Canadian National Railway Co (CNI) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CN first quarter conference call. I would now like to turn the conference over to Mr. Bob Noorigian, Vice President, Investor Relations. Ladies and gentlemen, Mr. Bob Noorigian.

Thank you. I'd like to welcome you to our first joint analyst and media conference call, and I'd also like to welcome any other interested parties that are on the call today. I'd like to begin by cautioning you that today's presentations and discussions may refer to non-GAAP financial measures for purposes of comparability. The Q1 financial statements and notes are attached to our press release and are also available on CN's Web site, www.cn.current address/investors, slash analyst presentations.

You will also find, at that same location on the Net, a reconciliation of certain non-GAAP measures that were used by us today to reconcile them to GAAP measures. Also today, as you would expect, our presentations will contain some forward-looking statements within the meaning of the U.S. Private and Securities Reform Act of 1995 and other applicable legislation. There are a number of risks and uncertainties that could cause actual results to differ materially from what we present to you today. Some of those results are details on the first slide of this presentation, as well as reports that we file from time to time with the SEC and other regulators.

I would also like to welcome anybody who would like to ask questions through the Internet, you're going to have to type them in, obviously, and we'll be happy to answer those also. With me today is E. Hunter Harrison, the President and Chief Executive Officer, Claude Mongeau, Executive Vice President, Chief Financial Officer, and Jim Foote, Executive Vice President, Sales and Marketing. With that, I'd like to have the pleasure of introducing Hunter Harrison.

Thanks Bob. And good morning to all of you. Please that you could join us today. Hopefully I've trusted you've seen the results of the press release or you have seen the slide presentation over the Web. Before Jim and Claude get into some of the details of the first quarter results, let me make a few comments as far as an overview of the quarter.

First, you know, you see that our earnings were -- came in at $1.04 versus $1.15 last year. And I should note that that's before the effect of accounting -- a policy change that all rails have gone through, which Claude will go through with you in some level of detail.

I was extremely pleased with the overall performance for the quarter, particularly in light of the environment that we faced. Our revenues were down only one percent. But actually, if you look from a volume standpoint, our carloads were up about four percent. Jim will talk more about that.

These were achieved in spite of the fact that we had an 11 percent reduction in our bulk business and the majority of that was made up of $49 million revenue drop year over year in Canadian grain alone.

We also had a rough impact from fuel costs as a result of issues in the Middle East. We saw our fuel bill was up about $15 million or 12 or 13 percent. And probably the most telling issue was the toughest winter I've ever been through in my railroad career.

And the weather impact, which is hard to estimate year over year over a "normal" winter, but somewhere in the neighborhood of $25 million. Split kind of between half of that cost which will not be recoverable. Half of it revenue and some of the revenue issues certainly you could argue that there was a timing issue there.

But all of that produced a solid free cash flow performance of $181 million. There's a slide here -- I'm not going to go through a lot of detail on the weather and what took place. But I would say this, a lot of you had raised questions about what causes the biggest problem in winter?

You know, we can deal with snow. We deal with those issues. We can dig our way out. It is very -- extremely difficult to railroad with 40 below zero type temperatures that we battled throughout this quarter.

And the big impact it is -- it's what it has on your brake system and the brake pipe. We have to cut down the train size because of the taper that's caused in the brake pipe because of the condensation freezing.

We cut the train size down. If we push the envelope a little too far we get sticking brakes. And we get sticking brakes then we get flat spots on the wheels. The wheels break or then we in turn break the rails.

So, it has caused a lot of concern for us. Although we have learned this winter more about certain actions we should take to avoid some of these things. But I think our people did a wonderful job and I would congratulation all of them in the face of this weather to produce these kind of results. Claude.

Thank you, Hunter. As you said, basically, I think it's fair to say that the quarter, the way it came out, is a very good quarter in a tough environment.

I'd like to single out three main elements we had to face during this quarter. As Hunt just said, very cold and difficult winter, which impacted both productivity and service. Our grain movements were also hurt badly with a drop of 13 percent year over year.

And finally, a third element, given the uncertainty in the Middle East we had to face up to fuel prices which were close to $35.00 a barrel on average during the quarter. So, given this adversity, we're pleased to report $1.04 of EPS for the quarter.

This excludes an after tax gain of $48 million, or .24 cents per share for the cumulative impact of a change in accounting for the cost of removing railroad ties.

Going forward under the new approach, we will treat the cost of removing ties as a period expense, which will have the impact of these three things slightly our labor costs, which will be fully offset by lower depreciation expense going forward.

At a dollar four, our EPS is down 10 percent, or .11 cents from last year. This is very solid performance given that other incomes is down $34 million from a record $38 million last year. This drop brings us closer to a more normal level and it had the impact of reducing EPS by about .10 cents, or slightly more than .10 cents on a year over year basis.

