Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific's Conference Call today. The slides accompanying today's call are available at www.cpr.ca. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to introduce Nadeem Velani, VP, Investor Relations, to begin the conference.
Thank you, Sharon. Good morning, and thanks for joining us. I'm proud to have with me here today Hunter Harrison, our CEO , Andrew Reardon, Chairman of CP's Board, Mark Erceg, EVP and CFO , Paul Guthrie, Special Counsel to the CEO, Keith Creel, President and COO , James Clements, VP, Strategic Planning and Transportation Services, and joining us today, Bill Ackman, Member of Canadian Pacific's Board and Pershing Square Capital Management Founder. Before we begin, I want to remind you this presentation contains forward-looking information. This presentation also contains non-GAAP measures outlined on Slide four. The formal remarks will be followed by Q&A. In the interest of time, we would appreciate if you limit your questions to two. It is now my pleasure to introduce our CEO, Hunter Harrison.
Thank you, Nadeem, and good morning to everyone. Thanks so much for joining us. My job today is to facilitate and try to provide some clarity to this whole issue now that we're faced with. I've gotten a lot of questions from the audience here about why now, why we're trying to do this transaction. Let me just give you a little bit of background. We, the Rail industry, came out of 2014 with a substantial amount of criticism about the lack of infrastructure and to being able to handle traffic throughout North America. We addressed those concerns very seriously, and we took a look at enhancing infrastructure and doing some things differently. We found that we were met with opposition from local communities with kind of the "not in my backyard" mentality.
So we're faced with an issue that we're a common carrier. We don't have a choice about hauling these goods. At the same time, we have communities that would prefer not to see infrastructure added into their backyard and at the same time, people are opposing consolidations or merger actions. So the question becomes, what do we do? What do we do in the future? What do we do in the East? What do we do with additional growth if that infrastructure cannot be added? So as we went through those issues, one of the things that quickly came up was potential consolidations, where we believe, and we've talked a lot publicly about, that we think we can, without adding infrastructure, add capacity to particularly the infrastructure east of the Mississippi River.
Now, we engaged in very brief conversations with the CSX for only really one day, and that was kind of blown out of proportion. Then we were getting requests from the shareholder community saying, "Your numbers have been pretty compelling. It looks like to us you've done an excellent job. Why would you not take those type numbers and marry up with a eastern road, for an example, and create even greater synergies to solve some of these issues?" So we started down that road to explore those opportunities. Now we've come to this point where we've had one meeting with our friends at Norfolk Southern. That was Mr. Squires and I, face-to-face. We have tried to engage, and one of our top priorities is just to get the Norfolk Southern to sit down and engage in a dialogue with us. We see no downside there.
So what we're going to try to do today is go through several important buckets. We're going to talk about the trust structure, and Paul Guthrie's going to speak to that. James Clements is going to talk more about the regulatory environment and some of what we think are rather unique ideas to improve some of the competitive landscape, once again, without adding infrastructure. Mark Erceg, our relatively new CFO , is going to talk more about the latest structure of the deal. Keith is going to talk about some of the operational issues. Then finally, Bill Ackman is going to talk to us more from a shareholder perspective and Pershing Square's experience in the past. Let me just take one minute to clarify a couple of issues that are kind of a little personal needle in the side to me.
I've been involved in several of these transactions, and there's been reference by NS to the potential CN-IC or KCS-IC, excuse me, merger in Kansas City, which was turned down as a result of a trust and that's totally untrue, it was not. Kansas City Southern changed their mind at the last minute. The trust structure was not in question. In the case of the CN-IC merger, people have talked about disruption, have talked about all these things that mergers do. That merger was okayed in advance. They gave away some of their oversight responsibilities. They were very complimentary of the job that the two organizations had done for the shipping public and just because one railroad can't implement a merger successfully doesn't mean another can't.
Finally, one little piece, one little tidbit I'd bring to your attention is I had a visit with the then CEO of Norfolk Southern back in the mid-2000s, where they invited me over to their office car in Augusta, Georgia. A t that time, I think it was 2006, brought to my attention that they were very pleased that they were hopeful that they could have a quarterly result that started with a six. Now, that's effectively 10 years ago, and they're trying to still get to the point of starting with a 6. So I think it raises some real issues as we go forward about the potential credibility of what can and cannot be accomplished. So I'll have some additional remarks at the end, and we plan to have a Q&A session and we're here as long as you want to ask questions.
I think the other group, the call was limited to one hour. We're willing to stay here as long as it takes to explain our proposal to the public and most importantly to the shareholders because that's really what this is all about, is creating shareholder value. So with that, Mark, let me turn this over to you so if you can outline the proposal for us.
Thanks, Hunter. As Hunter just indicated, we remain committed to our strategic vision, which is to create an integrated transcontinental railroad with the scale and the reach necessary to deliver unsurpassed levels of safety and service to our customers and our communities while also increasing competition and creating significant shareholder value for both NS and CP shareholders. Consistent with that, we have modified our already generous offer in three important ways. First, we're prepared to dramatically reduce the regulatory risk by agreeing to close the transaction into a voting trust, which Paul Guthrie is going to explain to you shortly. Second, we've made our offer significantly more attractive financially by agreeing to use a trust structure. NS shareholders will now receive their cash and their stock considerably faster than before.
Just as importantly, we've agreed to increase NS's pro forma ownership from 41%-47%, allowing NS shareholders to more fully participate in and benefit from the significant value creation we expect to create through this transaction. Finally, we're prepared to complete our due diligence within three weeks in order to expedite the transaction. Now, if we put all this together, we get a revised offer of $32.86 in cash and 0.451 shares of stock in a new investment-grade company, which will trade on both the TSX and the NYSE under an as-of-yet-to-be-determined new ticker symbol.
Boiling it all down, because NS shareholders will receive cash and stock considerably faster than before and with much less risk, I might add, and because of the increase in pro forma ownership, our revised offer actually represents a 77% premium versus NS's unaffected stock price of $79.14 a share, which provides 30% more value than our previous offer. Probably just for clarity, I should mention that CP shareholders would exchange their shares on a one-for-one basis, which would result in 53% pro forma ownership for existing CP shareholders. Now, after a lot of careful study, we believe there's an enormous amount of value which can be unleashed by combining our two great railroads. Between pre-merger, what we're calling operational improvements, and what we're also referring to as post-merger combination synergies, we expect to capture an incremental $1.8 billion, and that's USD, per year.
Operational improvements like fuel efficiency, velocity improvements, improved asset utilization, yard and terminal consolidation, and workforce optimization, which we would expect to manage via natural attrition, those will all begin upon trust approval and phase in over four years. These operational improvements represent over 70% of the value that we've identified through our studies. Now, it's very important to understand that these operational improvements are not contingent upon final STB approval. To be clear, we're not shooting for the moon here. Rather than that, pretty much across the Board, we're just looking to move NS up to the industry standards, and we're very confident that we can do that. Just as one example, let's just take fuel efficiency. Right now, CP uses 1 gal for every 1,000 gross ton- miles. Now, in contrast, NS uses 1.28 gal. That's obviously an enormous difference.
By simply bringing NS's fuel efficiency in line with the Class I industry average of 1.12, we can save $100 million per year. Now, combination synergies from extended reach and longer length of haul, market share gains from improved service and interline efficiency, those will only become available upon full STB approval, and at which time they will also phase in over a for-year period. Then in addition to the operational improvements and the combination synergies, we also see an opportunity for meaningful tax efficiencies, which we believe will result in an effective tax rate below 30% for the combined entity. Then finally, we expect to uncover and monetize redundant or underutilized assets along the way, although we've not specifically factored that into our analysis.
Now, beyond the significant value a CP-NS combination would create, our offer also gives NS shareholders a vested interest in a combined network with better growth prospects than what either one of us would be able to achieve on our own. I should add a larger and more diversified book of business, which is less dependent on commodities, which, as we all know, have been and can be very volatile. For example, thermal coal that currently represents about 15% of NS's business. By contrast, it only represents 1% of CP's business. If we put these two companies together, we'll both have a more sustainable business and stable business going forward. The last thing I should probably quickly point out is that we plan to combine these two historic companies in a very responsible way by maintaining a strong investment-grade balance sheet.
Leverage when the trust closes is expected to be about 4x , which would be BBB at S&P and Baa2 at Moody's. Then because of the significant cash flow of the combined entity, we plan to quickly deleverage. By 2017, we expect our leverage to be 2.8 times, which we believe would support a BBB+ or Baa1 equivalent credit rating. With that, let me turn the call over to Paul Guthrie. Paul is going to explain in detail how a voting trust really works because there's been a lot of miscommunication on this topic recently.
Thank you very much, Mark. Paul Guthrie, I'd like to address both the voting trust and regulatory matters before I turn this over to my colleague, James Clements. As contemplated by the 2001 merger rules, CP will apply for authority to use a voting trust. Under the rules, CP will have to show how the proposed trust will insulate the transaction from unlawful control violation and why use of a voting trust would be in the public interest. First, let me say that there has been an assumption that CP's plan would put NS into trust. In fact, CP contemplates that either company could be put into trust, and at this time, we are leaning towards putting CP in trust. It is clear that Hunter Harrison, going to NS as the CEO, is greatly in the public interest.
We are confident that his proven track record will result in NS being a better railroad. We expect that approval for a voting trust will be forthcoming and anticipate such approval would occur some two to three months after our application. I'd like to turn you to the first of the slides that's entitled STB Criteria for Voting Trust Approval, and I'm going to take you through a few points on that slide. On the left-hand side, you will see the number one and insulation from unlawful control violation. An independent trustee would be appointed to oversee either CP or NS while in trust. Whether CP or NS is in trust, Mr. Harrison would be CEO of NS and will sever all economic and other ties with CP, including stock and pension rights.
Under the second bucket, consistent with the public interest, the public benefits will result from improved operational efficiency, asset utilization, service, economic efficiency, fuel consumption, and competition. If the transaction is ultimately rejected by the STB and either CP or NS must be divested, operational improvements will have materially increased the value of NS, benefiting all shareholders. These public interest benefits outweigh any risk that the transaction is not approved. I'd like now to take you to the first of the timeline charts, STB Trust Approval. All that I would like to say on this chart is, on May 2016 or earlier, which you'll see at the right-hand side of this chart, close into trust, and at that time, the shareholders will be provided with shares in the new public company and cash. The second chart, the STB Merger Approval Timeline, just sets out the approximate timeline for this transaction.
I don't have any further comments on it. I'd like to turn you to the slide that's entitled Voting Trust Precedent. On the left-hand side of this slide, you will see a very pertinent example. This is the CN-IC merger from 1999, and it's very pertinent, of course, because it involved Hunter Harrison. Hunter Harrison resigned from IC and joined CN as COO. IC was held in voting trust pending the STB approval. The operational improvements began upon Mr. Harrison's arrival. The transaction was approved and the trust dissolved. The five-year oversight period was shortened due to successful integration. All of this was done without any service disruption. On the right-hand side, we set out one example of other transactions. This one's to G&W and RailAmerica. This is the latest transaction that involved a voting trust. That was in 2012.
As I said, there are other examples of this. I'd now like to turn you to the slide that deals with regulatory matters in general. It's entitled Exceeding the Public Interest Standard for Mergers. First of all, let me say that a lot has been said and written, some quite recently, about the difficulties of overcoming the regulatory standards. We are confident that the current STB Board will judge our application based on its merits, under the proper legal standard, and when they do, they will act favorably on it. So I'd like to take you to the left-hand box. This is the public interest standard, and this is under sustainable and demonstrable gains in important public benefits. First of all, service and safety improvements. The merger will result in an efficient, reliable, single-line service. It will ease Chicago congestion.
Under sustainable economic and environmental benefits, it will increase equipment utilization, reduce fuel consumption, streamline facilities, create capacity through efficiencies, not new construction, and it will reduce highway congestion. On the right-hand side, and my colleague, James Clements, will be talking about this in a moment, there will be an enhanced there's a necessity to show enhanced competition. This merger will create a stronger railroad, better position to compete. It will open new competitive opportunities. The proposed access model will introduce meaningful competition. Let me say in closing that the public interest test is a balancing act. The proposed end-to-end CP-NS merger does not result in any potential anti-competitive impacts, nor is there any reason to assume that other carriers would feel the need to merge in order to compete. It creates a balanced, competitive industry. Thank you, James.
