're optimistic that some of this uncertainty in the potash market, which we are uniquely benefited from, will clear up and perhaps India would get resolved and we'll see a bit more movement in November and December than we currently anticipate with a very bearish view.

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Nadeem S. Velani, Canadian Pacific Railway Limited - Executive VP & CFO [30]

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Scott, just obviously being mindful that we do get to have winter in our -- into the network. So just mindful that as long as you don't get a very early winter in that November, December time frame.

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Operator [31]

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Your next question comes from the line of Brian Ossenbeck from JPMorgan.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [32]

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Just wanted to come back to potash because it is a -- it has been a big driver for you and some decent exposure there. Last year, John mentioned about the -- you've got the quick settlement, really, I guess, with the export price. Can you just talk about maybe risk of this extending a little bit longer? Looks like China has some inventories that are pretty high, they're dealing with the swine flu. So yes, a lot of moving parts, but it does seem like maybe a possibility that it gets pushed a bit into '20. But it sounds like -- but Keith just said that you don't -- they have that expectation that it pops back here. So maybe if you can just put a finer point on that? I'd appreciate it.

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Keith E. Creel, Canadian Pacific Railway Limited - President, CEO & Director [33]

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Yes, before John gives the finer point, let me clarify mine. I share your sentiment about China. I have no aspirations or expectations for the reasons that you pointed out that the China piece will get resolved. Our optimism is more focused on India.

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John Kenneth Brooks, Canadian Pacific Railway Limited - Executive VP & CMO [34]

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Yes. So, Brian, I mean it -- potash, alone, has been about a 2% RTM headwind. So you're right, it has been fairly significant for us. We're staying very close to certainly Canpotex and K+ S as this develops. I think there is a little optimism out there that the India contract, if anything, will be the first to settle. And optimistically, let's call that in the next 30 days. And again, I am -- this is more hoping and fingers crossed but if 30 days -- that will provide a price discovery, I think that overall will give the market that comfort, whether or not we can see some of that benefit then ramp up into December is we're not banking at to the point, but we think it could be realistic and could -- that opportunity could be out there to more normalize those volumes. That being said, as we build out our 2020 model, I think the expectations remain pretty strong that the volumes that we've become accustomed to will normalize pretty quickly. And don't forget, we do have K+ S continuing to ramp up that production, so we're going to see, I think, a pretty decent jump with them too as part of this.

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Keith E. Creel, Canadian Pacific Railway Limited - President, CEO & Director [35]

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And finally, the first quarter of this year, we could not and we were not in a position to move the demand that was there in the normal market given our unique challenges that we had with our catastrophic derailment.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [36]

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Got it. Maybe a quicker follow-up on crude and just the liquidated damages. John, I think you mentioned there was about 1% of freight revenue gross, so I guess $20 million in this quarter. Nadeem, could you give us a sense as to what type of cost those were going to cover? Is this a material mover on the numbers this quarter? And it sounds like you're expecting this to come through based on the contract structure and the speed or lack of speed, I guess, transferring from the government. But just wanted to see if you could put some more context around that and if you expect to -- this to be kind of a one-and-done event here in 3Q as volumes hopefully ramp up in 4Q.

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Nadeem S. Velani, Canadian Pacific Railway Limited - Executive VP & CFO [37]

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Well, obviously, Brian, liquidated damages, the premise is to protect you to have the resources and the capacity to service the business, which we did. So whether it's headcounts, capital investments, et cetera, that we put towards -- set aside to move that traffic or it's not taking on other business that would consume some of that traffic and that capacity. So in terms of expense associated with it, there are expenses. There's expenses with people, there's expenses with locomotives, with assets and network maintenance and so forth. So I'd characterize it that -- I'm not going to give you an operating ratio on that, no margin on that business. But safe to say, there are expenses associated with it, too, based on the premise of liquidated damages.

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Operator [38]

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Our next question comes from the line of Benoit Poirier from Desjardins.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [39]

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Could you discuss a little bit about the dynamics between the Western ports and Eastern ports on the back of the trade issues with China? I was wondering if the volume is weaker in Vancouver as opposed to Montreal. And if you could give also an update about the [contract car] expansion in your Montreal, whether it represents an opportunity for CP in the medium term.