As Jim will discuss in a minute, our revenues performed very well, down only 1 percent. Good performance given the drop in grain and also the significant appreciation in the Canadian dollar. During the quarter, the Canadian dollar increased 3.5 cents, or roughly 6 percent, which caused reported revenues to drop by close to $50 million, or a little bit more than 3 percent. Now there are compensating benefits as we've discussed in the past at the level of operating expense and interest payments, which are done in U.S. dollars, and as the Canadian dollar appreciates, we get a benefit there, which makes us overall close to a natural edge in terms of a bottom line performance.

To give you a sense of things, every cent of the appreciation in the Canadian dollar would impact us at the bottom line level on the order of four pennies per share on a full year basis. So during the quarter, that 3.5 cents in a appreciation costs us on the order of about 3 or 4 cents as well on a year over year basis.

So overall, good start for the year. And if I turn to expense, you can see there that we have very solid performance, which is showing our solid cost control. Tight management across the board to offset the impact of a 13 percent increase in fuel costs. Fortunately we were well heads with roughly 47 percent of our fuel consumption edge at about $23 per barrel. But on the wet side, we were hurting with the fuel prices close to $35, as I said. But also crack margin had expended by a couple bucks on a year over year basis. So tough to deal with this kind of an increase on the expense category that represents just under 10 percent of our overall expenses.

Labor expenses are down slightly. And that's despite an increase in our pension costs, and also the cost of expensing stock options which we have started to recognize on a perspective basis in this quarter, and will continue to do so going forward. The main driver here of that reduction is the benefit of a 5 percent reduction in our overall workforce.

Equipment rents are done a full 11 percent, and despite Winter congestion, we're getting the benefit here of asset utilization in not renewing certain leases which are surface car types, but also the benefit of the TTX rate for flat cars which have come down on a year over year basis.

Casualty and other is the only category that's going up significantly, with an increase of $13 million. This reflects mostly the increase in legal claims in the U.S., which we now book on an actuarial basis.

With the Spring arrived here in Canada, we are focused on reaching much higher levels of productivity and also delivering sequentially lower expenses in the next three quarters.

If I turn to cash flow, solid performance, $181 million of free cash flow. We're continuing to make progress on working capital, which was offset in this quarter by lower proceeds from disposals. If you recall last year in the first quarter, we received the cash from the sale of our trans-rail positioning in New Zealand which we inherited from the acquisition of the . This is a good start to the year and we used this cash to buy back 5.8 million shares during the quarter. As it stands, we bought 8.8 million shares or roughly 2/3s of the 13 million program which we announced in October. During the quarter, we also completed a $400 million U.S. financing.

I think it's fair to say we picked the perfect timing just after an upgrade from Moody's of our debt rating, and also just before the war broke in Iraq, which allowed us to come in to close lowest treasury rate in the last 40 years and costs for that 10 year year bullet of 4.4 percent, which is a very good financing giving up lower interest costs in the quarter but also lower interest costs going forward for the balance of this year and next. If I wrap it up to give you a bit of an outlook for the year, I think the first quarter is a good start to the year, it's in line with our expectations.

We're really focused on growing the business from a volume standpoint and also an intense cost focus across the board. As we look out for the full year, there's a few elements we are watching which brings volatility. Obviously grain and Jim will talk about it, fuel, it's been down recently but you never know with the uncertainty in the middle east, and also the impact of the stronger dollar, which is mostly important in the makeup of our results, but does have a slight negative impact as the dollar of Canada appreciates. Overall, the benefits are showing through of our discipline and on the cost side, and also, the management, the tight management below the line with our tax rate in the first quarter being slightly lower than usual as a result of settlement. We are confident for the full year, we should be much closer to a 32 percent effective tax rate than the 32.5 percent that has given a guidance in the past. So, a good start to the year, and committed to deliver on our targets for the full year. Jim?

Thank you Claude. Overall, the revenue performance, again was very positive this quarter. If you look at the big components of the revenue, you'll see that our volumes were up 4 percent in the quarter. Twice in the quarter was up 2 percent with about 40 percent of that being attributed to the fuel surcharges that we had in place. So, we started the quarter up about 6 percent despite the 40 percent or $49 million decline in just Canadian grain, and the other weather related issues. Then about 2/3s of that, was eliminated. 2/3s of that 6 percent growth was eliminated due to the exchange that Claude just described. And then, the remaining third of that was eliminated due to mix change, which is principally the impact of the decline in Canadian graining being offset by the lower rated intermodal business. So, our freight revenues then in the quarter, were basically flat, then another $10 million decline in other revenues brought us down to the reported negative 1 percent debt other revenue being attributed to one time gains that we had in the first quarter last year. More specifically, merchandise was up about 2 percent and there merchandise on excluding auto, but the petroleum, medals, and minerals and forest products up 2 percent.

Driving that was a very strong petroleum story in the quarter as we benefited there from the very cold weather, which increased shipments of natural, butanes and other gasses. The Alberta Plastics Producers had a very strong quarter. And again, our sulfur business continues to be up. Metals and minerals was up, driven by a rebound in the domestic and steel market, and forest products down somewhat in the quarter. Most of that is a timing issue related to the service issues due to the weather, but paper being up and the strength in the lumber and panels business continues to be very strong, driven by the big demand continuing in the U.S. for housing starts.