Thanks, Paul. CP is proposing to change the status quo and introduce an innovative approach to pricing and service that will enhance competition for our customers. The first piece is about bottlenecks, and I think it's important for me to outline what a bottleneck is and what we're proposing to do. Today, in the industry, if you have a move from A - C on this chart, and there's a competitive alternative for a portion of the move, B- C, this is the situation that results in a bottleneck. The segment from A - B is what is called the bottleneck segment. As a carrier that moves from A - C, CP in this example, we do not have to quote a rate from A- B. We only have to provide the shipper with a rate through to C.
They don't have access to the competitive alternative of B - C. Where we would go with the proposal is we would provide the customer the alternative to see what the option of B - C is by providing them with a rate from A - B as well as a rate from A- C if that's what they'd like. They are then free to make their own choice based on the alternatives and the competition that would exist. We don't think that this is an onerous option for the shippers or for the railway. In fact, it's got direct parallels to how we price today in Canada and we're also not the only ones that think this will enhance competition. This is what shippers are asking for today in the U.S. regulatory environment.
And then to further competition, we are also proposing what we are calling modified terminal access. In terminal areas, CP would allow another carrier to come onto its railway in order to serve CP-served shippers when we are not providing service or we're not providing competitive rates to the customers that we serve in those terminal areas. Again, we don't see this as an onerous option for us to provide out to the shipping community because we are in charge of our fate here. If we do a good job and we provide service, which is one of our core principles, and we provide competitive rates, then we're not going to be faced with the other carrier coming across our network. The other thing I want to make clear here is this is not open access.
We're not allowing a second railway to just run all over our network and come on, service shipper at one of the points, and run across our network wherever they want to take that traffic. It is simply an option where the second carrier can come in at the terminal area, go to that customer, and provide that service to them and take it back to their railway to haul it across their network. I think this is a compelling competitive alternative, but I'm not the only one. Today, the STB is allowed to grant this as a remedy to shippers if they determine that a railway in a terminal area is providing anti-competitive-type service or rates and so we are just simply bringing forward and simplifying this remedy that has been contemplated by the STB as allowing access for the shipper and options.
If we take these two pieces together, both the terminal access and controlling the bottleneck rates, we will provide enhanced options and competition to the shippers across all of our network. Now, you may have some questions about short lines and when we look at that, we would also be proposing that we remove the paper barriers for the short lines that we don't own the track and where it is the short line, the remedies that I've just described in terms of bottleneck pricing and terminal access would be allowed to any of the short lines on the CP-NS network. This framework, plus the service and reach of the combined network, provides competition to all the shippers in the proposed transaction and now I'll hand it over to Keith.
All right. Thanks, James. I'm going to spend my time and my comments providing color from an operational perspective to set the record straight. Last week, I listened to Jim's comments and the NS team's comments, and I've reflected on them and thought about them. It's apparent to me, just simply said, with all due respect, NS does not understand the facts of our transformational journey that we started mid-2012 at Canadian Pacific. NS does not understand the way we run an efficient railway day to day, shift to shift, week to week. In spite of the naysayers, back in 2012, it seems like it was yesterday when they all said that we couldn't. This team has taken, with this operating model, this company, this franchise, from being an industry laggard to an industry leader.
It's done day to day by implementing a scheduled railroading operating model that focuses on sustainable principles, not cut-to-the-bone principles. Providing service, improving the service for our customers. Asset utilization, turning assets, sweating assets, making asset use in a very asset-intensive industry more efficient. Controlling our costs, not cutting costs to the bone. Understanding what your costs should be and controlling and creating a discipline so that you progressively and constructively manage those costs. Developing people. People are the folks, the key asset that make this happen day in and day out in a railway industry and doing it all safely. Respecting the communities we operate in and through. Respecting our employees. Respecting our moral and professional obligation to run the railway safely.
If you execute this properly, it creates sustainable, profitable results that, yes, produce a very strong operating ratio, and yes, produce a strong cash flow, which, as an operating officer, excites me with an ability to reinvest back at the physical plant to sustain those results on a long-term basis. Be it, number 1, call for cash, protect the safe operation of the railroad. Number two, invest in our physical plant so that we can do things more efficiently, more productively, be it in our terminal, be it on line of road, be it in our yards and finally, invest to increase our capacity to grow with our customers today and in the future. The facts speak for themselves. You can see on the charts that we provided for the industry. Since the turnaround began back in 2012, over 2,000 basis points improvement in the operating ratio.
While significantly, significantly increasing our capital spend of over $400 million more annually. Hardly what I would suggest reflects a cut-to-the-bone philosophy. So now let's frame it up from a service perspective. CP customers at this railway since 2012 have benefited from increased and improved transit times across every lane that we operate in. So if you're a customer that owns your own cars, I would say that matters and it matters because you don't need to own the same number of cars today that you would have owned in 2012 before this turnaround began. Now I want to speak specifically to service-oriented truck competitive traffic. I believe that's the exact quote that was used. By definition, to me, better said in the industry, that's domestic owned business.
This is another area that we've created significant success contrary to the naysayers or the lack of understanding at the NS here on the Canadian Pacific Railway. Where we've revised the service schedule. Back in 2013, we cut a day off of our key domestic routes going from Toronto to Calgary to Vancouver. Our customers that have benefited from this have awarded this company and recognized that service improvement with over 20% growth since those operational service improvements and changes were made. So to suggest that we don't understand sensitive truck competitive traffic is just not fact-based. Now let's talk about Chicago. Hunter mentioned it. How soon we forget. I'm an operating guy that actually lives in Chicago. I've lived there almost the last decade of my life. Blood, sweat, and tears for two railroads, not one, trying to manage efficient operations through a very capacity-constrained Chicago terminal.
The single largest interchange location in North America is in Chicago. So for any railroad to suggest that the industry would not benefit, that our customers would not benefit, that their customers would not benefit from rerouting and moving traffic away from that congested gateway, to me, again, is not fact-based. It's not substantiated. If you understand Chicago, Chicago is a place that depends upon the Belt carriers in Chicago. The Belt Railway specifically, as you see on the chart, for the lack of a better term, is the heart of Chicago when it comes to operations. All the major Class I railroads interchange traffic in Chicago. All that operate in Chicago interchange in the Belt. We're all very dependent upon the Belt. When the Belt runs well, Chicago has a chance of running well. But when I say run well, it's fragile at best.
So to suggest that you should, again, take our suggestions that we can improve efficiency and create capacity in Chicago with a grain of salt, as I've read by some STB commissioners, to me, again, is reckless. I would suggest to you and those in this industry that clearly understand the pains associated with 2014, as I sat in STB hearings and explained how Chicago worked and explained how this industry for Chicago, for the weather, was in complete gridlock that affected this entire country, to suggest that an improved Chicago doesn't serve the public interest, again, I think is unfounded. It's not fact-based, and it's irresponsible.
I would also suggest in closing, before I turn it over to Bill, those current today serving STB commissioners that held those hearings, that took those phone calls, that dealt with concerned shippers when this country was in gridlock. I would suggest they would agree with my reflection on the memories of and the impact of a better Chicago. With that, I'll turn it over to Bill for his comments.
Thank you, Keith. So Hunter asked me to give a perspective, the investor perspective on the transaction. So I'm going to begin with what I would call a flow chart. If you start on the way you look at this transaction, there are really two choices. You can stay with the standalone plan. In the standalone plan, Jim Squires has a goal of getting to a 65 OR in five years. Alternatively, you can pursue a merger with CP. We believe a transaction could be executed, due diligence completed by the end of the year, and then we'd file an application for a trust. If the trust was not approved, again, what we believe to be a very unlikely event, you're back to square one with Jim Squires.
If the trust is approved, Hunter Harrison would immediately join Norfolk Southern Railroad and would run the railroad and start implementing the benefits that we've heard about here. Just thinking about it, touching on what Paul Guthrie had to say, if you put CP in a trust and Norfolk Southern is outside of the trust, Hunter is simply leaving Canadian Pacific and joining the Norfolk Southern Railroad as a CEO. Hunter is, other than the employment contract we have with him that ties him up for another 20 months or so, he's a free agent. He's free to leave absent that contract and go take another job. He would take another job and run another railroad. That is certainly something that the STB really has nothing to play a role in.
With respect to CP staying in trust, well, the good news is that CP is being run extremely well and has been run extremely well by Hunter and by Keith. I think Keith demonstrated when Hunter had to take an absence earlier in the year, when Keith was effectively the interim CEO of the company during that period of time, how well this railroad runs with Keith at the helm. Assuming the trust is approved, that we expect a May 1st closing, on that date, shareholders would receive $32.86 in cash and 0.451 shares of a new company. We're calling it CP-NS. The Canadian Pacific shareholders would turn in their stock certificates, and they would get a share in the new CP-NS on a one-for-one basis. This is an entirely new company. It has new management. Hunter is the CEO.
It's got a new capital structure as part of the transaction. It's a holding company that owns interests in two railroads. One Canadian Pacific is held in trust. One is held outright and it's going to have a different business plan going forward and we believe that company has enormous value and I'm going to take you through the details on that transaction and on the valuation. About, call it, 18 months later, on December 31st, we expect to have an answer from the STB and at this point, I think it's difficult to precisely estimate the probability, although we think it is likely that it gets approved, certainly more likely than not. But let's assume it doesn't get approved. In that circumstance, the holding company, our CP-NS, would have an obligation to distribute either CP or NS to shareholders in a spinoff to separate the two companies.
Hunter would continue as CEO of NS. Keith would continue as CEO of Canadian Pacific. Shareholders could choose to retain both, either, or none of those shares in that circumstance. All of the operational benefits, however, that Hunter will implement during this period of time while we're waiting for the merger approval will inure to the benefit of the long-term NS shareholders. The STB approves the transaction. The merger closes. CP-NS becomes one company. The management team and the company consolidate. We get the benefit of synergies. Turn to the next page. Not only is this a substantially more value-creating transaction, it's less risky. The reason why it's less risky is here we have proven management. In the case of Jim Squires, Jim is not a proven railroad operating executive.
This is the first time NS has put forth an intermediate goal in terms of an OR target. They have been stuck in a low 70s OR, we'll show you, for the last 20 years. It's a real leap of faith for people to assume that all of a sudden, beginning a week or so after the CP offer, the company now has a plan to get to a 65 OR. So if you want that plan, that's worth $90 a share according to analyst estimates. The stock is trading above that. You should sell your stock in NS. If you want this plan and what would happen in our plan, there would be a merger. We'd close a trust. Hunter would become CEO of NS. Keith would run CP. We'd follow the path as I described before.
In the event the merger does not close, the non-closing scenario, the stock of CP-NS on the day of closing, the stock certificate you receive, we believe, will be valued at $125 a share. If the transaction ultimately closed, the stock would have been valued at $140 a share. So the right way to think about it is it's worth $125, plus you have some probability of receiving an extra $15 of value, depending upon your estimate of the probability of that transaction. If you go to Page five, talk briefly about the NS plan, which calls for a 65% OR by 2020. As I made the point before, this is the first time they've issued medium or long-term guidance. You can hear in this analyst's own words, I quote, "The Citi analyst, Norfolk's standalone case lacks detail, upside.
We credit NS for diverging from its tradition of not issuing financial guidance. Whether its OR and EPS growth targets lack the necessary detail or upside to convince shareholders that further overtures from CP would be worth ignoring. Now let's look at the long-term record. Let's look at the last 10 years that Hunter was referring to. This is a chart of all of the Class I railroads, all seven. The bright red line is CP from 2006 to the present. The black line is NS. You note beginning in 2006, looks like around a 73% operating ratio, and today something north of a 71% ratio. It's bounced around in that corridor, but really, there's been no progress made in the last 10 years.
Now if you look at it on a relative basis, NS was the number two railroad in terms of operating performance for 2006, 2007, and 2008. Then if you look at it in the last really five years, it's gone from it's in the bottom of the pack, and most recently and now is dead last at number seven. Let's assume for a moment that NS is able to achieve a 65 OR in five years. Let's look at analyst estimates, going again back to Citi. "Based on our math, NS's target for a sub-65 OR in 2020 was largely priced into the valuation prior to CP's proposal. Assuming 4% revenue growth, a 65 2020 OR, and further buyback activity of $750 million-$1 billion annually, we see 2020 EPS of roughly $9.
Assigning a 14 x and a 10% discount rate implies a mid-$80s to mid-$90s valuation in line with the current merger-affected stock price and up modestly from the $80 price pre-offer." So that's your upside case in the standalone circumstance. As we pointed out, the synergies here, the substantial majority of them, are created by improving Norfolk Southern railroad and those will be achieved regardless as to whether or not the ultimate merger is approved. If you look at the chart at the bottom, $1.26 billion of pre-merger operational improvements that Hunter will implement along with the rest of the NS team and then layered onto that, if the transaction closes, we have additional cost synergies of $270 million. We have some revenue synergies of $225 million and we have annual tax savings begin at $200 million per year.