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John Kenneth Brooks, Canadian Pacific Railway Limited - Executive VP & CMO [40]

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I think certainly, Benoit, we're seeing -- in terms of blank sailings and some of the impacts relative to the trade, it's definitely more, at least as we've seen more of a West Coast issue. Our East Coast volumes have hung in there fairly well. In terms of [contract car], I -- you know what, it's an opportunity that we're staying close to. We also have critical port relationships with Montreal that we continue to manage. So we're going to stay close to that file, if it -- we view it presents an opportunity for our eastern strategy, rest assured we'll be all over it. Frankly, right now, we're maximizing and focusing on what's existing there with our customers and partners at Montreal.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [41]

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Okay. And my second question for Nadeem. Just in terms of CapEx, I understand the $1.6 billion for this year. Obviously, there's no guidance for 2020. But if we look at the direction, would it be fair to assume kind of a stable CapEx? Or if we don't see the volume recovery, as expected, would there be a -- do you have some flexibility to lower the CapEx, let's say, for 2020, Nadeem?

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Nadeem S. Velani, Canadian Pacific Railway Limited - Executive VP & CFO [42]

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Benoit, so when we had our analyst day a little over a year ago, we highlighted kind of CapEx in that $1.6 billion range for a few more years, so at least into 2020. And just a reminder, a bulk of our commitments on the CapEx side beyond what we do on the basic maintenance capital of $800 million to $850 million a year. We have a few specific, very large investments that we've committed to. So one item is the grain hopper cars, about $600 million over the life of that, so about $150 million a year. Plus, we're doing some locomotive modernizations that we've committed to. So when you put it all together, there's somewhat limited flexibility. So if you were to say to me that volumes are going to be down significantly next year, you're -- could we take CapEx down $100 million, potentially? We're not of that view. We think, as Keith pointed to, that we're going to have some positives next year. So I think staying around that $1.6 billion level into 2020 is a good number to think about for us and what that could mean in terms of free cash flow going forward.

Now beyond that time frame, I'll just point out that we've said that we could see some -- that CapEx number drift lower as we start to -- not having to do the hopper cars, as those roll off, those are pretty significant investments year-over-year. As PTC rolls off, you'll start seeing some of that roll off our CapEx, and we have the potential to see that $1.6 billion come down in the outer years at 2022 and beyond.

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Operator [43]

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

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Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [44]

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And at the risk of repeating the questions on 2020 growth, but I think it's important because I think a skeptical investor could look at you guys and say, "Well, your primary competition, Canada, went through some capital and capacity constraints last 2 years. Now it seems that they're back. They're talking about some intermodal contract wins this quarter as well." So I guess when -- John or Keith, when you guys talk about that 2% to 2.5% of incremental growth that you see coming, how much of that is more innovative to what you guys are doing on the footprint of CP with your customers as opposed to just simply a jump off for freight that comes up every year?

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Keith E. Creel, Canadian Pacific Railway Limited - President, CEO & Director [45]

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I'll let John provide color, but the bottom line, Brandon, is all of it.

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John Kenneth Brooks, Canadian Pacific Railway Limited - Executive VP & CMO [46]

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Yes. And look, I mean, I think the bulks, again, Brandon, provide a unique opportunity next year. You -- we saw these headwinds in the delayed harvest that are going to present nice, incremental opportunities for the base. In addition to that, I -- and again, without all the details, we've got a good chunk of initiative in wins that are bank, that are going to come on, again, mostly mid and Yang Ming early, that are going to give us a tailwind in those spaces. And then there's this third chunk of these opportunities that we continue to work that -- are they in the bank? But no, they're unique to us though versus just a contract renewal that we're competing on head-to-head with our competitor. These are unique opportunities where we're targeting specific customers to generate value long -- not only, I think, for next year, but also long-term by using these tools that we have with our real estate and our property.