Auto down for the quarter, but a little bit better than our original expectations. Again, the bulk story being the Canadian grain. Bulk in the quarter down 11 percent. But again, Canadian grain itself down 47 percent, offset by an increase in U.S. grain shipments, which were up 10 percent in the quarter. Fertilizers, also was very strong in the quarter, up 8 percent. Then coal relatively flat. Intermodal, a very strong story with most of the growth driven through the import business at both Vancouver and Halifax. So, again, very strong revenue performance.

If you look to the next line, which is the map, your first question, those of you who have it in front of you, might say, why in the world would Foote put this map in this presentation, 'cause it looks so bad? Well, the answer is that wanted it in. But the truth of the matter is that it tells a very good story. If you are familiar at all with what has been going on in Canada and have seen some of these precipitation maps in the past, you will, in the past, have seen this area that is now in red expanding to a much greater area across Canada.

Basically the area which is now on the map in tan, area under recovery, up until about a month ago was highlight in red as high risk for drought. Short answer is, the weather conditions in Canada have created a situation where the growing conditions are better, soil moisture is now good. The subsoil moisture, what that moisture content, which is necessary to sustain the crop throughout the year, is improving. Both the and Canada are reporting a five-year average crop or 45 million metric tons. And as you know, we are still using about 85 percent of that for our budgeting and planning purposes. And we're staying there as of this point in time. But early seeding projections are for higher than average plant, with a crop makeup being skewed more favorably towards wheat.

The next slide talks about our Intramural excellence plan. Again, for those of you who are not familiar with the story, that's our plan to improve service and profitability for the Intermodal business. We first started the first phase of that program in February '01, where we smoothed out our train operations in Eastern Canada, principally that business moving between Halifax, Montreal and to a degree into Toronto and Chicago. But almost simultaneous with starting that program, we faced these severe winter weather conditions in Eastern Canada, which has an impact on our overall service. But we continuing to work on that program and we're dedicated to work on that program. And we are listening to our customers and working with our customers to make sure that this is a success.

And it is already producing results because despite the bad weather, the intermodal trains that are operating under this IMX umbrella operated much better during the weather difficulties then did the rest of the intermodal network. And we are seeing a substantial improvement in the intermodal business in profitability in the first quarter.

The next slide. Where do I see the revenue outlook? Well, I feel good about the remainder of the year. I think at this point in time it's prudent, although it might be conservative, for us to stay at the 80 to 85 percent range for an average crop for planning purposes.

The remaining Canadian coal mines that we had discussed closing have closed. Both and . That was in our plan and that basically shuts down all of the metallurgical coal mines located on Canadian National.

The outlook for intermodal is very strong. Our challenge here is to grow this business profitably. Volume in this business is not the issue. The outlook for the summer and into the fall rush is very optimistic and we are working right now to be prepared to be able to handle that volume, again, profitably as we go forward.

And the continued strength of our franchise, really, our core merchandise. Our customers, which is the strength of this franchise are very optimistic about the second half. And our service plan is prepared to be able to handle that volume for the rest of the year.

Thank you. Let me take just a minute before we wrap up here and take your questions to talk a little bit about safety and bring some areas to your attention that we have shown some significant improvements on.

You see on the slide there that our injuries under reporting criteria were down 15 percent and our train accidents were down 19 percent in spite of the fact of the severe weather that we've talked about here. Makes it extremely difficult to be able to have a safe operation when people are working in high snow in difficult conditions and when the infrastructure or the rail is put under pressure as it is by the cold weather.

So, I'm very pleased overall. Now, am I satisfied? No. Is there room for more improvement? Absolutely. And the thing these ratios do not recognize is they're efficiency ratios. They do not -- neither deals with severity.

It's just an occurrence of an injury no matter how severe or it's the happening of an accident that's over a low level of criteria as far as dollars and cents and it does not get into the area of severity. But we're continuing to focus a great deal in that area.

So, let me wrap up kind of this way -- a good quarter. Outstanding performance by the CN people in some pretty adverse conditions. Some real fine encouragement moving forward. This war on bureaucracy that we're waging has gained some real traction.

Encouraging signs in Western Canada from a grain standpoint. I'm really excited about Jim's efforts with the IMX program and the performance that we've seen there and the improvements.

So, overall, I think this -- in spite of some difficult conditions the first quarter that we're setup to have the kind of year that we had previously forecasted to you and look forward to three more good quarters.

With that, Nancy, we'd be glad to accept questions from the audience.

Well, thank you, Mr. Harrison. If you have a question, please press star one on your telephone keypad and you will be placed in our prior sequence cue. If at any time you wish to cancel your question, please press the pound key. (speaking in foreign language).

There will be a brief pause while the participants register for their questions. Thank you for patience.

(speaks in foreign language).

So our first question will be from Morgan Stanley. Mr. Jim Valentine, you may now proceed.