So the benefits are material if the transaction closes, but you still get, call it, 2/3 of the benefits even if the merger does not ultimately get approved. In terms of benefits to the public, those have been outlined quite well by the team. But one of the counterpoints that has been made by NS, they say, even if the proposed combination were ultimately to be cleared, it'd be subject to a wide range of onerous conditions that would reduce the value of the stock consideration that has been proposed. What's interesting here is there is no obligation for the company to go forward with a merger. If the STB comes back and imposes conditions that are too onerous that would destroy shareholder value, then the companies will simply separate. The spinoff will take place. The merger will not take place and you'll have Keith running CP, Hunter running NS.
Shareholders will already have received the $33 a share in cash 18 months prior to that STB denial. If you go to the next page, just going to line up each transaction. So in the standalone plan, you get $0 upfront and the fair value of the equity, if you believe that management can execute on a 65 OR in 5 years, you get $90 a share, which is less than the current market price for the stock. The CEO, Jim Squires, he does not have a proven track record for turning around railroads. If you look at the two CP scenarios, on the day the transaction closes in May, you get, call it, $33 a share in cash.
You get a 0.451 interest in a new company, which will be valued, that interest will be worth about $92 a share at the time, and for a total combined value of $125 million. You get proven management, Keith at CP, Hunter at NS, with a superb long-term track record. Again, in the approval transaction where the STB goes forward, you get $140 of value in that same excellent operating team. So how do you value this transaction? Because there's been a lot of misleading information about this. Even some analysts get it wrong, to be honest. The point we're making here is if this were a cash transaction, you could simply line up $90 versus $120. Clearly, one's better than another.
Or even if it were a very large company buying a small company, you could look at the value of the acquiring company's stock and you say, "Oh, I'm getting half a share of that. I can value that." But here what you have is you have two companies that, on an unaffected basis, had almost identical market caps: CP at $23 billion market cap, NS at $24 billion market cap. Now these two companies are coming together and when these companies come together, a lot of changes take place. Number most importantly, we have a new CEO at Norfolk Southern, a new operating plan, a new approach to railroading. Number two, you're going to have a different capital structure. Number three, you're going to have Precision Scheduled Railroading, which is not the way the business has been implemented historically. So it's a completely different NS.
You're also going to have an ownership in CP run by Keith. So again, you're getting an interest in a holding company. Instead of owning just one company, CP, it owns two. It has a different capital structure, a different management team, a more diversified base of operations, bigger scale, a larger market cap. It's a completely different enterprise and in a transaction like this, you don't value the company based on where CP stock trades today because the new company doesn't yet exist. You have to value the company based on what it will look like when the transaction closes. So what will it look like? Well, to get to that answer, first we walk through the assumptions that we use, which we believe are conservative and again, we encourage. I'm sure analysts will come up with their own numbers. But we start with kind of the base assumption.
So the base revenue assumption we use is consensus estimates through 2018. Beyond 2018, we assume 3% revenue growth, which we think is a conservative assumption. We don't give any benefit revenue synergies because this is, again, a base revenue assumption. We have a base operating ratio, and we use, again, consensus estimates and then, in case of OR, it stays at 58% for CP and 68% for NS beyond 2018, again, excluding operational efficiencies. Then we layer on top of that the operational efficiencies. We assume basically a four-year phase-in for the transaction closing in May. So 17% of the synergies are achieved from May 1st to December 31st. Cumulatively, another 25% gets you to 42% by the end of 2017, another 25% by the end of 2018, another 25% by the end of 2019 and the last stub period, you get the full synergies in 2020.
Now, my experience with Hunter Harrison, the last time he told me it would take four years, and it took two and a half and what I like about 71-year-old CEOs is they're motivated to get things done promptly. So I would say these are probably the most conservative estimates in terms of the synergy realization. In terms of the post-merger combination synergies of about $500 million, we just phase those in 25% a year and again, we think this is conservative. Tax synergies, obviously, you get immediately. We put no value for real estate or asset monetization and if you look at how much asset value excess locomotives, other equipment that were extracted from CP, we've got many, many years left of deferred locomotive purchases because of that monetization. It can be very material.
Let me point out real estate. This is a particular area of mine. What's interesting about Norfolk Southern is vast ownership of real estate in some of the most valuable real estate markets in the world, the Northeast, and certain parts of the South of this country. On taxes, we assume a 27.5% tax rate for CP and a 36.2% for NS. This says NS while in trust. But again, the likely outcome is that CP will be in trust, and there are no tax benefits while the entity is held in trust. Post-transaction, the combined entity will have a tax rate below 30%. In terms of CapEx, we use consensus estimates, and we make flat CapEx as the percentage of sales.
In terms of valuation, we use a 17x of 2021 EPS, which we expect to be CAD 27, assuming STB approval, or a 16x of 2021 of CAD 25 with no STB approval. The reason for the slightly higher multiple is as the company generates more earnings, there's more free cash flow conversion. This turns into about a low-20s free cash flow multiple for the company. We use P multiples that are similar to where CP and CN trades because of their higher margins and their higher free cash flow conversion. Then we discount those value of the company based on 2021 earnings in 2020. Then we discount back the value of the stock at a 9% discount rate. How does that look?
If you go to the next page on transaction valuation, you start with the earnings estimates of $25 and $27 for 2021, a forward multiple of 16-17x. The fair value of CP at the time, CAD 399. T his is CP- NS, excuse me, CAD 399-CAD 464. We discount that back to the present. We convert it into U.S. dollars. The U.S. dollar value of the company, $204-$237 a share. So the CP stock that today or closed yesterday at CAD 176. We believe in mid that's, I guess, the Canadian version. We think will be worth between CAD 271 and CAD 215. The U.S. stock, which closed in the 130 or so, we believe will be worth $204-$237 a share. So you get a sense of how much value creation there is on the closing of the transaction.
Breaking this down into stock and cash, the NS shareholders receive 0.451 shares. So 0.451 x the U.S. dollar value of CP, you get to $92. Add $33 in cash, and you get total fair value of $125. In the STB case, it's worth $140 and so you have to probabilistically discount that $140. So somewhere between $125-$140 is fair value and that means a premium to the standalone plan of 39%-55% and a premium to the unaffected price of 58%-77%. Now, these are two of the biggest one of the biggest premiums I've seen for any transaction, particularly one of this scale. Now, this is a complicated way to describe the valuation. I figured people would like a simple version. I like simplicity. So we're going to go to the next page, a much simpler way to think about CP.
So what we've done here is we calculate the new CP NS 2017 EPS. This is based on the assumptions we used before and assuming that only 42% of the pre-merger operational improvements and, of course, 0% of the post-merger synergies are achieved by the end of 2017. So analysts can do their own assessment, but we believe the company will earn approximately $12.29 in 2017. Our valuation on the previous page comes up with a $204-$237 valuation for CP NS. That's a 16.6x-19.3x of 2017 earnings and we think this multiple range is conservative because, again, NS will be in a transformational turnaround at this point in time. CP still has very substantial growth. So earnings are going to grow much more quickly than a standard rail at this point in time.
So we think 16, take the low end of the range, 16.6x, that's a very conservative valuation. In order for the CP- NS deal to be superior to the standalone $90 valuation, CP only needs to trade at CAD 170 a share or $128 . So basically, the stock can go down from where it is today, and this still is a better deal than the standalone plan. So if it trades at 10.4x earnings, it's still a better deal than the standalone plan. So let's look at the track records of the team. Hunter Harrison's track record's very well known. My guess is there are a number of risk arbitrageurs on the phone who don't know Hunter that well. But let me tell you a little about him.
He ran Illinois Central from 1989 to 1997, made it the best performing railroad in North America, 2,000 basis points lower operating ratio than the rest of the industry, nearly tripled operating profit. OR went from 80%- 63% and then, again, Hunter's focused on shareholder value, a five and a half-fold return for the investors in Illinois Central. Then he went to Canadian National when that transaction was acquired in a trust deal and he led the transformation of CN into the best performing railroad in North America. EBIT's up almost threefold. OR from 78%- 67%. This is 67% in 2009, which, as you know, was a recession year. A five-fold return, 5.25-fold return to shareholders and I think a very important point here, and this really gets to whether the changes that are being made are cut-to-the-bone short-term changes.
Even after Hunter left CN, CN has continued to improve. The OR's continued to drop. The revenues have continued to grow. These are changes that have sustainable long-term value and then Hunter went to Canadian Pacific. Again, Hunter only knows how to increase profits by, it looks like, threefold. Many leaves, if you look at the chart. OR from 81%- 60%, a four-fold return for shareholders. But I think this track record speaks for itself. Now, on the next page, we go through Jim Squires's background. Jim is a lawyer. He's educated at a very good law school, University of Chicago Law School. He graduated in 1992 and again, this is just from the company's website. He joined NS in 1992, so right out of law school and he served in several law positions, according to his bio.
He became VP of Law in 2003, SVP of Law in 2004, SVP of Financial Planning in 2006, EVP of Finance in 2007, EVP of Administration in 2012, President in 2013, and then CEO in June, about six months ago, and Chairman a month or so ago. Now, if you look at this bio, obviously, it looks very different from Hunter Harrison. Yes, he's worked at a railroad since 1992, but he's worked on the legal and the administrative side and the finance side, not on the operating side. The problems at NS are not legal. They're not finance. They're not administration. They're operations. Jim does not really have an operating background. I guess his first exposure to operations would have been when he became President.
From 2013 to the present, we have not seen an improvement in the operations of the company. Next slide, we compare the return of Canadian National versus the return of Norfolk Southern over various periods. So we look at when Hunter was at CN, the OR went down 1,170 basis points. The OR increased over that same period by 410 basis points from 1998 to 2009 at Norfolk Southern. Revenue grew about the same, 5% compounded at both places. Since Hunter retired, CN has continued to outperform NS, threefold the return of NS from December 2009 to the present. OR continued to drop from what was already a very low operating ratio by 780 basis points. Revenues doubled NS's growth rate and doubled the improvement in NS's OR.
Then if you look at Hunter's tenure over the last four years at CP in terms of the relative returns to investors, a six-fold return versus Norfolk Southern. Revenue compound annual growth rate of 7% versus -1%. Again, these are comparable periods of time in the railroad industry that were comparisons. These do not look like short-term improvements. Then let's look at the very long-term record. So Hunter joined CN, call it 20 years ago and that gray line that shows the operating ratio dropping like a stone over that period, even after Hunter left CN, that's the CN track record. It's really remarkable. The red operating ratio is basically stable, 84 to about 81. Hunter joined CP in June of 2012, and the OR drops, again, like a stone on an even more dramatic basis than the OR of much more quickly, frankly.
This is my argument about the 71-year-old CEO. He works faster now than he did 20 years ago. But take a look at Norfolk Southern, 20 years and some, it looks like kind of a mountainous period here during the Conrail integration, but back to low 70s OR, 20 years without improvement and then let's talk about we've been here before. So in 2011, we bought a 14% stake in Canadian Pacific with Hunter as our partner. We proposed him to the Board of Canadian Pacific, and we said, "Look, you have the worst CEO in North America, and we have the best and we'd like to replace those two." And the Board didn't like outsiders coming in and telling them their railroad was underperforming. So they came out and said, "We've got a new plan, and we can beat Mr. Harrison," and they really derided our plan.
They made some remarkable statements, all of which are recorded. I encourage you to go to the CP Rising website. It's still left over from the proxy contest. You can watch our analyst day. The CEO on their analyst day said, "Curves and grades is physics and the dismissive comments by Mr. Harrison indicate a clear lack of research or understanding of both." Basically, Mr. Green said the laws of physics would not allow Hunter to achieve the results he's achieved. They said, "Our operating ratio targets for CP are unrealistic and lack credibility." We said the company would get to a 65 OR in four years. The company got to a sub-60 OR in three years. Then because those arguments were not having a lot of credibility with shareholders, believe it or not, the Board hired a consulting firm.
Oliver Wyman is considered the most highly regarded consulting firm in the railroad industry. Oliver Wyman concluded that our multi-year plan the company's multi-year plan was ambitious but achievable. They also concluded that Pershing Square's stated OR target is both unrealistic and unachievable. They paid $5 million to Oliver Wyman to put out a white paper. The white paper said, "Mr. Harrison's never going to achieve these results." It just seems familiar to me. The arguments always go like this. Hunter shows up. He says, "Look, I can fix things." Management says, "We can do better." They put out a new plan. They say, "Now we're going to get it right even after 20 years of failure." Then they say, "Well, what Hunter says he's going to do here are just not achievable.
