Canadian National Railway Co (CNI) 2002 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Canadian National third quarter result conference call. I would now like to turn the meeting over to Mr. Robert Vice President Investors Relations of Canadian National. Ladies and gentlemen Mr. Robert

Good morning, thank you for joining us today, and I have the honor of cautioning you this morning, like we do before every meeting, that the presentation that you listen to today will contain forward looking statements under the Dean of the US Private Securities Reform act of 1995 and other applicable legislation and that this forward looking statements will involve risks and uncertainties that could cause the actual results to differ materially from what we present today.

Some of those risks and uncertainties are detailed in the first slide of our presentation and reports that we file from time to time with the Securities and Exchange Commission.

With that I would like to introduce Mr. Paul Tellier CN President and Chief Executive Officer.

I've a good line to all of you and thank you very much for joining us to review our third quarter results. Let me very briefly introduce my colleague our Chief Operating Offier. Jim our Chief Marketing Officer and Claude Mongeau our Chief Financial Officer.

We are pleased with these results. The second half of this year is very challenging and we feel that we are coping well and here is why I say this. If you look at the first line in spite of the fact that Canadian Grain is down this past quarter $45 million and year to date our grain rate of revenues are down $150 million and this is unprecedented.

In spite of this we have succeeded in increasing by nine percent and of course part of this is due to the very solid WC contribution - Wisconsin Central contribution and the declined in that very strong which represents of course the strength of our extremely strong performance in various business units such as petroleum and with and inter global.

And when I think - I often think for the production this year on this side of the water will be less than 50 percent of the five year average and in terms of the water a very strong story on the free cash flow producing for the first nine months after $444 million.

If you move to the second slide you have there with the in the bar chart basically the picture for the year to date - merchandise on a pro forma basis as if you know Wisconsin Central of January 1 as opposed to October 9 last year.

Merchandise up seven percent up eight percent and way up and therefore the great situation is directly related to the and you know we - this is going to go on for some time. But we are reacting and already we have with a couple of hundred lay offs as a direct result of the great decline and we are looking at every single possible productivity initiative in order to off set this decline in commodity. Claude over to you.

Thank you Paul. Overall these are very results and as you said they are achieved or they were achieved in a very tough environment. Our came in at a $1.32 this is up nine percent versus adjusted in 2001. This is very good performance and is driven by a couple key factors.

First the WC acquisition is showing through with strong accretion. This is the first year anniversary of that acquisition and we still feel like we are very much in a honeymoon period. We are ahead of all financial targets and the integration is going very smoothly.

Second the strength of our merchandise franchise is also coming through revenues are up 13 percent and pro forma growth is two percent despite a double digit decline in the commodities. will give you more of the details on the revenue front.

On the expense front we held a line to contain increases and delivered our operating ratio of 67.8 percent. This is a slight increase but I'm very pleased when you consider the margin impact that comes with declining profitable business.

Finally we are continuing to make steady progress with our effective batch rate is down a percentage and a half point to 33 percent - to 33.5 percent. Our interest expenses are up on a basis but on a pro forma basis they are down by a full 10 percent. Other income came in at eight million versus 12 million last year.

We had a very strong first half in terms of other income with 60 million in the first two quarters. Going forward in 2002 and 2003 we see other incomes more in that range of around 10 to $12 million a quarter.

Lets turn to the expense performance. Despite an increase of $35 million or just under four percent you can rest assured that we are continuing to focus on all productivity and cost control initiatives. Hunter will give you more of the details.

But labor productivity is up seven- percent year over year. Asset productivity for loco and continued to improve despite sluggish volume. As in ... we are also facing some costs pressures. Labor expenses are up four percent our head count reductions are off setting regular wage increases, but fringe benefits and lower capital credit are pinching us.

Purchase services are up 15 percent, half of this however is due to a one-time credit in 2001. The other pressure points are timing for the most part and a few costly derailments. This is an area of intense focus and we expect our purchase services to be down sequentially going forward.