Great. Thanks. Great quarter guys. Jim, maybe if you could just touch on how the foreign exchange impacts the specific commodities? Namely, which ones are you seeing becoming the least competitive? I mean, we're hearing that some of the saw mills need to shut down in Canada or have shut down. And I'm just trying to understand what commodities are you going to see the most impact, if the Canadian dollar stays as strong as it is?

Well, at .69 cents, we have not seen any specific impact on our customers. There's obviously, a lot of noise in the trade right now because of the dispute between Canada and the U.S. on lumber imports and that tariff issue. So that gets confused in this as well. The demand for lumber and panels continues to be extremely strong right now. And at this point in time, I don't see the increase in the Canadian dollar at the .69 cent level having any kind of a material impact on us.

You may recall back, or I know you do recall back to the time of the IPO when we talked about the Canadian dollar moving. And at that point in time, we were at .75 cents. So we still have a lot of room to move. We still have the most productive customers in North America. And we would expect that this is not going to be an issue at this point in time.

Great, great. The second question for Hunter. Hunter, now that is buying the minority in TSM , how does that change your joint venture, I guess, partnership, or whatever you want to call it that you have, joint marketing agreement that you have with them right now?

I, Jim, I really don't think it makes much difference. I mean, it's just an ownership issue. We still have the alliance with them. You know, the railroad as I understand, will still be operated, effected by the same people. And I really don't see much of an impact of changing ownership.

Okay, good. And the final questions for probably Hunter. The war on burocracy, how much do you think there was savings in the first quarter, if any, and how big do you think that number could be for the full year this year and maybe for next year?

Jim, I think, and Claude can correct me if I'm wrong. But the first quarter was somewhere around $5 or $6 million year over year, in what we categorize as burocracy. I think alone, it was like a million and a half for overnight mail, if you can imagine. A lot of little things, a little bit here and a little bit there. You know, for the year, I would hope that that run rate increases. You know, and I've said that one time, we've kind of set an internal goal over the next 18 to 24 months to get a point on the operating ratio out of the burocracy.

Great. Thanks much guys. Great quarter.

Thank you. Our follow up question from Puritans, Mr. Tom Wadewitz, you may now state your question.

Alright. Good morning everybody. Two different lines of questions I guess. One for Jim to start off with on the revenue side. The Canadian grain picture, obviously was difficult in the quarter, but you did estimate some offsets with the U.S. grain and then with the fertilizers. Can you give us a sense of whether you expect that strength in the U.S. grain to continue and also whether you see the fertilizers remaining fairly good?

Well, the U.S. grain is going very good for us and will continue to go good for us up until the, even when the new crop comes in, but in the first day after the year, because you may have remembered that the grain and soy beans in our broad territory in the U.S. was much much better than the crops in the surrounding area. So, as we had predicted, our business is being driven being strongly by the fact that we just have more crops available to move, and that will continue into the second quarter. On the fertilizer side, yes, as the crops on both sides of border are planted and there is high prices right now, that the fertilizer business is expected to be very strong and in fact, that is moving right now at very high rates for us.

Okay, then one follow-up for you Jim on the IMX project you've got going on. To what extent have you been able to incentivize the customers to actually do more of the shipping on off-peak times. That's one of the things you had talked about. Has that aspect of the program worked pretty well?

Yes, but in this first phase in our rationales for rolling out the IMX program, where we did, was that it was not necessary for us to move a lot of business from one date of the week to another through our customer incentives. Most of this moved due to changes in the operating philosophy and policies we added that related to the oversees business. But there is very strong support for this in the intermodal arena, because this is the, this is the model that they realize needs to be rolled out, and they're eagerly willing to work with us to the extent that we can make this a success.

Ok. And then one, just one final question for Hunter. Can you give us an update on where things stand with the Union and I guess in particular, I'm referring to the UTU at Central.

Yes Tom, I can tell you that I spent yesterday in Chicago and central Illinois and town hall meetings with UTU people. Last week, I was in Baton Rouge and Jackson, Memphis in town hall meetings. I'm taking the negotiations to the voters. And, it kind of laid out the issues that they're difficult decisions that we have to make on both sides. The negotiating committee have a meeting scheduled in, I think it's in 2 weeks to revisit. And I guess, Tom, the best that I can say is that I'm cautiously optimistic that we're going to be able to get that agreement ratified.

Is there any kind of a reasonable time frame where you think you might have another vote on it?

Yes. I think that hopefully, if we make an agreement, an initial agreement, it generally takes, to get the ballets out and collect them and count them and so forth, usually takes 5 or 6 weeks. So, I would hope that we have come to some kind of decision within the next 30 days. And if there is some type of an agreement that's been initialed, it will be then another five or six weeks until we would actually get the results. So, we're talking a couple months here before we'll know for sure.

OK, great. Thanks for the time.

From CIBC World Markets, you may now state your question.

Thanks very much.

Hello? Operator, I think we lost him.

Hello? Is that all right?

Yeah. Now he's back.

All right. Yes. The coal revenues in the latest quarter, how much of that would relate to the CP Coal business that has been taken as a result of their terminal problems in Vancouver?