And not only are they not achievable, but all the customers are going to flee and that's what's going to happen." But when you look at the track record, when you look at Illinois Central, when you look at Canadian National, when you look at Canadian Pacific, when you look at 50 years of what I can say is the greatest railroad of all time, a three-time awardee of Railroad of the Year, just as I was at the recent last year or so where he won again, the facts could not be more stark. The other point I want to make here is, look, I am very confident that the Board of Norfolk Southern is comprised of very high-quality, honorable people that I have a lot of respect for. But what happens in situations like this is that pride gets in the way.
Perhaps in the case of Mr. Squires's, he's been at Norfolk Southern his entire career. He's now made it to CEO. Unfortunately, Hunter showed up six months after he became CEO of the railroad. I'm sure Mr. Squires's would prefer to keep his job. He's fighting awfully hard. This is not about Mr. Squires's job. This is not about the prestige of being on the Norfolk Southern Board. It's about what's in the best interest of the owners of the Norfolk Southern railroad. It's about what's in the public interest in terms of the railroad infrastructure of the country. In those respects, this transaction makes enormous sense.
It makes no sense for a Board to run out and get a so-called white paper written the night before our presentation when they don't even know the whole presentation is based on CP going into trust when, in fact, the likely plan is for Norfolk Southern to go into trust. Of course, what we've learned is you can pay consultants, and they'll say what you want. With that, the facts are clear. I'm going to turn it over to Mr. Hunter Harrison.
Thank you, Bill. At this point, Sharon, we're ready to take questions from the audience.
Thank you. If you would like to ask a question, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. As previously highlighted, please limit your questions to two. There will be a brief pause while we compile the Q&A roster. Your first question comes from Scott Group from Wolfe Research. Please go ahead.
Yeah. Hey, thanks. Good morning, guys. So.
Morning, Scott.
I think the voting trust structure is really key here and the idea of putting CP in trust is new to us. So can you discuss is there any precedent for the acquiring railroad to go into trust? And maybe just some more color. We've heard from NS about the reasons they're so confident the trust can't get approved. Maybe can you share any conversation you guys have had with past STB members, maybe including Linda Morgan in the past, why you think this structure can be approved? And then just with that, Hunter, if at some point we learn that you couldn't run Norfolk Southern Trust, would you still be pursuing a transaction?
It's Paul Guthrie. First of all, no, it's premature for us to have had any discussions with the STB staff. So that has not been done. Yes, we were blessed with having Linda Morgan, as you know, is the ex-Chairperson of the STB on our Board and we had many discussions with her at the Board level and at the personal level about the voting trust and other regulatory matters. I think she would be very surprised to hear that people say that it's impossible to have the voting trust approved by the current STB Board. She was always very supportive of the fact that mergers could take place in the appropriate circumstances and I think you've heard this morning why it's appropriate that this merger should be approved.
Scott, I want to add to that is that really the only thing that's changed in the standards is the public interest test with the trust. It's beyond me to try to understand what's not going to be in the public interest here. One of the reasons that we are still trying to engage in a dialogue is that if there are advantages that our friends at NS know or understand about which company is better put in trust, we'd like to hear those and put them in the blender. If there's no dialogue, then we are left to independently make the decision alone as to which way we should proceed. I think that my view, when all is said and done, the trust issue is not a major hurdle.
Actually, Paul, the other question was, is there precedent for the acquiring company to be in trust versus the target company? And maybe you can address what we've learned on that respect.
Well, in the CN-IC situation, that, of course, was exactly that situation and Hunter would be familiar with that.
So CN was in trust and IC was in trust?
No, IC was in trust.
So what are the rules with respect to does the STB require the target company be in trust or neither company?
No. No. Sorry. Either company can be in trust if that's the question, right.
Okay. That's helpful and just second question for Hunter and also for you, Bill. So can you guys talk about the next steps? And it seems like it might be tough to reach a deal directly with NS management. So what are the steps you guys are thinking about to get a deal done and maybe improving the terms even more if that's required? Would you consider more cash versus stock? Would you consider a higher price as I think many were expecting today? And then, Bill, can you comment if you own any NSC stock, if you are able to own NSC stock? And then do you think would you consider maybe leading a proxy contest to bring this to a vote?
Well, from my standpoint, Scott, one of the things I've learned over time and it's kind of hard to learn, but never say never. But our interest right now is to try to engage in a dialogue with Norfolk Southern. That's the best outcome for all of them. One of the things we lose sight of is whatever the outcome is here, is we got two railroads to run going forward. Now, to create a lot of adversarial relationships in this is just not healthy. So if we could sit down and enter a dialogue, that's step number one. I don't want to speculate and draw lines in the sand about what might be next. I personally think that the offer is awful nice. It's very generous. I think it meets the criteria. But that's for others to decide. But I think that that's what we'll be trying to pursue.
I guess from our perspective, and I can give you the perspective of a shareholder activist, if I were not on the Board of CP, I would be buying stock today in NS and considering seriously putting up a slate of directors as a shareholder activist and I think the Carl Icahns of the world, the Daniel Loebs, the John Paulsons, I mean, this is an ideal activist situation. You have a transaction where the company, if the transaction goes through, is worth $125 plus to NS shareholders and if the transaction fails, you have a management team that has a $90 sort of price target. So that should motivate activists to come in. But putting aside activists, ultimately, I would think the big shareholders of Norfolk Southern Railroad are going to pick up the phone and going to call the management and speak to the Board.
People will sort of come to their senses. Now, I do think it was appropriate for the Board to reject our first overture because there was uncertainty, and there was value. It's very common in a situation like this for a first offer to be rejected. Now, in response to the rejection of the offer, we've made very material changes to the deal. We've brought forward the timing, 18 months. The transaction closes. You receive cash in six months instead of maybe in two years. You receive stock in a new company. A lot more of that value is being shared with shareholders. So this is a much higher offer. It's a 30% higher offer based on where we expect the stock to trade. We encourage you to do your own analysis.
If you don't agree with our $125 value for X, what is your 2017 earnings estimate, and what multiple would you use? But you're going to get to a number where the stock's worth $120-$130 a share. That's a huge premium to the market price. It's really not going to be about increasing the offer. It's about engagement and hopefully, with this offer and with the certainty and the reduction in regulatory risk, the Board will consider it very seriously. Their advisors will study it, and they'll make the right decision to engage.
And Scott, I would just hate to add. The last point is this, not necessarily from a shareholder perspective. But the company has said it doesn't matter about the price, that it's all about the regulatory and all about the trust. So they've indicated to us it doesn't matter what the price is. So there's no use in going out there making additional offers if it doesn't do anything with the company. Now, when we get to the point of talking to the shareholder, it's a different situation. But I just would hate to add that.
Okay. Thank you for the time, guys.
Your next question comes from Chris Weatherbee from Citi. Please go ahead.
Thanks for the time.
Morning, Chris.
Maybe following up on that question, just sort of thinking about that cash versus stock and I sort of understand the point, and I can sort of get the picture from a valuation perspective and that would change that with that proportion, the proportions being changed between cash and stock. But given some of the responses from the company and sort of what we're hearing from shareholders, I guess I'm just a little curious why sort of the cash component maybe didn't go up and how you think about maybe how that could be changed going forward if it does get changed as you pursue this down the road. I guess I'm just kind of curious about that.
Well, I think, again, it's important to realize that the offer that we have now brought forward is substantially more financially attractive than the prior one. In the earlier scenario, cash wasn't going to change hands until the final STB approval, which would have been as late as December of 2017. Now, cash is available as early as next spring, which is considerably sooner. We're increasing the pro forma ownership from 41%- 47%. In that sense, they're going to be equal participants in this transcontinental railroad that we're going to put together, which is going to have, as we said earlier, $1.8 billion worth of synergies available to it going forward. This is a very, very attractive proposition from a financial standpoint versus their base case, which more or less at this point suggests they're already overvalued.
One thing I would add is in terms of getting a transaction approved, in terms of having a transaction that shareholders are going to support, I think it's very, very important that the combined company has a strong balance sheet. We're staying a BBB-rated company as a result of this transaction, which is a strong investment-grade credit. If we were to lever up and put more cash in the deal, it would be less valuable to the shareholders, and they'd own an interest in a much more levered company. Again, this is not a sale of a small company to a really big one, right? This is a merger of two similarly sized companies. It's as important to the people who own the target as it is to the people who own the acquirer that the combined company is strong financially. I think it'd be very important to the STB as well.
That's helpful. Then just following up with the second question, obviously, the trust structure is probably key here, and you guys talked a decent amount about that. But one of the other sort of pushbacks that we got from Norfolk Southern was really about some of the access ideas from a terminal access perspective and bottleneck pricing. You guys have articulated sort of what your strategy is here. How do you think about the potential impacts to the industry from a pricing standpoint? The pushback we've gotten from companies in the industry is the potential risk to pricing and some of the big gains that have been made over the last decade or so. So sort of how do you think about that going forward? And what could this potentially do, if anything, to that dynamic?
Well, Scott, I mean, what we've said before, Chris, is that we're not suggesting, being so presumptuous, to suggest to the Board what they should do. What we're saying is, "Here's what we will do in this situation, which we think is appropriate for us and our customers, given that we're allowed to do the transaction." Now, clearly, it's pro-competitive. It possesses all the things that we've ever heard from the shipping public and this company has, since I've been associated with it and I think if you check my track record wherever I've been, I've never been an advocate of bottleneck. I've never been an advocate of paper barriers. I've never been an advocate of and been concerned about access. So this is not a different position that we're trying to take advantage of. What's the right thing to say today? Keith, you want to add to that?
Yeah. I was just going to say, just look north of the border. Look to Canada. You've got the two most financially successful, service successful, operation efficiency successful railways in the industry that, although it's not the exact same idea, we still face the same competitive issues that you might be concerned about or that NS or CSX or any other road and we survive, and we thrive. If you're willing to compete, provide a service, your customers are going to reward the business to you, and you're going to do well. The ones that can do that well will do well. The ones that can't, maybe not so much. But at the end of the day, we intend to be a leader in that regard.
So it really comes down to service. All right. That's great. Thanks very much for the time. Appreciate it.
Yeah. Thanks, Chris.
Your next question comes from Thomas Wadewitz from UBS. Please go ahead.
Yeah. Good morning. Thanks for all the information in the call. It's great to have a lot of further detail so we can understand the approach. It seems like I know, Hunter, you've said that you're highly confident that you'll get this voting trust structure approved. It seems that we don't have much in terms of precedence post-2001. I know you cited Genesee & Wyoming and RailAmerica, but that's a different type of railroad.
So I guess, is it what is it that gives you the confidence that there wouldn't be an issue with control, which I think would be a point you'd say, "Well, yes, you leave CP and you go to Norfolk, but you still know Keith well. You were the CEO, and there's some element of residual control or relationship." What gives you so much confidence that wouldn't be an issue? Or is it just a probabilistic, "We think it's 70%, and we got to see its worth. We just got to go forward and see what happens"?
Well, I mean, Tom, I'd go back to a little bit of the precedent and the history of the past. There has never been. I know the rules have changed a little bit, but there have been seldom cases of trust being turned down if you go back through the public record. Now, all we have in this case that's effectively different is talking about the public interest. I don't understand the argument that to put a company in trust is not in the public interest. I think we made a pretty compelling case of all the improvements we can make that are in the public interest. So if it's in the public interest, if the Surface Transportation Board retains oversight, why not do it? If you cannot get a trust approved, they should have just written the law and said there's no more mergers.
There has to be a mechanism. As I understand it, there were some statements made at one of the conferences that the trust was kind of the gold standard now for approval of mergers. Maybe I'm being too logical and rational here that this makes sense, but I just can't see the argument against it.
Let me, if I could, add to that, Hunter. Back to me, since you mentioned my name, I'll take you back to personal experience. Back in 1998, 1999, when IC was put in trust, Hunter was the CEO of IC. Hunter left the employ of IC, went to the Canadian National, and started their journey ahead of the approval. I remain back at the IC. There were a lot of us that were trained and taught and developed our operating ability by Hunter. So certainly, we ran the railway to make him proud. But at the end of the day, we know what the law says. We complied with the law. We respected the law and not only did they approve, they approved the deal early, and they reduced the oversight period. So I would say experience speaks to that point significantly.