On the fuel side we are benefiting from good extradition this year at around $25 dollars per barrel and we are also edged the full 45 percent of our volume for 2003 is edged at $22.75 cents per barrel.

ramps are up and that's despite improvement. The issue here is off line car cycles which are improving, that's the good news for car availability, but it is showing through in our result in the form of lower car hire income for our cars on other railroads.

Overall if I have to say on the expense front that there is a silver lining with the tough grain situation it is the fact that we have a renewed intensity on all aspects of our cost structure and the benefits or the dividends will flow through the coming months and quarters.

Our cash flow story again is a very bright spark. We delivered $88 million of free cash flow this quarter putting us at here to date performance of 444 million. The strong cash flow and the conversion of our convertible preferred instruments are the key drivers of a fast improving balance sheet.

At December 30 our debt to total CAPP on a book basis was at 38.6 - 43 percent including all leases. At the same time last year if you go back we stood at 46 percent adjusted debt ratio. This means that we more than fully met our goal of absorbing the WC acquisition in less than one year.

This strength bodes well for future strategic flexibility but it was also a key consideration in our decision to announce the share buy back. Our goal is to keep the debt ratio in the range of 45 to 47 percent adjusted debt ratio and this will free up cash to buy back up to 13 million shares in the next 12 months.

Let me wrap up the - in terms of the as we close the year here we have a bit of guidance on Q4 and full year result. On the revenue front Q4 will be more of the same a tale of two cities really, tough offset by merchandise and intermeddle.

On the cost side we are facing also tough comparisons because last year we had two meaningful one time credits which helped our expenses in 2001. A fuel recovery of 15 million as a result of a long-term dispute with another railroad and a $10 million recovery credit for materials used in motor repairs.

Finally we will also lap the WC Accretion with only eight days to finish it. However we are very comfortable overall with our revised guidance with full year EP has growth in the range of five percent and very solid streak we are in line for to deliver a target close to $500 million.

Jim over to you.

Thank you Claude. On the first page of my slide it's just set out the third quarter revenues, I would like the first say that all of the comparisons that I'll be talking at to here on are pro-forma basis.

Third quarter revenue performance was very strong but hidden by significantly lower grain on revenues primarily in Canada. Our merchandize revenues and when I say merchandize here I mean patrolling the chemicals metals and minerals and forest products were up five percent.

If you include all, which was up 20 percent into the merchandize number, you find that our revenues increase seven percent in the core. Inter was also up eight percent.

More specifically breaking these numbers down the climb in chemicals up a 11 percent through principally by higher sulfur trap. Our metals and minerals revenues were down seven percent as lower iron moves on Wisconsin Central and strike that two of our customers off set a somewhat rebounding steel market.

Forests products continues to be up due to a very strong lumber market. Lumber in the third quarter up 15 percent. The in position of duties on Canadian lumber moving into the United States as created an unusual situation where producers are running their mills flat out at full capacity in order to reduce costs to both avoid the on average 80 percent inside dump being penalties and to the inner position announce just filed for refunds on those penalties where we expect that lumber traffic to continue to be very strong into the future.

A good sign is that papers also starting to show some signs of strengthening as production had increased from the low 80 percent range into the higher 80 percent range more recently. And even with those low production run rates, we have recognized positive growth in paper as we continue to realize market share gains from trucks. As we saw in the second quarter in anticipation of the strong paper market our pulp business continues to be up as well.

Auto revenue is up 20 percent for the principally by hired incentive driven on auto sales in the U.S. for about a third gain that is also coming from truck and inner model of eight percent strong overseas on strong overseas and domestic growth.

We did see some positive impact from the U.S. Port Labor Issues but very difficult for us to quantify because there were no specific diversions there into Vancouver, just some what higher shipments for almost of our customers.

Now the other side of the story pulp almost every piece of the pulp business was down somewhat but Canadian Grain down itself 36 percent in the third quarter. I think everyone knows about the Canadian Crop situation, so I won't delay with the point other then to say that it's that.

U.S. Grain situation is better as Corn beans in hard rock territory are reasonably good. But crops elsewhere are not so good so the prices of those commodities have gone up and our customers are holding in anticipation of a realizing a higher price.