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Keith E. Creel, Canadian Pacific Railway Limited - President, CEO & Director [47]

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I think the other thing to remember is, business be it come to Vancouver, be it come to Prince Rupert is not a 0-sum game for the Canadian ports. The Canadian ports and the intermodal space, international intermodal steamship lines are winning share because of both railroads' compelling service and operating into the Midwest. That's not changing. That dynamic has not changed. There's a cost advantage and a service advantage that both railroads get to enjoy. Now is the mix changing a bit? Yes. But at the end of the day, again, it's not a 0-sum game and there is space for both railroads to do well. That's the bottom line, which represents growth. Now varying degrees of growth? Yes. But again, it's not 0 for one and all for other [either].

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John Kenneth Brooks, Canadian Pacific Railway Limited - Executive VP & CMO [48]

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We've had a tremendous -- to that point, Brandon. We've had a ton of success this year in our transload development, in our Shoreham Facility in Minneapolis. That Minneapolis market is unique to CP. It's not directly competitive with our Canadian competitor. It's been a big growth engine. And I expect it to be a -- continue to be a strong growth engine for us, not only in the international space, intermodal space, but also in terms of exports and opportunities in and out of there. And again, that's an opportunity that we're enjoying that really has nothing to do with our competitor.

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Keith E. Creel, Canadian Pacific Railway Limited - President, CEO & Director [49]

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And we've chosen our partners carefully. Our partners will benefit from the value of our service, from the value of our franchise, the capacity we have in our terminals, the shorter routes to the markets from Vancouver to Chicago, Vancouver to Toronto, Vancouver to Montreal. At the end of the day, they're going to bet -- get the best service in the marketplace, which is going to allow them to grow with their customers in their marketplace, which is a win-win for both of us. That thesis has not changed, and it will not change regardless of the competitive option that's out there because our product at the end of the day, (inaudible) not by what we say but by what we've done and what they've experienced. If they can take it to the marketplace with the quickest routes and the most efficient, reliable route to the marketplace, it's a very compelling value proposition, which we feel confident. And confident will allow them to grow their own unique share on their shifts which (inaudible) we -- we're going to benefit from.

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Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [50]

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I appreciate the thorough answers. It sounds like the constructive tension is working. And Nadeem, on your leverage profile, remind us, again, your target? And by a -- or I guess, walking away from the buyback this quarter, does that mean potentially a different focus on dividend over the buyback in the future?

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Nadeem S. Velani, Canadian Pacific Railway Limited - Executive VP & CFO [51]

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No. I wouldn't read too much into that. So we're -- our target leverage is 2x to 2.5x. We are -- it does get impacted by currency given our predominantly U.S. dollar debt and the Canadian dollar volatility that we've seen the last few years. No, I'd say that's -- a lot of the cash we generate is very back-end loaded. Part of the rationale is to align our buyback with kind of the end of the year. In terms of our capital allocation, we've been very aggressive in increasing our dividend. Our payout ratio target is closer to the 25%, 30% kind of level. So we're going to be balanced going forward in terms of how we look at doing returning cash to shareholders. I think share repurchases are going to be a big part of it, and I think we have a lot of room to grow our dividends as well. So a reminder, we typically do that at our AGM in that April, May time frame.

So nothing changed. Don't read too much into it. It's more of a timing issue. And you can expect further updates on the buyback as we get to the end of the year.

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Operator [52]

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Our next question comes from the line of Allison Landry from Crédit Suisse.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [53]

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Another one on capital allocation, but maybe from a longer-term strategic standpoint. And specifically thinking about some of the tuck-in acquisitions that your main competitor has folded into their network recently to support growth in the intermodal franchise. How do you think about that? And is this something you might consider at any point in the future to increase penetration in the intermodal market?

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John Kenneth Brooks, Canadian Pacific Railway Limited - Executive VP & CMO [54]

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I guess, Allison, what I'd say is it's not something that we're all over today. I think not that we don't consider it and look at every opportunity that might be, certainly, accretive to the business, but we're not in the trucking business today. We're focused on the organic and initiatives that we've talked about as being our growth engine. And you know what, I think there's other ways to develop some of that expertise. If you look at the innovation that the trucking industry in the first mile, last mile business and wanting to really understand that deeply. There's a lot of good partners out there that we focused on, really partnering with strategically to understand -- better understand that space, to build our expertise going forward, without having to spend the capital to buy them.