If I can just add one thing, Hunter would be leaving the entity that's held in trust to go take another job. If his contract actually were over, he could do that anyway, and no one would stop that and then lastly, I'd say, what's the downside? We can't, with precision, tell you what the probability is. We can tell you what our best judgment is. The upside, if this transaction happens, is enormous. If we sign a merger agreement, lawyers spend some legal fees over the next few weeks. We apply for a trust transaction and let's say it gets turned down 90 days later. No harm, no foul. There's been no negative impact on either railroad. So I think you just look at these things on downside versus upside. I don't see any downside other than a few million dollars of legal fees. The upside's enormous.
If they do basically approve the trust but then ultimately come to a different final determination, you still get a significant portion of the operational improvements in that interim period. You still then end up with an entity that's running considerably better than it is today, and your valuation's the 125. There is no downside in any permutation that one can put forward constructively at this point in time.
Last point, Tom, I heard this on your call the other day that we could do alliances just as easy. Well, people that talk about doing alliances just don't understand railroading. Our weakness right now in the business, and you know this as well as I, is if I get a customer asking me what our service is from Central Canada to Florida, all I can tell them is what we're going to do, what it does going to Chicago. I have no idea what the final service is because I have no control over. So end to end, okay, one quoted service and rate is powerful and you can't do that through alliances.
If I could, I appreciate that really thorough response from all of you. If I could ask a second question, with respect to the final ruling on the rail combination, not the voting trust but the ruling on the actual application for the combination, you could say, "Well, the shippers aren't the biggest hurdle here, maybe the other railroads, because you're doing some pretty innovative things to help increase access and to help offer something to shippers." I think Paul said that you don't believe CPNS would prompt others to merge, and it wouldn't be a downstream effect. Why do you have the view that there wouldn't be downstream effects? And how do you think you kind of get over the bar of resistance, it seems likely, from the other railroads to the final approval of your deal? And thank you for the time.
Well, let's take it a step at a time. Number one, and I don't want to paint everybody with a broad brush, but let's say Railroad A objects. Why do they object? Why do they object to something that's pro-competitive? Why do they object? You know what they're objecting for? They're hiding behind this whole issue of saying, "Look, we like this duopoly. We don't like to have more competition brought in. We like to have paper barriers. We like to have all that artificial protection." And it's being stripped from them. Now, as far as downstream effects, look, I can make a case that the four big boys in the US, that somehow they do some combination. CP doesn't have any compelling position there that's going to hurt them.
So it's their decision. I don't see it as an automatic that they've got to merge themselves with the two giants in the west because of something that CP is doing, this Western Canadian railroad. So I just think it's a lot of rhetoric about nothing.
Ultimately, Hunter, if the STB decides that it's going to have downstream effects that are negative, they won't approve the merger. But still, the vast majority of the economic benefits, the operational improvements, you're going to get anyway, right? And if your proposed operational changes and your offerings, the STB decides, "You know what? That's going to be bad for the other railroads," they don't have to accept those proposed changes. They can propose other ones. We can consider them and decide whether or not we want to go forward.
I guess what we should do, Tom, is let them be a part too. I'm just kidding, okay? So.
Okay. Thanks for the time. Appreciate it.
Yep.
Your next question comes from David Vernon from Bernstein. Please go ahead.
Thanks for taking the question. It seems like one of the reasons here that Norfolk won't accept a deal or doesn't seem to want to even propose a deal is that they think, for whatever reason, that the regulator won't accept that trust. Given the size of the potential for value creation here, would you consider offering them a break fee if the regulator doesn't approve the trust?
I think we'd love to engage with them and if they come back to us and say, "We'll do the deal, and we want a breakup fee of X," we'll take it under advisement, won't we, Hunter?
That's one thing you should talk to them about, but they won't talk. You can't put everything in a letter and all they want to do, and right now, they don't want to sit down and talk. So we'd have to see and understand what else is coupled with it.
I guess, along those lines of thinking, have you thought about anything else short of a proxy fight that would maybe get NSC to the altar here? Because it does seem like they want to do the regulator's job in a way and say that the deal won't get approved, so we won't accept it. I'm just trying to understand if there's a way to get them off that position.
Well, that's what we're doing this morning and that's what we're going to be doing with other shareholders, at their request, by the way. I mean, we've got a long list of shareholders that want to talk to us and they've got a lot of questions, and we've got a lot of answers and so, as I said early on in this process, we're taking our argument and our case to the shareholder. In the final analysis, this is about, as Bill made the point, this is about the shareholder, not the NS Board, not NS management. This is about the shareholder and that's what we're going to do until we get shut off at the pass and give up, is that we're going to go to the shareholder.
And look, I'm cautiously optimistic and I've seen this movie before where the press release that was put out this morning was put out before they even heard what we had to say and I guarantee you, the Board was not assembled to put together that press release. That was put out by a PR firm and by the way, NS hired the same PR firm that CP did, okay? And their motive is protect the company at all costs. I just think this Board is comprised of some high-quality people, and that hopefully, they're listening to the call, or they'll get a copy of the transcript. They'll consider the facts. Cooler heads will prevail. They'll listen to their advisors, and they'll engage. That's what I would do if I remember this Board of Directors. I think that's what any Board member would do if they're observing their fiduciary duty.
Great. Maybe just as a quick follow-up, who would run the holding company?
Well, that's another question that we've tried to raise and when I raised the one face-to-face we've had, when I raised that, if they had concerns, desires, or thoughts, they said it's about shareholder value. Well, if you're not having a dialogue, you can't get there. So we have some flexibility there. One of the things that we tried not to be so presumptuous that we had all the answers, that we walked in there and, "Here's the plan, and here's what we're going to do," we walked in there and said, "Look, we think this has the potential to create compelling shareholder value and we're neglecting our duties, our fiduciary duties, if we don't explore those opportunities." And we've been effectively stonewalled so far at every turn.
So I don't want to get into because they could come back with a different response, and we could have a different model. I think, hopefully, we've tried to clarify today, either company can go in trust. Under certain circumstances, they would need to be a holding company. Under certain, there wouldn't need to be, depending. But once again, if they're opposed to it and they won't talk, then we'll have to come up with our own plan and do the best we can without them, which I think it's too bad. I just can't understand why people won't talk. What is the danger? What are they scared of to sit down and talk?
I mean, going to the CP situation, the last time the Board wouldn't talk to Hunter, the shareholders voted 87%-94% to replace the seven directors that we opposed. The other eight directors, none of them got a majority vote, and we didn't even oppose them. It was the biggest landslide vote in the history of public company proxy contests. It was all because the Board wouldn't engage with Hunter. My view is the Board's going to have to take a look at that precedent, and they're going to engage. I think the analyst community can be very helpful in what you say and what you write. The shareholders will have enormous effect. If they do it publicly, great. But even if they pick up the phone privately or send a letter to the Board, that will have a huge impact on this Board of Directors.
I appreciate it. Thanks very much for your time.
Your next question comes from Brandon Oglenski from Barclays. Please go ahead.
Yeah. Well, good morning, gentlemen, and thanks for hosting this call and Hunter and Bill, I'd say Norfolk shareholders already owe you a huge favor because this is the first time they've actually put out financial targets, at least in the history that I've understood of the company. But let's just talk about that for a second because it sounds like their plan for a 65 OR. Now, it does match other carriers, the rate of improvements, pretty conservative. But based on the limited information that Jim has provided on his call on Friday, it does seem that a lot of that is focused on future growth based on some service plan that they have in place that's going to drive that future growth on pricing.
But these sound like assumptions that we've heard a lot from the past from Norfolk, even without that financial target to be held accountable to. So we have accountability now, but it does sound like it's predicated on commodities stabilizing, Eastern Appalachian coal not going down any further, which I think is a bit not a conservative assumption now, just given where natural gas prices are. So I think when we look at your track record, Hunter, at the IC, at CN, at CP, there's clearly a more efficient and better way to run a railroad. It's much more cost and velocity-focused and maybe I'm stealing your words from you here. But I just want to differentiate because Norfolk is saying that you want to cut to the bone. You want to jeopardize future growth with your strategy.
But when you lay out your targets, it looks like it's much more focused on shrinking the cost structure, improving velocity on the network, and then driving growth and I think what's lost on a lot of people is actually your legacy at Canadian National the last four or five years and maybe we're giving them too much credit. They have been the fastest-growing railroad, I think, on the history books. So how do you speak to these differences in plans and compare and contrast what Jim is effectively laying out to his shareholders and what you have done now three times over at three significant railroads?
Well, look, I don't think this so-called Precision Scheduled Railroading number one, it's not a secret, okay? I wrote a couple of books about it. Number three, I don't know how many times we invited the NS, and they took us up on it on benchmarking. So we've told them everything we know. But there's some I don't know if it's pride or obstinacy or what that people don't get it for whatever reasons. I think what really happens is somebody talks to me, maybe Mr. Squires talks to me, and I say, "Here's the plan, and here's what we ought to do." And he goes to his management team and says, "Here's what Hunter says. What do you think?" "Oh, no, we don't want to do that." Because if they say, "Yeah, let's do that," that's a great idea.
Then they get criticized because, "Why didn't they do it?" If you go back and if you peel these things back, underlying all this is some of our plan. What I've read recently about them, and they kind of talked out of both sides of their mouth. They're saying, "We're going to cut to the bone," but now they've cut 2 hump yards, I read. They're looking at another hump yard. They're looking at 1,000 mi to rationalize. Well, that's all very appropriate. I'm not criticizing them. Don't have more assets than you need or people or what. But look, they just don't get it.
Well, I appreciate that, Hunter and Bill, I want to direct one to you because there's a lot of criticism in the market right now, just given volatility in other stocks and what's going on this year. So I want to ask you a two-part question here. First, the timing of the deal. Why didn't you get more aggressive with CP? And maybe this is a question for Hunter too. But when you were talking with CSX, why not look at Norfolk last year when you had a much higher equity valuation, when arguably the industry faced a lot more congestion issues? Is this just by any means an indication that CP's standalone plan is now much more harder to achieve than you maybe thought maybe 12 months ago? It's now a merger is the next way to drive value for your CP investment.
Then, secondly, and this question's been asked a couple of times now. But Jim Squires has made it very clear on his call. He said, "At any price, the regulatory risks here are just too steep to pursue a deal." So you have the podium. What are you asking specifically of Norfolk shareholders, of Norfolk management, of Norfolk's Board to walk away from this call? What do you want to see them as the next step?
Sure. So on the first question, let me just say that I don't run this company, okay? Hunter Harrison does and it was Hunter's idea to approach CSX. It was Hunter's idea for the timing to approach CSX. It was Hunter's idea for the way in which CSX was approached. With respect to Norfolk Southern, it was Hunter's idea to look at Norfolk Southern. I personally got more involved in this Norfolk Southern situation because Hunter asked me to. So I do as I'm told, okay? That's how I think about my responsibility as a director here and I obviously have enormous confidence in Hunter, and we want to bring whatever value we can bring to get this thing done.
I think from the perspective of a Norfolk Southern shareholder and what I think a Board should do in a case like this, as I said before, it was appropriate to reject the initial proposal for some of the reasons that they described. It is inappropriate to start muddying the waters and trying to get people to come out against the deal and try to scare people about regulatory risk. What a Board should be doing in a case like this is it should be focusing on the fiduciary duty to maximize shareholder value, and it should be focusing on the stakeholders and the business and if you think about each of the various stakeholders, beginning with shareholders, with the shippers when I have the opportunity to walk around the CP property, employees come to me and thank me. I don't feel like I did anything.
But thank me for the changes that took place at CP that have been implemented by this management team. The impact on employees, people who are buying homes that couldn't buy homes before, has really been dramatic. So I think this is a transaction that creates enormous value that benefits all the stakeholders, including the infrastructure of the country. That's a deal you have to take seriously and by removing the regulatory risk of waiting two years, people get their cash, and they get stock in the new company in six months. All that has to happen is we sit down now, we negotiate a merger agreement, we announce a transaction by the end of the year, we file an application for a trust. Now, it can go awry. If we're totally wrong on the trust issue, we get turned down, okay? We think that's an extremely remote circumstance.
What we spend is legal fees and some time. Minimally distracting. It's not like one of these transactions we are hanging out waiting for a telecom deal to get done for three years, and the company is in limbo for an extended period of time. The limbo will end in 90 days. We think the limbo will end with a trust approval, a shareholder vote, Hunter is CEO of the company, and then we'll see on the STB in 18 months or so what Board of Directors can't take that seriously. Now, they have some issues. They want to talk about a breakup fee. They want to have discussions about, "I'm not excited about issuing any more stock." Hunter said to me, "Is there a $1 or $2 in my pocket? Maybe." But they got to come and sit down with us right away.