Very little. Very little. They worked out an arrangement at the beginning when they had the problems out there in Roberts Bank that allowed them to handle their own coal business. The original expectations that we might pick up more of that business didn't materialize. So, the Canadian coal was actually down in the quarter, offset by the increases in U.S. coal.

Should we view the first quarter as representative of the year as a whole?

No. The Canadian coal business will continue to decline in the later part of the year as, even though the mines have shut down up there now, we will continue to have some reserves on the ground to move. But as we move into the later part of the year, that will wind down and our expectation for coal is that it will be down year-over-year.

Then on other items, that was off about 10 million. What would have accounted for that?

Well, there were, principally last year, we had a one-time gain from the sale of assets on the billboards and advertising rights that was the majority of that.

I see. And then other income on the, further down the income statement, that was just 4 million, compared to 38 last year, and I know that line is expected to be substantially lower, but should we be viewing something much larger than 4 million and a quarter going forward?

We've given guidance that our full year results in other income should be on the order of 40 million. These real estate monitorization opportunities are lumpy. One example is the, you know what Jim was just referring to, which last year gave us a benefit, both on the operating revenue and on other income. At 4 million, we're just a little bit under that trend rate of about $10 million a quarter. The way I look at the year, at this point in time we're, a lot of the sales we're working on are in the second half of the yaer. So, for next, for Q2 we might have another low quarter and then jumping up a little bit for the full year, coming in at around 40 million would be my best guess at this point.

Well, thanks very much.

Thank you. From Smith Barney, Mr. Scott Flower. You may not state your question.

Yeah. Good morning, all. Couple of questions. Do you know, I wonder if you might be able to help us a little on the Intermodal excellence project. You had mentioned that it helped in profitability. If you can just give us some sense of how much, obviously you only just started this February 1st, and I'm not looking for operating ratio. I'm just trying to get some sense of order of magnitude and the early days of how this may have helped you. And I guess you mentioned some of the things you've changed have been primarily relative to the international business.

Well, I think the guidance that we gave when we first started talking about this program was that overall, we felt that we could improve the profit margins in the intermodal business as a whole of about 20 percent.

I would say that of that 20 percent improvement, we've picked up probably in the first quarter about 10 to 15 percent of it, which is, you know, directly related to about the size of the number of trains we have rolled into the program.

So, reducing the assets needed to move the traffic clearly produced a bottom line results. What we needed to do in order to make that happen was to work with our customers -- principally the import business on the East Coast, because that's where we started it at Halifax.

And more balance our assets. More balance our trains to the flows of import and export containers so we didn't have these excess assets sitting and waiting for quite sometime for the vessel to come in.

So, we've made some simple business rules that we are working with our customers on in order to smooth out that volume -- i.e., we won't try and move a million containers on one day. We'll try and move them over two and three and to smooth out the balance. And those are the business rules that were necessary for this train.

And help me with the migration. Will that at some juncture get migrated towards your Western import business or no? Is it the greatest gains are to be realized in your eastern part of your system?

No, actually, the greatest gains are certainly yet to come. The great opportunity on the cost side for us is in Western Canada. But we want to do this prudently. We to first make sure that we have this business model working, that it's working effectively, that it is providing superior customer service.

And then we will begin to roll this out methodically over the kind of 12 to 18 month time frame that we originally discussed.

OK. And then just a couple of other quick questions. You mentioned some of your bullishness relative to the intermodal business and I guess in particular to the import side. A couple of questions about that.

One is, how much of some of the strength you've seen may have been due to shippers trying to beat some of the May 1st pricing increase across some of the different trades? And secondly, is this just coming from discussions with the customers about where the import cycle is?

I'm just trying to get a sense of, you know, how you see your bullishness and exactly -- is that customer conversations, et cetera? How much of this might be a little bit of pull forward prior to May 1st with some of the large pricing increases in some of the trades?

Well, obviously, we tried to measure what's happening in the marketplace too, because we're seeing these phenomenal volumes coming at us. And we're hearing speculation that this is movement in the advance of the May 1st price increase.

And then in discussing this with our customers we've come to find out that they're anticipating this volume to continue beyond May 1st. That they're vessels are sold out throughout the summer and they're anticipating a strong fall rush.

So, that would be, you know, this kind of double-digit growth three years in a row. And we need to make sure that we are prepared to handle this business in the appropriate manner.

Right. And then just a last quick question -- and you may or may not have this. But obviously, my sense would be if I look at some of the revenue ton mile stats or per carload, that's getting distorted by some of the changes in exchange rates.

Do you have any sense of what some of those metrics might look like if they were currency adjusted? I'm just trying to get a sense of how you're looking at the yield environment and pricing. And I, my sense is that some of the stats we're seeing are being effected by the strength in the Canadian dollar.