The Fertilize part of the business was flat and coal we had a weak quarter down two percent is the remaining coal mines in Canada continues to slow down and some of our Illinois mines experienced production difficulties. The next stage I think pushes the third quarter in prospective. The slide shows the last four quarters in the solid growth that we are continuing to realize in the merchandise side of the business. off setting that is this unusual that we are getting on the gray side which is driving the bulk revenues down and lowering our over all revenues.

In the third quarter we had just a normal grain crop total revenues for the quarter would have been up six percent.

The next stage just to put the out look in a little bit in perspective. That trend that you saw in the previous page was a strong merchandise slash intermeddling growth should continue as we leverage our service plan and focus on modal ship to grow the business. Simultaneous with that we are continuing to realize price increases in the one to two percent ranges.

The bulk business going forward will improve slightly but we certainly need more favorable grain growing conditions in Canada and the U.S. and coal business will no longer continue to be at rain on the company going forward as that business was virtually gone.

So we will be sticking with the game plan to draw the top line it is definitely a producing result. .

bert (?): Thanks Jeff thanks Jim. With clearly a challenging quarter if some one had asked me four years ago when I joined this group if we could just take a kind of a top line yet we have taken with as Jim as just described and be able to produce them the kind of bottom line results that were achieved and operating ratio I would not get off it if possible I think it shows something about the brilliance of this organization.

Let me just highlight a few of the initiatives and the achievements this quarter that gives some explanation to the kind of performance at and Claude and Jim have described.

Number one I don't want to over look that we had what I would call a major break through we collected bargain agreements with our new agreement that we signed with both the on the central and the central and the central we started those in the third quarter and we also had ratified and we are pretty intense negotiations right now with the and the central and I will visit with most of you hopefully in a week or two about the details of those agreements and the results they can bring.

To the first panel is the look at our service performance. A nine two percent performance on on what we described as a car strip plan. That was achieved on a pretty challenging environment given that we the weather conditions we had experienced on the south river with two hurricanes as well as continue to maintain the past service levels and we continue to raise the and I think to some degree you can recognize that the out standing performance of and are here merchandise leaders with the ability to take this service plain and leverage it out in the market which helped reflect performance.

If you look at the next page on the state performance I did want to high light not over look the fact that the group that did an out standing job and make some improvements in about 90 percent. This is still an opportunity that we have to go further and then we will continue to focus on that in the future.

The next panel talks about the locomotive utilization. We've moved to a new level new record of two records safety three for available horsepower. That is level we might not be able to achieve.

Also in the quarter of the locomotive standpoint we received the 30 new GE-9 locomotives which helped which helped debt performance to some degree and you can just see on the other side of the page.

The impact we've had overall with the size of the locomotive and if you could be the CNLO essential all together and look at the total locomotive the ownership when we started was 2495 and that's now down to 1641. Our reduction in about 34 percent of the locomotives which is pretty out standing performance.

If you move the next page to the car I'll give you one example of the center being . Some out dating performance talked about was in the lumbar side and if we had not achieved this side of it would not have been able to handle those levels of upper loading.

We drew debt to 216 miles per day, which is about a 13, 14 percent improvement over last year, and correspondingly you can see a reduction in our flick you know that's the end ownership and lease. Long term lease and ownership. That's come down from about a 75,000 level down to as low as 60,000. So nice work in that area.

The last initiative I'm going to talk a little bit about is something that is a big break to your hard part. We have developed a strategy generally to take our inter modal and trade operations and consolidate.

And the first initiative here which is an opportunity that was created by the bureaucracy plan and those of you that will remember we had two major hump yards 350 miles apart in both Montreal and Toronto.

We did not think that we required this. As a result we closed the classification yard at in Montreal. That freed us some space there and as a result we were able to take our operations at a third which runs along the interstate here between most people when you go to Montreal to see it arriving in from the airport read a 210 acres which hopefully Claude is going to do a good job of modernizing for us.

Move dollar operations in consolidated deviant to . You can see listed there some of the some of the savings and that represents about a $10 million radio operating expense just for that one project.

We have announced a similar initiative at and we'll be exploring other opportunities as we go forward. So overall outstanding performance given the environment we were dealing with and with that Paul over to you.