There's an opportunity for even a sweetener here, but that's if they engage immediately. We put enormous value on the table. I don't think there's a Board of Directors observing their fiduciary duty that's not going to consider this very seriously. I think their advisors will make the same recommendation.
Look, I made it clear to Mr. Squires in our meeting when he talked about regulatory risk that we would accept the regulatory risk if he would identify what it was and put some type of cap of recognition to it. So number one, the reason why this came up when it did, the initial issue with their competitor, NS, was we got a signal from them that we ought to talk, a signal from a shareholder and a member of their Board. So we went and talked, and we wasted two hours, okay? And look, I've worked with Norfolk Southern, adjacent to them, for 50 years, all my life. I've had tremendous respect for the railroad, their tradition, their culture, and all. But for whatever reason, they've gotten a little off track the last 10 years, as Bill described.
That was admitted to me by Mr. Squires, that they were stuck, they were in a rut, or whatever the case was. At the same time, this is going on, we look and see that they lose what I call three pretty key Executives, the Chief of Marketing and Sales, who was tremendously well-respected in the industry. They lost the CEO, and the plans changed of the initial announcement, and their Operating Chief announced his retirement early. Now, with all that going on, we felt like it might be an opportunity here. So we picked up the phone, and we made a call. Shame on us.
Thank you.
Yeah. Actually, one thing on correcting the record, the NS said that we refused to sign a confidentiality agreement, and that's why they're willing to talk to us, but we refused to sign a confidentiality agreement. First of all, we're very happy to sign a confidentiality agreement. It was a small part confidentiality agreement and big part a standstill agreement and the standstill agreement said, "You can't make a proposal. You can't do anything for two years." And so, of course, we couldn't sign it. So if NS said to us, "You know what? We want you to sign a confidentiality agreement so we can speak to you in confidence about various things, we do it tomorrow." And we'd sit down and Mr. Squires is a lawyer. He knows the difference between a confidentiality agreement and a standstill agreement, okay?
He misled shareholders when he said we refused to sign a confidentiality agreement. As a lawyer, he should also know how to structure a transaction that minimizes risk to his shareholders. This is what we proposed, a transaction where the downside is some legal fees. Frankly, we're happy to pick them up if the transaction fails to get trust approval. So it's zero downside other than some legal work. The upside, as we've described, is obviously enormous. Those are the kind of deals you have to do. When you're in a situation of conflict, i.e., you're a CEO that's likely going to lose his job as a result of a transaction, you've got to take these things even more seriously and with more independence. The Board and Leadership on the Board has to take a very important laboring oar in this situation.
By the way, my first opening in our visit with Mr. Squires was I asked him if he wanted to be CEO with this NewCo . He said it was about shareholder value. He has not yet responded. I don't know where he's going to be.
Your next question comes from Walter Spracklin for RBC. Please go ahead.
Pretty much. Good morning, everyone. Thanks for taking my call.
Yeah, Walter.
I guess my question, and I guess you've certainly seen Bill's slide on the options. The two options in front of Norfolk Southern shareholders is quite compelling. I'm going to move a step ahead now and suggest that if a third option were to come on and if Norfolk Southern were to look to a third, to another railroad for a hookup potential, is that something that would be so compelling because of the interchange access points and so on that you wouldn't still be interested in engaging that? Or is that how would you react to that scenario? And Bill, certainly, you'll have very much experience on this, much more than anybody else. How would you see that unfolding?
Well, from the railroad standpoint, look, if they make a deal with somebody else, and it works, and it's got all the compelling issues that we've talked about here, more power to them. I'm not going to object to mergers. We're not trying to be Johnny Come Lately here. What works for us today doesn't work next week. We're not opposed to, given that you can live up to the rules, mergers. We think they're good. We think they're healthy. Look, what is going to happen to the infrastructure in the U.S., East of the Mississippi, going forward? You don't want to build any railroad. You don't want to have any mergers. What is going to deal with the growth? All I hear people saying is no. But nobody's got a positive idea.
We've got two all of a sudden. I wake up this morning about 3:00 A.M., and I start reading from two former commissioners, Chairmen of the Board, who have got all kind of ideas that all they say is no. Who has got a positive idea? So look, I don't have any problem. If they've got a better partner, I don't know why—I don't know why they wouldn't like—they don't like us, our lipstick or what. But let them. More power to them. Congratulations.
I guess, Hunter, my second question here is you've obviously had a tremendous amount of success when you were outside of the CP organization looking in and seeing the opportunity that you could the cost opportunities that you could achieve as an outsider at that time. As an outsider to Norfolk Southern looking into that organization, is this simply do you just see the exact same type of opportunities, in other words, taking your very successful operating model approach and just rinse and repeat?
Or do you see something they're doing wrong, perhaps on the whole infrastructure standpoint, that you kind of see some low-hanging fruit that, "Just get me at it. I can turn that around pretty quickly"? In other words, is there a big difference between what you did at CP and the opportunities you saw at CP from the outsider looking in and what you see with Norfolk Southern?
Well, yes and no. Look, they're two different organizations. Clearly, in my view, Norfolk Southern going in has and had much, much, much better infrastructure, okay? And in fact, the last visit I was over there, they told me when I got there, "You're not going to like this. You're going to think it's gold-plated. You're going to think we got too much of this or that." And I did. But it was a philosophical disagreement. Now, in how to run a railroad day to day and to execute, I felt like that both of them were making similar mistakes in different type circumstances. So look, I'm not trying to say this is the only way to run a railroad, that we've got some magic wand. I can just tell you that what we've done, it hadn't changed since I've been CEO. It's the same formula.
We've been doing it 22 years. It's been successful, and it works. We're going to stay with it until somebody comes up with a better mousetrap. It's so simple and basic and doesn't have the complexities, people don't like it. It's understandable. Everybody knows what the issues are. So I don't think look, my bet is if with all these hurdles we're talking about, if I end up getting to spend some time at Norfolk Southern. I think one of the things I'm going to find is a hell of a bunch of good railroaders.
Actually, to that point, Hunter, maybe you can just talk about how can you just go over there. Are you planning to recruit lots of people into it, or how do you operate? I think it's important for people to understand.
No, and it hadn't been my MO. Although, for whatever reason, we had to do a little more with the CP than normal. But I don't have a team, a traveling team. It's me and a few comments on a piece of paper, and it's evaluating the staff and sitting down with people and saying, "Look, I'm looking for the best athlete. I don't care where you came from, the IC or the CP or the CN or where you came from. I'm looking to create shareholder value and put a hell of a team together and I know that that company, NS, has some wonderful railroaders. Somehow, if I have to be outside looking in and I'm limited here, they got a little off track, leadership or something happened that they've had some slippage. But it doesn't mean they can't be bouncing right back.
So do I plan to go in there if I was ever given the opportunity with some hatchet and start? No, we need good talent. You don't get rid of it and throw it away. You take good athletes, and you develop them and you develop a certain esprit de corps and a team spirit. We're in here together, and we're in here for the shareholder and it gets to be fun and that's when you start creating the type environments that Keith and I have experienced at Illinois Central, at Canadian National, and at CP.
That's very helpful. Thanks for the time, Hunter. Much appreciated.
Thanks, Walter. Appreciate it.
Your next question comes from Allison Landry from Credit Suisse. Your line is open. Please go ahead.
Thanks. Good morning. In your approach to valuing the pro forma company, as outlined in the presentation, it doesn't appear that you've made any allowances for give-backs to customers or costs associated with environmental mitigation and both of these could prove to be material, judging from past deals, whether it's Conrail or the CN, EJ&E. Do you think there'll be some value leakage during the approval process related to this?
Well, Allison, I've talked about that a good bit. Look, the old days are kind of over. This is the most classic end-to-end that I've ever seen in the three-for-two, two-for-one, which is why we addressed all the competitive issues. So I don't plan on we're not going to any other railroad or any customer and make some cash overture to buy a deal, number one. That's in the past. Environmentally, that's a different issue and we hadn't had an opportunity, as Mark alluded to earlier in his comments, to do any due diligence relative to environmental. But to Bill's point, if there's a whole lot of environmental exposure that we're not aware of and the numbers don't work, the deal's off.
What Hunter's basically saying, I mean, the kinds of things we don't have an obligation to pursue a merger that destroys shareholder value. This transaction is step one: put CP in trust and put Hunter at ns and again, if it's not approved, we tear things up and fold the tent. If it's approved, Hunter's running the company. Then it's an 18-month process. We're very closely with the STB on getting approval on terms and conditions that make sense. If the terms and conditions don't make sense for environmental reasons or otherwise, we don't have to go forward with the ultimate merger. We separate the two companies, and we have two publicly traded railroads within a year or two of the denial of the deal. The only other thing I'd add is we don't know what we don't know.
But Mr. Harrison does not have a history of going in and taking large restructuring charges. That has not been the case in the past. All of the reductions that we've largely effected have been through natural attrition and so we don't expect there to be big charges or write-offs. That's not Mr. Harrison's approach, at least not in the past.
I guess, Allison, I certainly appreciate the issue you raise, particularly from a shareholder perspective. I'm hard-pressed to understand why the other railroads are trying to help us and don't want us to get exposed too much to these issues that we're not smart enough to deal with.
Understood. Thank you for that. As a follow-up to the earlier comments on Norfolk's potentially elevated capital spending in the past, I know in the presentation, one of the assumptions was for the combined entity and your outlook for what the CapEx profile would look like over the next several years. Could you comment on how much you think you can reduce spending at Norfolk on a standalone basis?
Well, I haven't really, to be honest with you, I hadn't peeled back the onion all the way to really delve into every bit of capital and this is not clear. I know there's different philosophies about assets and about how many routes you should have and so forth and my last trip over to Norfolk Southern, which was 4 or 5 years ago, what I saw was a railroad that was in really good shape, that had a lot of assets sitting around, and that what I have read and looked at philosophically and what we have been able to do, Keith's been able to do here with—I mean, he's effectively—we were hoping to take initially a two- or three-year holiday for locomotives and it looks like now we're going to be taking six-year+ holiday. Well, that right there, just locomotives, is huge.
I think it's going to be substantial. But at the same time, I don't want to put a mark on it and say exactly what they did wrong. I don't think that's fair on my part.
If I could add a little code over to that, Hunter. Allison, working with Hunter for the past two decades, what he's taught this team, what he's taught me is how critically important it is to just be a steward of capital, have the right capital spend, not irresponsible capital spend, be it long, be it short. We come to CP. CP was grossly underinvesting in this physical plant. The first call on capital from an operating perspective is to make sure we maintain a safe railway. So once you've got that base covered, which is what we've been having to do for the past three to four years, is catch up capital, so to speak, then you can take a look at your physical plant, what your assets are, what your business levels require, and then you pace your capital against that.
So again, it's back to being a steward. Don't spend a dollar of precious capital until you've improved and exhausted all operational opportunities for efficiencies. Don't just throw it. So that's sort of simply said, but that's exactly the way we manage our capital day in and day out. So if capital is being spent in excess, then obviously, we're going to take a look at it. If it's not in certain areas, then maybe we increase it. So a lot of that has to be looked at day to day. You got to kick the tires. You got to get boots on the ground to be able to answer those questions. Fundamentally, that's the way we manage capital.
Maybe I can just add a Board perspective. So when we got involved here, one of the criticisms levied against a "activist" or a hedge fund manager on the Board is, "Are we going to push for buybacks? Are we going to not allow the company to spend the money it needed?" And from the first day, number one, we actually never raised the dividend. We said to Hunter, "You have whatever you need, blank check. We trust you in allocating the capital resources of this corporation." And we took CapEx spending, I think it was like $850 million the year before he showed up and this year, it's $1.5 billion. This is and look at the benefits that we've gotten from the investment in capital.
Now, the company's now projecting next year to take that $1.5 billion down because you're finding that you've fixed the plant, if you will, and it doesn't require as much capital. So for the purpose of the model, we used to call it simplifying assumption of CapEx being a percentage of revenues. But this team doesn't spend CapEx based on a percentage of revenues. This team spends CapEx based on one rail tie at a time.
yeah and it depends on the audience. If you're talking to shareholders and finance community, they don't want you spending any capital. If you're talking about an opposing railroad and you're not spending capital, you're cutting to a bone. So one way you're wrong, either way you go and to Keith's point, that's the way you look at it, is this. You look at it where you need it. You don't get in some routine of saying, "We're going to spend X amount of millions this year for everything." If you don't need it, depends on ton miles or other issues. But we feel like, bottom line, there's some opportunities there.