Obviously, the Canadian dollar has an impact on the revenue per car load, the sense per RTM, however you want to look at it. And it is difficult for you to try and pick that apart unless you really have a good understanding of the business, really in its guidance sense that we don't necessarily provide. But probably counter intuitively, you wouldn't think that the biggest impact on our business is in forest products. Because most of the forest products, lumber and paper is all done in U.S. dollars. So that's where we see the biggest impact. So it changes from business unit to business unit. The overall guidance I can give you is what I have provided in the past. Our goal is to get reasonable sustainable price increases in the 1 to 2% range. We are getting those price increases, real price increases in the 1 to 2% range and we are continuing on our plan of selling service and not commoditizing our business, and have not caught a rate in order to gain their market share for a long time.

Great. Thank you very much.

From Deutsche Banc, Mr. John Barnes, you may now state your question.

Hey, guys, good afternoon.

Hi John.

Could you, I may have missed this. I got on a couple minutes late. Can you just elaborate at all, have there been any progressions between the Canadian and U.S. governments in terms of lumber tariffs, and especially in light of the B.C. Provincial government looking at proposing their own kind of plan to eliminate some of the tariffs on that lumber?

Well, the B.C. government is certainly trying to come up with a solution to this tariff issue, and have made some changes as it relates to their stumpage fees. But to the best of your knowledge, there has been no signal back or statement from the U.S. government whether or not they believe that the program that B.C. has ruled on is acceptable. So right now, it's still up in the air. As it relates to the anti-dumping duties, our customers continue to believe that based upon their high production levels and what they're not producing at, they can clearly prove that they're not dumping, and that they will get that back. But it still continues to be a contentious issue.

Okay. Hunter, along with your comments recently about the war and bureaucracy, you talked a lot about, you know, part of the next phase in getting another percentage point under the OR. You know, a lot of that hinges around your ability to improve safety in your railroad and that type of thing. Can you just elaborate again for us what type of measure are you putting in place to continually ratchet up the safety of your rail operation?

Well, we're doing some analysis right now, for example, John, just, and I should caution, just analysis, of the relationship between capital spending and operating expense relative to the infrastructure, for example. And try to do an analysis that says, is it prudent on our part to put the railroad in even better shape than it is today. Is that smart, from a safety standpoint from a derailment avoidance, from an operating expense standpoint. So some big, big projects and works going on right now in that area. But I should emphasize this is all about the fundamentals of the basics. Just day in and day out, living up to policy, living up to rules, obedience to the rules, the executing, day in and day out the basic fundamentals. And the whole issue of bureaucracy? is what we've just said to ourself to do. Let's look at what we're doing and see if it has any value. And if these things don't have value, lets come out of the process and let's open our time and energy there. So, a lot of basic work on pealing this onion back and just getting to the basic fundamentals.

OK. Thanks for your time.

Thank you. Our following question from Credit Suisse First Boston, Mr. Gary , you may now state your question.

Hi, it's actually Chris this morning. A couple questions on fuel and costs in general, and then also, if you could review your free cash flow goal? Wanted to know on the fuel side how much benefit you were getting in the fuel surcharges. What should we think about in the second quarter there? And secondarily, on the comp and benefits line, we seen in a number of the carriers so far that, that has been substantially down, specially on a per head basis versus what we might have been thinking about.

Well, let me tell you, on the fuel side, as I said earlier, we are edged at about 47 percent for a price of just under $23 a barrel, 22 at 75. So, we're getting a good edge position to cushion against the increase. Jim has mentioned, we are also getting benefits, particularly in intermodal through the fuel surge charge, which kicked in at the prices that were in affect during the first of that quarter, so , there is no question fuel as a cost to us, but we're being able to cushion it with the initiative, and at the end of the day, also trying to profit it with discipline across the board.

On your question about labor and fringe benefits, we are and we're making very good progress on every front to reduce every aspect of labor costs, first and foremost with reductions in our work force, which is down basically 5 percent in the first quarter. One of the reasons why our costs per employee is going up, however, is the fact, as previously announced that reduced our expectation in terms of the rate of return that we get for the pensions fund, and that is a loan creating a 50 million dollar or so increase on a year-over-year basis in our labor costs.

All of this is non cash, but from a reported standpoint, you see a 50 million dollar increase, which impacted to swell to a 12 million or so in the first quarter. From a cash flow standpoint, and we're very pleased with the first quarter, and as I said, we have used that cash flow during the quarter to buy back shares, and we'll continue to do so until the program is complete, or 2/3s of the way complete for the program we've announced in October.

And did you have a goal in place for the full year?

In terms of the share buyback?

No, I'm sorry, in the terms of the ...

Yes, we said that we would continue to improve on our performance. Last year, we delivered just over 500 million dollar cash flow after dividends. We've increased our dividends by 16 percent, and despite that, are confident we will be able to continue to grow free cash flow in 2003.

And one last question on casualty and other. Is that the level that we saw in the first quarter of this year versus something that we might have looked at in the fourth quarter of last year? Is that more of a run rate? I know you said there were some extra things in the other, but as far as a look at the second, third and beyond.