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Keith E. Creel, Canadian Pacific Railway Limited - President, CEO & Director [55]

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And more to follow on those.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [56]

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Okay. That's helpful.

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Keith E. Creel, Canadian Pacific Railway Limited - President, CEO & Director [57]

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Yes. Allison, more color to follow on that. That's certainly not a space that we're sitting still in.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [58]

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Right. Okay. And then I think you've mentioned, just in terms of the peak season, maybe a sort of modest expectation in terms of how that's playing out. But any commentary on what you're seeing from an inventory level standpoint? Or are the -- are you seeing indications that those have started to come down? Or any thoughts you could offer? That will be helpful.

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John Kenneth Brooks, Canadian Pacific Railway Limited - Executive VP & CMO [59]

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Allison, it's a tough read. Like consumer spending is, frankly, quite robust on both sides of the border. Unemployment, as we know, is low. The markets are performing generally well. So those retail spaces have been -- frankly, have held in pretty well for us. I'm not expecting big things in terms of a big or maybe normal peak as we have seen in the past. But certainly, our transload business in the domestic space has picked up over the last few weeks. And I think we're fairly optimistic that, that's going to continue in the fall here.

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Operator [60]

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Our next question comes from the line of Jordan Alliger from Goldman Sachs.

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Jordan Robert Alliger, Goldman Sachs Group Inc., Research Division - Research Analyst [61]

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Just -- I just want to make sure I clarify what you had commented on in terms of operating ratio in the fourth quarter. I just want to make sure I heard right that you expected, even with the land sale last year, that things should be about flat in the fourth quarter. I think that's what you're referring to, but I wanted to make sure.

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Keith E. Creel, Canadian Pacific Railway Limited - President, CEO & Director [62]

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That's correct.

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Jordan Robert Alliger, Goldman Sachs Group Inc., Research Division - Research Analyst [63]

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Okay. And then just a second question, I know you've touched on a lot of the opportunity set, et cetera, but I'm just wondering on the international intermodal front, given the global trade issues and what-have-you, while I know you have a unique opportunity set, I'm just wondering, is -- does the pipeline get impacted at all in terms of opportunities you may be seeing as people sort of hold off on decisions as to what to do?

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John Kenneth Brooks, Canadian Pacific Railway Limited - Executive VP & CMO [64]

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Well, have we seen -- certainly, with the volume pull-ahead that took place last fall create an inventory gut across the U.S. and in Canada, yes. To the point I was just talking around Allison's question is I think we've seen that subside a little bit. We're seeing a little bit of a fall peak season. But you know what, we're -- until a lot of these trade resolutions get ultimately resolved, I think, yes, that continues to be a cautious area. We do -- in the West, we have seen some blank sailings continue as volumes have been muted with some of our steamship lines, but you know what, that's sort of a watch-and-see, that's one we're keeping close. And frankly, there's other areas to attack that can create some unique opportunities in that space outside of just going after and trying to win some additional -- that steam line -- steamship line business.

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Operator [65]

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Our next question comes from the line of Ravi Shanker for Morgan Stanley.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [66]

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If I can follow up there, international intermodal question. Some of the U.S. rails are now going to start to openly acknowledge that you're seeing a share shift from the U.S. ports to the Canadian ports. And you mentioned kind of Vancouver being a shorter distance to Chicago and such. How early innings are we, do you think, in that share shift? Do you think a bulk of that has happened and we stabilized here? Or do you think more of that volume keeps coming your way?

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John Kenneth Brooks, Canadian Pacific Railway Limited - Executive VP & CMO [67]

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Well, I -- yes, I think the -- Vancouver has benefited in that process. I think overall, the base though is down, so some of that might be muted in terms of the real value of what has shifted between the U.S. ports up to Vancouver. I can tell you, I think we think it's an ongoing value proposition that we're targeting, whether it be in the Minneapolis market or in the Chicago market.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [68]

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Okay. Got it. Just a follow-up on crude by rail. It's encouraging to see you saying that we're pretty close to getting the volumes moving with the exception for crude by rail to the curtailments. But are you still looking at crude by rail as a 2- or 3-year window of opportunity? Or do you think with -- in DRUs, this becomes more of a longer-term opportunity for you guys?