Got it. So focus on efficient capital spending. Thank you for the time.
Thanks, Allison.
Your next question comes from Ken Hoexter from Merrill Lynch. Please go ahead.
Great. Good morning. Thanks for the slides and info. Just a question on Norfolk Southern versus CSX. Last year, you talked a lot about CSX. Hunter, maybe just talk a little bit about what makes this move more right. They highlighted the minimal connections and overlap in part of their rebuttal discussion the other day. I'm just wondering why this became the bigger focus? You mentioned last time, I think, in your initial, "Hey, we recognize we made some mistakes." Why then did you choose not to revisit that topic again as opposed to going here?
I want to be very delicate here and that's not my strong suit. It just didn't fit in Florida. It became clear and obvious that they've got some of the same issues as far as regulatory approval and we didn't even get beyond that and once again, we were responding to a request of theirs and I really thought that it was totally inappropriate the way we were treated, which is important to me in the culture of an organization. I like to be able to trust people, shake their hand, make a deal and it just became evident to me quickly that there was a split, that they weren't in common ground, and that that wasn't going to work. Because there's one thing to get these deals done, as I said initially, it's something else to make it work down the line.
You got to do both here, or this is not successful. So again, it was our judgment that that just wasn't the way to go. So then, given the other changes that were happening that I talked about with personnel and so forth from an NS perspective, and we knew and we felt like that NS had a much stronger physical plant, and it was arguable and debatable internally about markets and extensions, and that wasn't compelling either way, that we felt like there was an opportunity to work with NS. So we are now pursuing that. That's the reason why.
Appreciate that and then on that you talked before about the level of public interest in the ICC. Was the ruling in place to have a demand or an interest for public interest, or was that pre the new revised rules? I guess what I'm asking is, has the public interest been tested yet in that part of the?
Well, I would say yes and no. The lawyers would say no, but I would say yes. Because it was implied, without being said in the public interest, that there was something that you tried to do with the trust even before it was written in the rule and it was not in the public interest. It was probably going to be turned down in the trust process under a different name, if you will. But the public interest you know what the public interest did? It brought it out and keyed it up and said, "No, it's exactly the public interest." But it's such an ambiguous statement that anybody can argue any case. What the hell is public interest? Okay? So get that defined for me. So we can argue about that for two or three years. What's in the public interest?
What's in one public interest and not in another public's interest? So that's just a way of kind of, in my view, it's a way of kind of removing the rules and let the bureaucrats deal with it, which is that.
Well, I appreciate the two hours you've given us. Thanks for the insights.
Sure.
Your next question comes from Jason Seidl from Cowen and Company. Please go ahead.
Thank you, guys and good morning. First, just on the voting trust, Bill, you laid out your belief that this transaction adds a lot of value. So if you apply for a voting trust and it gets turned down, is there a step that you could take to adjust the voting trust so it would be more palatable?
Yes. This is Paul Guthrie. We could make changes to the voting trust if we received feedback from the STB on a certain area.
What's usually the timeline for something like that? Is it spontaneous, or?
I don't know.
I think the point is, it's not that we just put together a little package, tied up in a bow, and stick it in a mailbox, and then we wait 90 days, and they come back and say yes or no. I think it's going to be an iterative process. If there's something wrong with the application or they had concerns or the public interest feedback was such that they wanted us to make modifications, if those make sense, we'll make them. Paul, what is the timing just from a regulatory standpoint? Explain why we think it's 60-90 days just to answer that question.
Well, the STB in the merger rules did not provide a time. It said that they would allow a brief period for comments on the voting trust. We're using two to three months as being the outside of a brief period of.
One of the other things that's interesting about putting CP in trust is CP is well down the road. It's three and a half years into the turnaround printing sub-60 ORs. It's not going to be harmed by being put in a trust, right? Norfolk is really the railroad that requires the turnaround. Hunter's going to be there and that's not going to be in trust. So it's less awkward to execute a turnaround at NS if it's not in trust and we think that should resonate, make the trust approval process even easier. right and remember why the trust was put in place. In some ways, it's a learning lab that allows the regulators then to see in market what actually happens. During that period of time, if we don't improve service, increase competition, then shame on us.
We're very confident that we'll be able to demonstrate all those things, that we'll demonstrate we're increasing the public good during that period. At that point then, the regulators will have assurances because they will have seen it in the real world in real time.
Okay. My next question is sort of a piggyback on what Allison was talking about. You mentioned the elimination of paper barriers. Do you foresee some pushbacks from some of your short-line partners, especially those who purchased certain properties with those paper barriers intact, and that was sort of in their financial plans when they purchased it and how much they paid for them? Do you foresee having to maybe compensate them in some way for this?
No. This is all in their interest. This is a case, effectively let me just give you a case, where a Class I buys a short line but says, "You've. Sells the short line. But you got to give me the business." And so this is opening things up, again, more to competition. It's allowing the short line to act as they need to act in the marketplace and it's a case where the Class I can't come in there and do the transaction but say, "Here's the rules of the transaction." And look, if the short lines wanted it another way, we'll address that. We're trying to be pro-competitive. We're trying to remove these barriers that railroads have hidden under. We're willing to deal with it. Others like that protection.
All right. Gentlemen, thank you for the time.
Thanks.
Your next question comes from Jeff Kauffman from Buckingham Research. Please go ahead.
Bill, Hunter, thank you very much for your time today. Quick follow-up with Paul, and then a question for Bill and Hunter. Paul, if I understood what you were telling Jason, that the voting trust is not a binary outcome, that it is an iterative process, and that you will get feedback through that process as to what would be preferred, that's correct?
Excuse me. I said we might get some feedback. If there was a particular issue that the STB wanted us to address on the trust, then we would look at that, of course.
Okay. Very well and Bill, a question for you. I mean, you are on the investment management side. You do know that in periods of uncertainty, investors tend to look three months instead of three years, and cash in hand's always better than cash on the come. When you reevaluated the offer, I think I understand why the cash came down because you said you're getting it now, but we're increasing the equity share. Did that feedback come from Norfolk investors that had indicated to you, "Yes, we would be comfortable with this," or is this a situation where, as you begin to engage Norfolk's investors with the new offer, if they indicate a preference for cash over stock, that you would be amenable to that?
So I would guess, from our perspective, we'd rather have more cash and less stock because we think the stock is very valuable. The constraint we have is how much we can borrow today and still remain a strong, investment-grade company. So the reduction before, we were paying for the transaction in two years, and the collective borrowing capacity of the combined railroad was greater and therefore, we could pay with more cash and still maintain. This is driven off of kind of EBITDA multiples of kind of debt, right? So look, we'd be happy to reduce the equity component and increase the cash component. We could do that. To do it dramatically, we'd have to go raise some additional equity.
So we're at the point here where, look, the shareholders who are looking at this deal are not going to approve it based on $33 or $45 in cash. What matters here is the stock component. If you believe this transaction, if you believe in Hunter Harrison, if you believe in the transformation of NS, then you want as much stock as you can get and the way we'll set this transaction up is we'll give shareholders an opportunity to elect cash or stock, and we'll prorate and if people want cash, they can have as much cash as is available.
What I think you'll find is the vast majority of shareholders are going to elect stock and the stock will be the scarce asset here. So anyone who wants cash is going to be able to get cash. Of course, this is a big liquid company. The reason why they're going to want stock is the stock is going to increase meaningfully in value when the transaction closes.
Remember, all the operational improvements that we discussed, we're literally just moving things to the class one average. We have not overreached at all in the synergy. There's $1.8 billion here, effectively, between the pre-merger operational improvements and the post-merger combination synergies, effectively, to share. With pro forma ownership of 47%, that's, in essence, what we're offering here, is access to this massive pool of value creation for both our shareholders.
Okay. Gentlemen, thank you very much, and best of luck.
Thank you.
Your next question comes from Turan Quettawala from Scotiabank. Please go ahead.
Good morning. Thank you for taking my question. I guess, first of all, are you proposing any mileage limitations to your network access options?
In the terminal, no. We have not. This is a different precedent in the U.S. In the U.S., people try to relate it to inter-switching in Canada, and they're two different animals. In the U.S., if you go back and use the old switching districts or reciprocal switching, you had cases where people that were five mi from the center of downtown were not open to switching, but somebody that was 60 mi out of town was. It was negotiated between each shipper and the carrier. So we, at this point, have not proposed any mileage and that's something where we'd be open to discussion by Gateway or with Norfolk Southern or whatever it takes to meet the marketplace needs.
Thank you, Hunter, for that clarification. I guess one more question in terms of look, obviously, you've created a lot of shareholder value here for CP shareholders. I'm just wondering if you can comment a little bit on when or if the risk becomes too much for CP shareholders on this transaction. I'm not necessarily talking about the monetary terms because, obviously, there's a lot of accretion here. But just in terms of process, is there a point where you would sort of call it quits because of the risk for CP?
No, I don't think so. Look, I think to Bill and/or Keith's points earlier, I think one of the things that I'm proudest of with this model is it's sustainable and it works at CN very well right now and I'm sure they've modified it and done some different things. But it's the basic, fundamental same model and I think that we have taught the people at CP the fundamentals of this style of railroading. I think that we couldn't have a better individual than Keith Creel to be at CP and I just think for there to be slippage or risk at CP that is something that does not. I don't even think about it. If I did, I'd give it a quick thought, mark that off, and I've gone on to other things.
So no, I don't think it depends on where my shares are, whether they're in NS, CP, or wherever they are, they're going to be in good hands if Keith's running the ship.
I guess from a regulatory standpoint, Hunter, is there any more regulatory risk that you could take on from a CP standpoint?
Well, I guess you'd have to help me define that. I think we could do the same thing that we've offered, our model. I don't think it stand alone with either company that there's any more risk. I think it happens to be a strengthening mechanism that if you look at the best carrier, the best two carriers, and you put them together, and they're the strongest and they're the best, and they can open up competition and it's a bigger playing field. That's exactly what you want. It's to create competition. I think competition is good and I think we'd be on top now and let the rest of them come after us and that's all good and healthy.
On the regulatory risk, I don't see regulatory risk. Here's what I mean. There is a risk that the trust gets turned down. But the cost at that point is just the legal fees that you've incurred for the 90 days that you spend trying to get a trust approved. If the trust is approved, you'll have your own estimates for what earnings are going to be for the combined company. But take our $1,640 or whatever. What do you think that grows to over time? What multiple do you put on that? That's the stock component of the transaction.
Yeah. But I think this relates not directly to the trust, but set the trust aside if there wasn't a trust, just the regulatory requirements of the STB.
But we don't have to. The company can just operate independently going forward. We can separate the two in a spinoff if the regulatory requirements are two owners. So we structure the transaction without regulatory risk of any consequence.
No, that's fair, Bill. I guess maybe one last one then. In terms of the regulatory side, is Hunter moving and the voting trust, are they sort of both connected? Or is there a possibility that you get the voting trust, and then the STB says, "Well, Hunter can't move"?
They're connected.
Okay. Fair enough.
Yes.
Thank you very much.
Your next question comes from Donald Broughton from Avondale Partners. Please go ahead.
Good morning, gentlemen. Thanks for the long call. Most of my questions have been answered, at least to the extent they can be. So I mean, obviously, through the last 20 years, I've been convinced Hunter's the Michael Jordan of railroading. Further analogy is certainly Keith's, although he looks like John Paxson. He's the Dennis Rodman, the Scottie Pippen, the Horace Grant one in railroading.
I better get some tattoos.
Yeah. But wow us with a detailed explanation. It's not the average age of the locomotive fleet. So where's the disparity in the fuel efficiency? Is it idle time? Is it network design? Is it congestion, topography, velocity? Where is it, guys?
Well, it's all of the above. But the one biggest place is just the number of locomotives. A locomotive in the wintertime idling is a high-horsepower locomotive, probably—I've been away from the field too long—but 3 or 4 gal an hour just idling. So the fewer locomotives you have that are sitting there idling, the less fuel you're utilizing and we have a philosophy of just maybe bare bones with locomotives and I think the NS philosophy is to always be sure they got plenty of locomotives. Well, it's a hell of a premium to pay. Now, is it wrong? Well, you can argue that. But that's where it is and the maintenance and all that goes with it.
Thank you, gentlemen.
Thank you.
Your next question comes from Steven Paget from FirstEnergy Capital. Go ahead.
Well, thanks for everything. I've lived in Calgary near the CP all my life. I should say the physical transformation in CP's properties in the past three years has been remarkable. My first question, you've spoken about U.S. regulators. But CP is a very critical and historic piece of infrastructure to us in Canada, a country where even a conservative government was willing to block mergers. What if the new government, a liberal, more interventionist government, sought to block the merger?