Thank you Hunter. Let me wrap this up to say a few words about it. To drive and hopefully some of you on this call you know will join us at the Investors meeting that we're having here in Montreal on November 4.

Let me process my comment on 2003 by saying there is a great deal a great deal opportunity out there.

For instance are we going to be in war in 2003. I'm sure everybody on this call as, is or heard use on that subject matter.

What could be the impact on the economy on both sides of the border, question mark.

prices, there's been a fair amount of . And difficult to guess where we are going to be on - in 203.

Grain I'm not going to the point, but this is back. You know in the first two quarters of this year for a simple reason that, you know, we won't talk about the size and the quality of the crop in '03 much before May or June of year.

So therefore keeping in mind that uncertainty we, my colleges and I, are ready to say that in that tough environment we will grow the one, two percent in 2003. We will continue to improve year to year our operating ratio, despite the fact that there are out there some pressures - there is some pressure on the .

For instance, on the pension front and this is, you know, a topical subject so therefore there and I'm talking here first and foremost in the Canadian side, because on the Canadian side we don't have the equivalent of the rail retirement program that exists in the U.S. which is as you know publicly managed.

We have a large pension fund. It is totally funded. It is enjoying a service, but because we are very conservative financial managers we have decided reviewing this with our report yesterday, that for accounting purposes we're going to reduce the rate of return assumption on those assets, of assets, we are going to reduce the assumption from nine percent to eight percent.

Well the impact of this, you know, on the expense line is slightly in excess of $50 million, but we think that in the spirit of good corporate , us being conservative managers, this is the right thing to do.

So , and this is an example, the pressure on the we are confident that we'll continue to improve year to year the operation ratio. And this of course will require aggressive cost take-out, and improvement, and we have a countywide exercise on the way, and we are very confident that we will deliver other, in addition to what Hunter has mentioned, other significant productivity increases.

of , you know, we are confident again keeping in mind the degree of that exists out there in the environment in order to grow around five percent in a difficult year, and to continue to produce, to generate very strong free-cash flow.

So before I return the floor to you, and we answer your questions, my wrap-up.

Good quarter, very strong performance on the merger side, overcoming the bulk weakness. On the front which comes in a central front, only good news to report. Because this is another flawless integration, the a couple of weeks ago decided that they were going to end their five year oversight after it's first year, and therefore we no longer have to file a monthly report on the progress that we are achieving.

And across the board we are ahead on every performance measure and therefore my last point.

Do we like the grain situation on this side of the board. We surely don't but you know what it forces us to re-double our efforts in improving productivity and we are confident that we will produce other break through. So I think that this, over to you and we'll be glad to deal with your questions.

Thank you Mr. Tellier. So if you wish to ask a question please press star one on your telephone. You will then be in a priority sequence queue. If your using your speakerphone please lift the handset and then press star one.

Should you wish to cancel a question please press the pound key. There will be a brief pause while the participants register for their questions. Thank you for your patience. You may now proceed.

For our first question is from Salomon Smith and Barney, Mr. . You may now proceed.

Good morning all just a couple of quick questions if I could. One was and I think the bulk outlook obviously has been trudged through quite a bit but a couple of questions on the farmer behavior.

Could it all get worse I know that in your commentary in the presentation you talked about maybe modest improvement obviously from declines of what we saw in fourth quarter but is there any risk that farmer behaviors been soused that what little crop there is, is actually moved to market in fourth quarter and that actually we can see an even worse decline in the first half.

Certainly that seems to be the way Canadian Pacific looks at their franchise and I guess you want to get your take. Your franchise maybe different in how the behavior is and what the crop availability is?

Hi Scott it's Jim. Yeah I don't think that our crops situation is any different and we are anticipating what available crops there is. We'll move in the fourth quarter. That's just the way things work and then we will see a decline in the first half of '03 in anticipation of the new crop to be grown next year.

How big a decline then should we be thinking about for the first half if it may bubble up a little bit in the fourth quarter against still down but how much further down should we be thinking about relative to looking at the first half before next years crop?

On a percentage basis similar to what you've seen in the second half this year.

It won't get any worse.