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Keith E. Creel, Canadian Pacific Railway Limited - President, CEO & Director [69]

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Yes and yes. We think it's 2 to 3, our best guess based on the probabilty of when pipelines might be built, but we think there's a high degree of probability that a DRU will come to fruition. And again, this railroad is uniquely positioned to benefit from that, be it built in Hardisty, which we will uniquely serve or Edmonton, which we would equally serve. With destinations that offer franchise strengths with optionality to our customers.

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John Kenneth Brooks, Canadian Pacific Railway Limited - Executive VP & CMO [70]

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Yes. I don't -- just to build on Keith's comments like I don't see any imminent pipeline coming on to play that this 3-year opportunity -- 3 years ago, to me, it still feels like a 2- to 3-year opportunity before we realistically see new pipes.

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Operator [71]

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Our next question comes from the line of Justin Long from Stephens.

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Justin Trennon Long, Stephens Inc., Research Division - MD [72]

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Wanted to follow up on just kind of the cost opportunity going forward. Nadeem, I know you gave kind of an initial headcount look for next year, maybe flattish to slightly up. But as we think about the company-specific opportunity for cost improvements in the business, is there anything you would highlight into 2020? I know we've talked a lot about kind of volume and revenue opportunities that are cost specific -- or company specific, just wanted to get your take on the cost side of the equation.

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Nadeem S. Velani, Canadian Pacific Railway Limited - Executive VP & CFO [73]

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I mean we'll get into it in January. A couple of things I would point out, we have a very easy comp in Q1 given a very difficult winter and the catastrophic incident that we had that had a huge amount of casualty cost. So certainly, that's a tailwind to us in Q1. I'd say some of the headwinds could be pension depending on how interest rates settle at the end of the year but certainly, pension could be a bit of a headwind. Beyond that, certainly, we've shown what we could do in terms of operating leverage when volumes are growing. And this quarter, we've shown what we can do from a cost control point of view when volumes are flat to slightly down. So it is in our DNA to improve our cost, it is something that we're very focused on. We're going to drive the earnings one way or another. You're not talking about potential when you're talking about CP, it's -- you're seeing the real execution of cost takeout.

And I know my boss has an expectation of what we do as an organization in terms of continuing to take out our cost and doing it in a constructive way and doing it while not compromising safety or service. So all that to say, we do have a number of initiatives in place, some of the items we highlighted at our Investor Day a year ago, as we continue to get the benefits from the new grain cars and what that means to our overall capacity and throughput, both on the loading side and on the unloading side, the density of our grain trains, what we are doing on the locomotive modernization side and what that means to the overall fuel efficiency, what that means to reliability, the overall network fluidity.

So we do have other productivity initiatives that we have direct capital investment tied to. Some of things that we're doing on the technology side that we've put in place, whether that's RPA, Robotic Process Automation, that's helped drive our headcount down that we'll continue to see opportunities on that side. So -- I mean we could go on for -- at length with other initiatives. Suffice to say, we've taken our OR down to industry best this quarter, and we expect to -- that to continue.

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Justin Trennon Long, Stephens Inc., Research Division - MD [74]

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Great. That's helpful. And Nadeem maybe just to follow up on pension. If rates stay in line with where they are today through the end of the year, any initial take on what that pension headwind could look like in 2020?

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Nadeem S. Velani, Canadian Pacific Railway Limited - Executive VP & CFO [75]

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There's 2 elements to it. There's our service cost. Our current service cost that's above the line, and then there's the recovery that we've seen in the -- below the line that we've benefited from. It's a little early to say. I don't want to give you numbers based on something that's 3 months away from setting in stone. So let me just say, Justin, let's stay tuned to January. It's just a bit of a fool's errand to set up an expense assumption based on something in October when there's such volatility in overall treasuries right now.

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Maeghan Albiston, Canadian Pacific Railway Limited - Assistant VP of IR [76]

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Justin, just building on that. To give you a sense, we've seen the discount rate bounce around by 20 basis points even in the last week. So it really is a volatile environment out there, but happy to help you model that -- a couple of different scenarios off-line after the call, if you like.