Maybe we can take that in two parts, the trust part from a Canadian point of view and maybe then the merger part.
Yeah. We don't anticipate that there would be an objection from the government to the, or even a review of the voting trust structure from the Canadian side. That's an STB issue.
I think our advice—I think we have been sensitive to both organizations that they both have tremendous tradition, CP in Western Canada and throughout, Norfolk Southern with its Thoroughbred and all its tradition, the two wonderful railroads, which was the reason for the thought of setting up a holding company so these two entities would not be lost in the shuffle. I think that and I'm certainly not an expert on Canadian regs. But in visiting with some advisors, I think it's safe to say, Paul, they feel like from a Competition Bureau standpoint that as long as we meet some of the rules of engagement here, that this will be approved from a Canadian Competition Bureau.
Correct.
But we're certainly sensitive that we have to have that approval also.
And Steven, from a practical standpoint, if you're a Canadian shipper, think about the power of reaching markets, single-line service east of Mississippi that you previously hit a brick wall with in Chicago. If you're a U.S. shipper, think about the same in reverse going to Western Canada. It's a very compelling service offering.
Well, thank you, gentlemen. My next question follows up on your statement, Keith. Assuming the merger clears all hurdles, looking at the map of the combined CP/NS, let's think about a railroad with 11 Gulf Coast Atlantic ports or sorry, 12 and one on the Pacific to the far northwest. What does that give Canadian customers, better access to tidewater?
It gives you better access to tidewater. It gives you access to market that you can't even scratch today. I mean, major metropolises east of the Mississippi, seamless service. If you're a customer that owns assets, that owns cars, that currently has to go through two-line service, handoff, so to speak, be it with either of the eastern carriers to our railroad or others, think about the asset cost that's sort of just melt away when you've got one accountability, you've got one very efficient network, you've got speed improvements on line of road, you've got reduction in call-in terminals, you've got less handlings. It's very, very compelling from what it does for them and their marketplace competing against their competitors to win market share. It's very compelling to their bottom line.
Well, thank you. Those are my two questions.
Thank you, Steven.
Your next question comes from Steve Hansen from Raymond James. Please go ahead.
Oh, yeah. Hi, guys. Just a single one, Steven, that were extended here. Given that the financial benefits seem pretty compelling, it does strike me that self-preservation and/or potentially the cultural impact might be one of Norfolk's potential reservations here and I guess, hence, their cut-to-the-bone commentary. In this context, Hunter, Keith, I'd just ask that you maybe speak to your plans for the $550 million in workforce productivity specifically and perhaps for some historical context. What kind of roadblocks culturally you've encountered at CP and how those have turned out over time?
Well, I'll start. I don't think there's been any special hurdles given an organization that's gone through the change that we have. Change is always difficult for people to deal with, all of us. But with all the change, for example, in the headcount, which right now is close to a third, and that's just fact. I'm not bragging. It's just fact. I still think we can say there's very few, if any, people that want to work that can't go and be fully engaged and employed. This has been through various natural attrition and retirements and whatever and I think that would be the same with NS. I'm not a big. I think somebody mentioned it earlier. I'm not a big special charge guy. I'm not a big buyout guy. I'm not a big paying New York dollars guy. You don't get a lot of return on those bucks.
So I mean, look, these are sound, fundamental, good railroaders. They understand. They've been through change before and I think the key with us, like with any organization, if we sit down and tell them what we're going to do and why we're going to do it, they get it, and they'll run for you. If they don't, then you have other issues.
If I can get a little bit more granular from an operating perspective, so I talk about this that I deal with day in and day out, operating employees, running trades employees. You think about the cultural issues. You think about the change, certainly significant. But at the same time, you think about where we're at today, 3 years, 3.5 years later. We've just ratified collective agreements on our U.S. properties that are very progressive hourly agreements, better quality of life, certainly substantial more money. I would suggest that our CP's locomotive engineers are extremely proud to be working into Elkhart, Indiana, making $48 an hour and have a better quality of life. It's a very compelling value offer from quality of life and from compensation that, to me, it just makes too much sense. So down the line, that's an opportunity as well.
It's something that we'd certainly look at and take under advisement. So I think it's certainly more upside. If you're not afraid to come to work and give us eight hours of productive work, you're going to get eight hours of pay or 10 hours of pay. If you're going to be the most productive railroader, we don't back away from making you the highest-paid railroader.
That's helpful, guys. Thanks. That's it for me.
Thanks.
Your next question comes from David Tyerman from Canaccord Genuity. Please go ahead.
Yes. Good morning. Just one quick question. So Mr. Hunter Harrison, you're considered the pretty critical part of this. So two parts to that. Excuse me. One, how long do you plan to stay to achieve what you're planning to do? And two, who would back you up?
Well, I've said the other day and I think with Bloomberg's, the little bit I've got is invested in this organization. I'm not a quitter. If I go in and take this task on and we're successful, I'm going to see it through and when I say see it through, I'm going to see it through to approval and see it through that we've got the ship pointed, turned in the right direction. Behind me to step right in and not lose a beat is Keith Creel, who's been on the call with us this morning and I feel very confident that between us, we can see this through, can get this done, can get this accomplished and so timeframe-wise, if I had to put a number on it, I would say somewhere around 2018, 2019, we'll be done at this thing humming. I'll ride off into the sunset, and Keith rides in.
So, Hunter, just to follow up the question, let's assume the merger is ultimately not approved. So, Keith's staying at CP. You're at Norfolk. How would you develop a, I mean, we've got the same question, the CP merger. We said, how do you think about succession? How do you deal with that? Do you do it internally, recruit from the outside? How do you manage the issue?
First time I try to keep my job. I don't have a deal then. But I mean, seriously, and I don't know if people understand that, but if this plan works and comes together, I'm going to be resigning from my responsibilities at Canadian Pacific, having to sever all financial ties, and will become a free agent, if you will, at Norfolk Southern and I guess I've got to prove myself again and it'll be me alone and I would do the same thing in developing the team there. I'm sure there's good people there. I'd look externally, possibly, sure. You need to look at all the sources that you can possibly look at. But once again, look, I don't have any. It's one of the advantages of having to work with as many different railroads as I've worked with in these kind of situations. I've got allegiance to everybody.
And so I'm just looking, as I said earlier, for the best athlete that can and if it doesn't, then I'm going to work as hard as I can to make Norfolk Southern the best railroad in the world and y'all are going to have a tough competitor.
Thank you.
Thank you.
Your next question comes from Benoit Poirier from Desjardins Capital. Benoit, go ahead.
Thanks for hosting that call and taking my question. Bill, how confident are you that activists will step in and current shareholders will get engaged? Assuming proposal with NSC doesn't work, Hunter, and shareholders are not engaged with that proposal, would you pursue M&A with other railroads?
So on the first part, look, I think that as I say a few things. Number one, we're in an unprecedented, I would say, commodity price environment, particularly with respect to thermal coal, things like that. I don't believe that there is a shareholder of NS who believes that management's recent statements about getting to a 65 OR in five years are credible, particularly in light of the environment. So that obviously puts a lot of pressure on Norfolk over time and if I were a shareholder of the company, even if I'm not an activist, I would say every shareholder today is an activist. Every big institution, I don't care whether you're Vanguard, State Street, Fidelity, Capital Research, you care about the companies you invest in. If you think they're not observing their fiduciary duty and considering a transaction they should consider, you're going to tell that to management.
You may tell that to the Board of Directors either over the phone or in writing. That, I think, has a huge impact. Then just the dynamics from an activist-investor point of view, there already have been a number of activists who have contacted us and Hunter. So it's out there. I think it's a reasonably likely event. But I don't think it's going to have to go there. I think that there are a lot of reasons why this makes just tremendous sense. We structured it in a way to minimize regulatory risk, get a quick answer on the trust issue, and have flexibility and optionality on whether we enter into a merger or not. Again, we think it's more likely than not at the end of the day these entities merge.
And if they don't, it's literally a paper transaction to separate the companies and just spin one off to the other. So that's about a low-risk transaction you can identify and you get the benefit of the greatest railroader of all time as your compensation for going through the process. So I think that's going to be very, very appealing to shareholders and I think it'll be very helpful for the analyst community to weigh in and for you to put together your own estimates on what this CP-NS, where it's going to trade, come May of 2016 and after and I think that's going to resonate meaninDfully with the Board of Directors of NS and I think we can avoid all this proxy and other stuff. I think this will ultimately, at the end of the day, be a friendly, consensual transaction. They usually are.
I guess Benoit did a question of, "If this doesn't work, are there opportunities?" I think we will not change our view of the potential that mergers have and I think it's important that even beyond the shareholder creation, I think, personally, as a U.S. citizen and as a North American, it's important for North America. It's important for the U.S. Now, are our options becoming a little more limited? Is this change that I've tried to create a little more difficult maybe than I thought? Yes. But I think that's not something that'll come off our radar screen. It's not something we're obsessed with. It's not something that if this doesn't work, we've got plenty to do to even enhance CP Railroad even further. But it's something that I think will happen eventually.
The other thing I'd say is our stock is incredibly cheap and so our other alternative uses for capital are to retire shares. I mean, that is a very value-creating thing for us to do at current price. One other thing I'd say is one of the other comments made by NS was that this was "opportunistic timing." And I'll point out to them that our stock is down at least as much as theirs is, if not more, for the year and we view this as issuing very cheap paper. So it's expensive equity we're issuing. But because of the synergies and because of the relative share prices, this is still a transaction that makes tremendous sense.
Okay. Thank you very much for the time, gentlemen.
Thanks, Benoit.
One last question, Hunter? Or we can keep going. One moment.
Your next question comes from Justin Long from Stephens. Please go ahead.
Thanks for the time. I'll keep it to one as well. Thinking about the $1.8 billion in synergies, it seems like the pre-merger operational improvements are predicated on getting NS's metrics to industry averages. Could you talk about the methodology and confidence level in the post-merger synergies you've identified? Was your approach to make a conservative assumption on that and then try to refine that number as you complete the diligence process? Can you just help me think through that?
Yes, certainly. So for just example, if you look at the support function area, we obviously have a very large back office, so to speak, to keep track of all the movements of all the cars and everything that we do. Obviously, Norfolk Southern has a similarly large organization. As we've done our benchmarking, we believe that we are close to best in class as it relates to that and by putting in shared service centers with the right type of information, support systems, and things, we're very confident that we can take the support function numbers that we have and dramatically reduce those. We were very conservative there as well. We effectively looked at our support functions and we assumed that the eliminations would take place with respect to that over natural attrition and we're very comfortable with that. So we haven't overreached, frankly, on any of these synergies.
You heard Bill talk earlier about Mr. Harrison's track record. Every time that he's put out numbers, he's gotten there sooner and quicker and with more value and so we stand by all of these areas. But each and every one, we went through every single metric case by case, line by line. We have a very, very credible case that we pulled together for this.
Okay. Great. Thanks again for the time.
Your final question comes from Scott Group from Wolfe Research. Please go ahead.
Hey, guys. I know it's been long, so I appreciate the follow-up. I think most of us get the shareholder value here in what you said today. I think we've been kind of dancing around one point on this. Bill, I know you just said you don't think it will come to this. I want to ask you, Hunter, are you willing to go hostile? I understand it's not your preference, but are you willing to take this to a proxy contest if the Board doesn't engage? If so, do you think you have the specific support of some of the larger shareholders that are out there?
Well, I think second part. First, we have the support of some large shareholders.
They haven't seen this deal yet. So I think the feedback you got, Hunter, was they wanted their cash now as opposed to waiting two years. They wanted their stock now as opposed to waiting two years. I think they're going to be even more interested when they but go ahead.
So I think that that answer is yes. Now, number two, that's an issue question that our Board has to address also. I've told you that from my view, my perspective, is we're going to work very, very hard to get this story to the shareholder and unless there's some compelling reason that I don't know about that this shouldn't happen, call it what you want to, we're going to work and do everything at our disposal to get this to the shareholder and get a resolution to it and if that calls for a proxy, so be it.
Okay. All right. Thank you, guys. I appreciate the time.
Mr. Harrison, there are no further questions at this time. Please continue.
Well, you warned me out. Thanks so much for joining us. Hopefully, this has gone a little way towards clarifying some of these issues that are a little that some of you hadn't dealt with before or some of us hadn't dealt with before. We will continue this endeavor. Thanks for being with us.
This concludes today's conference call. You may now disconnect.