It can't get much worse Scott.

Yeah. Then I guess just a one question I guess for Hunter is two fold. How are you, how have you been able to show the kind of improvements you've demonstrated in GTMs per horse power given a very soft bulk traffic environment typically I guess my understanding and thought had been that, that is, can be an area that's got a lot of productivity relative to how you operate the bulk train and yet you've still been able to show in third quarter fairly nice improvement in that metric related or I should say just separately.

Help me a little bit with how much further one of the things we have left to do in Wisconsin Central obviously in terms of the broader comments things seem to have gone very well and or ahead of expectations. Does that then mean that we just have that much left to do or are there new things that your finding with respect to Wisconsin Central that you may not have initially thought about?

Well Scott from the gross model horsepower stand point. The numbers are not in there. That is expected by some more discipline in the system. So more fine tuning of the schedule. It did help by the newer locomotives.

Certainly there, we, I think we replaced those - we took those 30 new locomotives and replaced 50 older which then cascaded down. As I was talking to the group this morning I think we think now that we can move up probably if we had a good bulk year and those gross we could probably move up to your point about (inauidble) volume helps you from that productivity . Probably do the 300 level. On the Wisconsin side the Wisconsin Central continues to improve and one of the ways there improving and one of the ways the in some degree we probably under estimated is by us cascading down better from the assets that we've been able to put down there they've been able to take advantage of those even better than what we thought so I think as Paul said earlier the Wisconsin central is a good story and it continues to get better in a lot of .

Great. Thank you.

Thank you. Our following question from Morgan Stanley you may now proceed.

Hello can you hear me?

Yes.

Great, great. All things considered good quarter guys. I had a few questions here first you know you announced a 13 million share buy back which is commendable and what I'm trying to understand is sometimes when companies announce this they just do it because they think there stock is cheap and want to send the signal on the market. Other times companies they should go out and buy all those shares during that 12 month period and I would include the informal and central in that category and I'm trying to understand how we should model this? Is this pretty much all under current conditions your current forecast should we assume all 13 million you bought next year?

Yes Sir Yes. And basically we would use the cast that we generate to buy back shares and obviously you know we're going to try to do this you know as a fortunate fashion as possible but basically the board it approved this program and it reflects you know two things. We think that first of all is the wide use of cash in creating shareholder value and secondly it reflects the strongest balance sheet in the industry as you know Claude just mentioned it. You know excluding our leases you know the debt total cap ration is better and even if you throw away a so we can't afford to have that kind of a buy back share program.

OK. And the other thing that you get to tell me and once again It's commendable that you're giving cash back to shareholders but what it tells me indirectly is that you don't have a large acquisition on the forefront not that I had that in my expectations but those issues seem to circulate every few months here. Is that a fair statement/

it all depends how you define large but you know there are a great many transactions you know as we keep saying on an on going basis we review strategic and so on and we could we could go on with this share buy back program and at the same time you know look at punctual initiatives here or there and so on. So one does not exclude the other at all.

OK. Great and the second question was for . I heard your comment about merchandise revenue growths continue at consumer levels and I'm trying to reconcile that with the fact that you know auto sales or productions are expected to definitely slow in terms of growth and I know our auto analysts will be down next year at lest in the U.S. and I'm trying to understand your franchise I know you operate not just in Canada but quite a bit in Michigan but trying to think about issues the models that are on your lines and then I guess further more kind of some of the secondary items like steel or chemicals that would be going into the auto production trying to get a feel for it - I guess if auto down next year would it still be reasonable to expect merchandise growth - can you continue at these levels?

Yes in the - in our forward looking modeling here we are assuming that the auto production decline in 2003 - you know it's kind of into the 15.5 range but the other business segments in the merchandise sector increased to off set that decline and our merchandise growth should continue to be you know in it's five to six percent range and most of that is coming you know based upon the service plan and our ability to get market share gains principally from .

OK great once again good job you guys given the circumstances.

Thank for you may now state your questions.