I think it's preferable for you to look at the casualty, in other, on a quarterly basis year-over-year because there is some nontrivial seasonality to that category. A good example is all utility costs and smoke . You know, these kinds of expenses show up in other, and we have more of them during the winter than we do during the summer months. So, I think the best way for you to look at this expense category is on a year-over-year basis. And we expect it to go up on a year-over-year basis pretty much in every quarter, largely because of the higher accrual rate that we are now charging ourselves for legal claims in the U.S. under an actual aerial basis.

Excellent. Thank you very much.

Thank you. From Bloomberg, Mr. Rip Watson. You may now proceed.

Good morning. Can you give us a little more specific outlook on the forest products and chemical area, please?

Yes. The guidance that we had provided before, and let's put that all together into the merchandise segment. In the guidance that we had previously provided there was that we had expected that business to grow about five percent for the year, in terms of revenue. We are still confident that from a volume perspective, the strength of the business measured by volume, that that outlook is still achievable. Obviously, if the Canadian dollar remains as strong as it is today for the rest of the year, our reported revenues will not achieve that type of growth rate.

OK. And could you give us, changing the subject just a bit, any further update on any acquisition of Canadian smaller railroads or any, your outlook on acquisitions in general?

Claude, you want to talk about the ONR.

Yeah. We have finalized our discussions with the Ontario government and the ONR for the purchase of the Ontario Northland. It's now in the decision-making process at the cabinet level and we're expecting the Ontario government to decide one way or the other in the very near future. That's the one thing that is out there in the short term. The other possible transaction, although the government has to decide firmly to go down that road, is in the British Columbia, where there is a possibility that the BC Rail could be privatized. And as we said before, if the government goes down that path, we will certainly be an interested party.

OK. Thank you.

Thanks, Rip.

Thank you. From National Post, Mr. . You may now proceed.

Hi. I have a couple of questions. With fuel costs going down, what do you anticipate, how do you anticipate that affecting the results over the next few quarters?

Well, they're going down from the high levels they've reached during the first quarter, but if you look at it on a quarter to quarter basis, they're still at fairly high levels, and there's a lot of uncertainty and volatility out there on the fuel costs. So, we're certainly expecting our fuel expense to continue to be up on a year-over-year basis, except maybe as they come down significantly towards the latter part of the year in Q4 or so. The good news is our fuel expense is edged at a known price of 22.75 per barrel for roughly half of our total volume.

So, the only impact on us is for the west side, which represents just over 50 percent of our consumption.

OK. My second question. Mr. Harrison mentioned something about saving a million and a half dollars on overnight mail. I wondered if you could just elaborate on that a bit?

Well, I can elaborate to this degree. In this day and age with technology the way it is and e-mails and all the systems we put in place to communicate, we found that we didn't need the overnight service.

And when we started just tearing envelopes open and look at what was in them and saying, why did this have to go overnight? Why could it not have been e-mail? Why could it not have been a fax? Why could we have not have talked over the telephone?

We just found that we had gotten in the habit. That a market had been created and we bought into the market needed or not. So, I mean, that's the kind of thing we're trying to do with the bureaucracy is really kind of peel this thing back and see what we need. What really adds value. And, you know, and watch the pennies and the nickels and the dimes and they turn into dollars.

How much do you spend overall on overnight mail in a year?

It's Claude. I would tell you it's about on the order of, you know, a couple million per quarter. You know, in total.

I think it approached -- I'll have to correct this if I'm wrong, but it approached nine or 10 million last year.

For the full year.

For the full year.

Well, and on a going forward basis what do you think that will be once you've, as you say, gotten all of the bureaucracy out of this?

Well, I think we've, you know, we've said if you looked at the improvements we've made they would give an indication that we can cut that in half, at least.

And I think it's more -- I would point out this is more representative of a mind set and focus on all small costs. There's a number of areas where we're branching out costs on real estate, the phone lines. You know, the cost of occupancy. All of the ancillary charges that come normally with having an employee. When you reduce the employee, you have to followup behind and make sure all these ancillary costs go away as well. That sometimes takes a little bit of time and focus and that's what we're, you know, aggressively pursuing.

Thank you. We will now proceed to our following question from Deutsche , Mr. . You may now proceed.

Hi, thanks. Just a followup question on the free cash flow for . Do you see need for expanding your share buyback program if the cash flow remains strong and you have a limited opportunity to do any acquisitions?

, there is certainly a possibility. Under Canadian rules you have an open issue bid that's for one year. So, that's what we announced in October. And we plan to complete that program in the next few months or so.

You know, going forward, you know, obviously the first call on cash is if we can find niche acquisitions that allow us to generate strong value both for shareholders and for our customers in expanding our franchise.

We've also discussed earlier, as Hunter was pointing out, that you know, we have to make sure there's no real opportunities to increase the investments for bottom line benefit in plants and in support of our growth initiatives.

But any excess cash flow beyond that we will use to reward shareholders. We have a very strong balance sheet. And whether it's in the form of continuing increase in our dividend or share buyback, we will certainly continue to reward shareholders with that excess cash flow.