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Operator [77]

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Our last question comes from the line of Ken Hoexter from Bank of America Merrill Lynch.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [78]

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Great job on the double-digit growth. But, John and Nadeem, maybe just to follow on Justin's first question there, maybe your thoughts on shifting resources. What are you doing now in terms of employees and the like? I know Chris asked about employees specifically. But costs overall, as you look at volume -- volumes in a flat environment, are you now looking to take more cost out? Or given your growth into next year, are you adding resources?

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Keith E. Creel, Canadian Pacific Railway Limited - President, CEO & Director [79]

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Nadeem, let me take that. Yes, Nadeem, I'll let you add more color. But essentially, Ken, that's something we started back in July. We saw the potential for a softening environment, relative to what our own unique expectations are. And we started to adjust locomotives and adjust people then and adjust hiring and adjust training. Yes, we did some things unique with opportunities to do some training up front. We carried some people a little bit longer than we normally would have to get people engineer qualified, to get people more time in the seat to do some things now that will prepare us to bounce back when the demand comes back. But we've gone through those things, we've got furloughs that we're looking at on a weekly basis, it's not something we want to do, but it's -- certainly, it's our responsibility to do. And we pay very close attention to our metrics. And our metrics are our guide, relative to demand to constantly adjust resources. So it's part and parcel of what we do, week in and week out. You won't hear any major announcements from us saying, "Well, we've woken up and realized we got a soft environment, looking in our rearview mirror. And going forward, we're going to make some monumental shift in headcount." It's just not the way we run the business.

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Nadeem S. Velani, Canadian Pacific Railway Limited - Executive VP & CFO [80]

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Yes, I'm not sure -- much more I can add other than we highlighted the culture that -- and how we operate as a team. So this isn't something that we're -- we just sit in a room and kind of model on a spreadsheet or something. The interactions that we have, that John has with his team on the marketing sales side, working closely with our operating team, working closely with the financial business partners, et cetera, this is something we do on a weekly basis. And to Keith's point, we've been ahead of this, and this is something that you should just expect from us.

So as we go into Q4 and as we go into next year, we are not in a position where we're going to sit there that we have to add a huge amount of resources to meet the demand. We have these conversations ongoing. And if we need to take locomotives out of storage and put them back into the rotation, absolutely, we have that ability, and we can move that fast. If we need to manage those furloughs that Keith spoke to, we can adjust that very quickly. So we're certainly not going to build the church for Easter Sunday, but we're not going to compromise our service, that's -- that we've worked hard to get to industry-leading levels. And so it's balancing both the service and the cost. And it's something that we feel we're very good at, and we can adapt very quickly on both ends, whether having to resource up or resource down.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [81]

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I appreciate that. And if I can just squeeze in my follow-up real quick. Just Keith, you mentioned, I think, maybe 4 times about not chasing business and that you won't do it. Is this something where you're seeing increased competition? Or are you just talking in general what you would expect given the efficiency that you and your peer have and recent contract switching? Is there something that's heating up that you're raising that more frequently during the conversation or just preempting it?

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Keith E. Creel, Canadian Pacific Railway Limited - President, CEO & Director [82]

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Yes. Not at all, yes. It's just more restating and making sure that people clearly understand philosophically what we believe in and we know to be true is the right way to run this business in a long-term, sustainable basis.

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Operator [83]

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And there are no further questions at this time. I'll turn the call back over to Mr. Creel for closing remarks.

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Keith E. Creel, Canadian Pacific Railway Limited - President, CEO & Director [84]

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Okay. Well, thank you for joining us today. I certainly hope after this robust discussion with questions that people walk away with the same sentiment and view that we have. This team is equipped and proven to manage responsibly when we have tailwinds and certainly to manage responsibly when we have headwinds, which we're currently going through for the long run. Long-term, sustainable, profitable financial results that our shareholders, our customers and obviously, our employees all benefit from. We expect to close 2019 strong in line with our guidance, which is going to set us up for a very encouraging fourth year of performance, leading the industry in growth as well as earnings, earnings in RTM growth in 2020 and beyond.

With that said, we look forward to discussing our fourth quarter results in January.

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Operator [85]

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And this concludes today's conference call. You may now disconnect.