Afternoon guys or morning whichever way you want to come at it. Two questions I guess mine primarily focus to I wondered if you could talk about sort of your business versus domestic versus international. A lot of the railroads are focusing on growing their international business and I wonder if you comment on sort of how you are positioning the whole port security issue in Canada versus the U.S. and what that implies for your volume growths in '03.

Well in '03 we continue to focus on the opportunities that exist for us to leverage our service plan more on the domestic side of than on the overseas side of right now they are 50-50 where we see opportunities to gain more higher rated traffic and really drive the business going forward is with our expedited train service that we provide to the domestic customers.

Obviously we are not saying that we are abandoning the overseas it is a significant part of our business there but the challenge is in that business which is viewed much more as a commodity is to improve the profitability of that business and that is something that we'll be focusing on in '03.

As it relates to security we are very actively working with the ports and the steam ship companies and the customs agencies on both sides of the border to work along the lines of having some level of pre-clearance that is acceptable to U.S. customs and we are doing sort of tests there too in conjunction with the Canadian and U.S. customs to show the defined message that will be acceptable to pre-clear. As well as our active participation on a test basis the first railroad - yeah first railroad in Canada to be certified into work with our customers to be certified so that they're is a propensity to believe that there is a higher level of security by shipping with .

And again those are test cases that we're working on.

So Jim just for sort of modeling purposes what kind of sort of revenue growth would you suggest we use for the intermeddle business for next year.

I think that ah I think that it is safe to assume at this point in time that we can that we can grow the intermeddle business kind of in this eight percent range that you see in the third quarter. That is a range that we're comfortable with growing profitably. Obviously this business you can grow at much much faster rates if one wants to do things on the side, to take on growth at the expense of profitability, but we believe that from a managing the portfolios standpoint and kind of eight percent run rate is a good run rate for us to work on both the top line and the profitability side of that business.

My second question has to do with generally pricing. You guys include fertilizers in with grain and I notice that CPs grain revenues are yields per RTM are actually up about 3.5 percent whereas your numbers are down four. I wonder if you could give us some sense as to what is going on on the price front within this sort of grain/fertilizer mix.

In the grain business the rate decline that you see in our grain is fertilizer is mostly related to lower grain rates. Those lower grain rates are principally a result of our working with the producers and the wheat board to market that grain into new markets - the US where we have the ability to leverage the Illinois central and to work very actively to open up new markets in Mexico.

In order to penetrate those new markets and to get that grain moving in those corridors and have - in other words much more beneficial for us do the long haul nature of the business enable to leverage the WC and the IT acquisitions.

We have worked on a rate structure which is more aggressive than the traditional rate structures that were in place where we principally moved grain to the west coast for export or over to Thunder Bay or Quebec city for export out the Atlantic.

So is this - so next year in terms that sort of again RTM or yield per RTM in the grain/fertilizer category, we're going to continue to see this coming off or are we going to start to see it moving up.

I think you'll - my sense is right now again the grain business being in somewhat of disarray that we ... very actively marketing various programs, but my sense is if we start to see some normality return to the crop situation that you will see that rate structure and grain structure move up.

OK that's it from me thanks.

Thank you our following question from you may now proceed.

Yeah good morning everyone. Let's see I've got a couple of questions here. I wanted to see if you could give me a little bit further color on the guidance that you'd provided. I know there are a lot of different factors but is it fair to assume that earnings in first half of the year when you had the really - most of the negative impacts from the grain side maybe down on a year over year basis, and if I look to the second half of the year then what type of a grain crop would you be assuming given the context of a five percent overall earnings growth.

Well Claude why don't you answer the first part and the second part.

We're going to give you more guidance on 2003 when we meet in Montreal at the November Train Meeting. But seriously that's depending on whether grain crop you finally turns in and what is moving Q4 and what is moving the earliest part of next year.

If we see continuing decline in the grain sector in the first after 2003 that would put pressure on our earnings and so we would expect the balance of earnings growth next year to be more back but this point of time we have a range of initiatives it's still early to call all the equipment things on grain, so I would defer our more specific guidance to our full discussion when we meet in Montreal.

In terms of our - for our modeling purposes in trying to predict then what the revenue line will look like next year. The numbers that we came to a grain number two ways. One is we took up a five year in the average and then took 85 percent of that, that's seems to be the guidance that we are getting from the experts in the priories in terms of the level of kind of moisture replenishment that will occur if we move through the year.

Obviously that can move around if we get a huge snowfall this winter etcetera. But for mauling purposes that was one way we did it and then the second way we did it was we just took a trailing five years which would take into consideration the bad year on this year, the bad crop - the small crop size this year and images of four preceding of crop years took that and those numbers come out almost the same as 15 percent of a five year average.

The wild card then comes into the carry forward what normally about you know 25 to 30 percent of the available crop to move in any given year is the carry forward from the prior year crop because this year's crop was so small that carrie would be abnormally low.

So even if you got a very good crop a third of which - a third of the move available crop normally comes from the carrie forward which is going to be very small, so we don't expect to have obviously a better year in grain in 2003.

We do expect it to market conditions will certainly be right for grain to move in the fourth quarter if anything in the way that I described a grain comes but the real you know the real opportunity would be for us you know in 2004 when I'm just you know I'm all ready starting to work on Paul right now to make sure that my bonuses is tied to 2004, that's going to be a hell of a year when this grain returns to normal.

OK. That sounds, sounds good. But just one other follow up question, I think this is for Claude. Looking at the expense side, the comp and benefit expense on a premium employee basis, I know that gets there's a mix issue with Wisconsin Central, but we had pretty significant inflation, the first couple of quarters and continuing into third quarter.

Is there point does that get lapped in first quarter of next year and that number would come down significantly or is that something that we'd expect to carry on through 2003 as well?

No we would expect it come down slightly. That all ready started to come down if you look at it carefully, from quarter to quarter is improving as slightly but it's still too high.

We have a range of initiatives, the French benefited inflation is particularly tough for us this year but while we'll continue we expect it to pay for a bit more in the 15 percent range next year than the 20 22 percent that we have been facing in 2002 so we are expecting our labor inflation going forward to come down on a year over year basis.

We are also working on a range of initiatives to a constrain line of work force and I mean our head count is coming down it should continue to come down going forward so we are basically working on all levers.

What do you think is a fair number for comp and benefits inflation on a pro worker basis is it five to six percent next year or is it still above that.

I think it is going to come down from this year I would like to see it more in the four six percent range but these things are difficult to predict and the one thing I don't fully you know have in this number is the pension benefit. Now that increased next year we will do the change of eight to eight percent prospectively so this will be on year over year basis you have $50 million of labor expense increase that you have to face up to in 2003 so if you factor that in that is going to add to our labor inflation this is a non cash item over Tom we have always been contributing to our pension plan so you know this year for instance our pension expense is essentially a break even but we have been contributing $75 million hard cash for the pension fund. So the increase is a year over year expense increase not a cash also increase.

OK thanks very much for the time.

Thank you.

Thank you our following question from Mr. one you may now proceed.

Thank you I was going to ask the last question but I will do a little follow up and if one expects $50 million increase pension expense next year plus a 46 percent labor increase can we sort of itemize where you can down the other costs to take a drop in ratio down.

Yes let me just give you a few areas clearly the mission that I have just described in will be doing a similar initiative that at there has been some mixed tribes late this year and lowering our terminal calls both in the in the facilities and in our break terminal was our second largest terminal has made productivity improve this year approaching 40 percent. So every area across the board you are going to see some improvement in. I mean clearly we have got improvements if your is in active service the car fleet it's a little bit in a lot of places.

Just another question then for Claude I guess is the risk source expense on the balance sheet to climb to 36 million in the third quarter versus 47 million in the first half per quarter in the first half. I just wanted some guidance with regards to that work force. Work force cash flow item if I may.

Are you talking about severance thing.

Yes.

Well we have been continuously seeing that the severance in year over year basis you know it all depends on the timing of the severance payment both of the head count reductions as we arguing to day are deeper to our democracy so if payments for a few years bridging towards these kind of payment out. So our overall provision stands at around million, and we expect that to be, you know, disperse over the next few years on a gradual basis.

OK. Thank you very much sir.

Thank you. A follow-on question from , . You may now state your question.

Thank you. A couple of questions this morning.

First of all, for Jim. Could you go through a little bit on that grain yield number, given that there was about a 3.5 percent increase I think this year in the regulated grain rates? What's the mix, or how much of your grain volume actually went on these new routes to the U.S. and Mexico?

And on the yield questions the second part is, the auto's there was a very big increase on your yield on your auto business. And could you talk about that a little bit?

Sure. The overall portfolio of grain that moved into these new markets would have been probably about a 20 percent increase in that portfolio. So it was a substantial amount of grain traffic that shifted into this U.S. slash Mexico program. And again, as I stated earlier, at lower than what it would have been say, you know, a kind of rate for moving to the export market.

So that is what's driving down the reported yield there.

In the auto traffic where you see a significant increase in first of all revenue per carload, as well as , is due to a change in some of the gateways that we're now using to move traffic to the west. We have been working very hard to utilize the central franchise to move traffic that we used to give to western railroads in Chicago to new gateways south of there, principally Memphis.

That results in a longer haul for us. And therefore a higher revenue per carload. Normally one would see as the length of haul goes up and the revenue per car goes up, as you see in the other business units, you would see a lower , as a result of that.

Simultaneous with this lengthening of our haul that we have done, there has been some shift in some of the traffic flows as one of our major customers has renewed the contract. Certain traffic that we moved in certain lanes is at - was at a low or at a low rate, is no longer with us, and new traffic at these longer hauls is. So we have both improved the revenue per carload and the as our portfolio of traffic with the manufacturers has shifted.

OK. That was good Jim.

One more, one more question.

Oh Paul?

Yes. Yes .

Sorry I had just two more questions.

Number - regarding the deferred tax, could Claude give us an indication on how the deferred taxes are going to look over 2002 and number two in note two there is a comment there about the earnings that would have been proforma had Wisconsin Central been acquired January 1st 2001, and there is a bit of a discrepancy between those numbers and the numbers in the proforma statements at the back. I'm just wondering if we can get a reconciliation on that.

We can certainly give you the reconciliation off line if you don't mind. On the deferred taxes our effective tax rate on book base is at 33.5 percentage overall and we feel it is an area where we can continue to going forward. On the cast taxes bases we are entering the period now where we have dumped with all of the tax attributes and we are now gradually moving to a more run rate basis which will be on the order when we get there a year or two from now will be about 10, 11 points less cash taxes than the effective book tax rates.

So you know if we get to a 33 percent tax rate for instance, that means we will be paying about 22 percent or so on a cash tax basis when we achieve the run rate essentially 18 to 24 months from now.

Thanks Paul.

Thank you Bob, last question.

Thank you Mr. Tellier. Our last question for today from Goldman Sachs Mr. Jordan you may now take you're questions.

Just a real quick question. Can you give some sense for what you're thinking in terms of edging into next year from a standpoint.

Yes, we have a gild edge position. We have a policy of systematically edging in process of 24 months out, so we have our next year's consumption at about 45 percent, that's our policy and it's at WCI has that around $22 and 75 cent per barrel equivalent for WCI. That's for 2003. For 2002 we are edged at around 25 a barrel and also 45 percent of our consumption.

Thank you.

That was a short one, a last one.

Thank you, so our following question will be from Mr. Chris Robinson. You may now take you're questions.

Hi guys, just wanted to check in with you on the capital side of the business. You're gross expectations for next year seem to be indicating that you might have to pick up you're capital spend a little bit. Could you talk about both next year and also where you hope to see things going over the longer term on that front capex.

Yes I can answer that. Quite the contrary I would say that we are very comfortable with our current on the order of a billion dollar capex. We have been spending this year despite the addition of the WC acquisition and as I mentioned in previous conference calls that billion dollars or so capital expenditure includes a number of very strategic lumpy projects, such as the roll out flat form and a number of other meaningful lumpy projects that we feel very comfortable going forward at around a billion dollar capital expenditure. We can do what it takes to maintain our plan and support Jim in his efforts to grow the business.

Excellent thanks a lot.

Thank you very much for you're and have a good and safe day. Thank you all.

Thank you and have a great day.