I see. And another question regarding EWS; you want to exit that. What's the current status of that?

We've said in the past that we are interested in exiting that business if we can find an opportunity to do so at the right valuation. CN and the other shareholders have engaged in a process of reviewing all of our options. There's a possibility that this could pan out with a transaction in the short-term. But at this point in time, there's no certainty to that outcome, and we're working hard to make it happen if we can find the right valuation there.

OK. Thank you.

Thank you.

Thank you. From Canaccord Capital, Mr. Robert , you may now proceed.

Great. Good morning.

A couple of questions. First of all, I just wanted to ask a question on the fuel efficiency. There was an improvement of about three percent in the quarter. Given the weather conditions, how did you achieve that?

Bob, just the same, you know, blocking and tackling that was basic. There was no new initiative. I mean, there's a lot of things we do from a locomotive standpoint; your locomotive's in service and all the associated programs that we have put in in the past just started to get us those kind of results.

We also get the benefits of the new locomotives we brought in -- the of the old locomotive out of their fleet. I mean, it's a number of initiatives, and grinding it out to get the benefits.

OK. That's great. Capital spend for the year -- is that still expected to come in at about a billion dollars?

Give or take. We've been spending on the order of a billion fifty or so for the past few years, and that's still our target for the full year, except for the impact that would come with this new dismantling policy. The geography of our dismantling expense, you know, will change, and so there will be a non-cash increase to our capital expenditure away from dismantling onto the capital investment line on the order of 70 to $75 million. So, this does not impact cash flow, but is a new way of reporting the cost of dismantling; it's part of a capital expenditure as opposed to dismantling, the way we did it in the past.

OK. And the last question for Jim. Just to get back to the point that was raised earlier, if the Canadian dollar stays up at these levels -- around 69, 70 cents -- over the year, what do you see as sort of the rate impact that you're going to have to overcome there?

Well, I'm not sure I understand the question, Bob. I think in terms of the impact on the producers in Canada at 69 cents, they still have an advantage of selling into the U.S. And as I said, at these prices, we don't see any impact on the business moving across the states.

In terms of the overall impact on our revenue line, as Claude said earlier, it was roughly $50 million in this first quarter, and that's three and a half cents change year-over-year. And so, at this rate, we kind of had that order of magnitude each quarter for the rest of the year.

Yeah, Bob, for every one cent in appreciation, you have on the order of $50 million left revenue. But when you look at it from a bottom-line standpoint, we get a benefit in the form of lower operating expense. We get a benefit in the form of lower interest expense, because 100 percent of our debt is in U.S. denominated bonds and so net net as a bottom line level, every sent of appreciation has an impact of roughly 4 cents negative for EPS on a full year basis. So, the volatility is in the make up of the results from a standpoint of actual bottom line results, there's a fairly limited impact.

Ok. I guess what I was thinking about was that some of them are very sensitive commodities like coal and that. Is the price set in such a way that, if there's an impact on their net price, their cost, or sorry, price to their customers, will you be affected by that?

No.

Okay. Great.

Thank you. Our following question from Merrill Lynch, Stephanie , may now proceed.

Hi. Good morning.

Good morning.

Thanks for taking my call. I guess, to revisit the FX rate one more time. What rate are you modeling, just going forward. Are you assuming that it stays where it currently is, or are you anticipating that it reverses some of these negative effects? And then the second question related to . It looks like they were down across the board with the exception of automotive, but I think you said that, that was 2 percent with pricing increases and that was distorted by FX changes with 40 percent from fuel, so it looks about like 1.5 percent price increases. Can you talk about if that was better in some commodity groups than others?

Well, the fuel surcharge had a disproportionate impact by business units. About half of that fuel surcharge is in intermodal. And the rest is read across the other business units, which is quite an improvement from where we were just about a year ago where we had about 90 percent of any surcharges were just in intermodal. And so, it gets difficult to point specifically where that has an impact. On the average revenues per car, the exchange has an impact on that, and it's pretty much across the board. As I said, our real price increases were a little over 1 percent in the quarter. That's real price increases excluding the impact of fuel surcharge which, so, by 60 percent of that 2 percent is in real price increase.

Ok, and was it, in terms of pricing increases, was it stronger in any one commodity group than another?

No, no. It is pretty much across the board, goal for all of the business units to achieve that 1-2 percent price increase this year, more to do with the makeup of when they're contract, et cetra may become renewable than where I believe they need to be more aggressive in one area or the other.

Ok, and then the FX question?

Your bet is as good as mine. If I knew where the FX would go, I'd be rich and on the beach, so, it's very difficult to predict. There's been a lot of volatility, a lot depends on the uncertainty across the world and some consensus that economy that's out there see the dollars staying at the level of 69 or so for the balance of the year, then others have to view that, if uncertainty clears up in the Middle East, the U.S. dollar will strengthen back up, which would bring back the Canadian dollar perhaps closer to the 67-cent level.

It's very difficult to predict, and the only thing I can tell you is, the good news is, we have for the most part a natural hedge, the way I've explained it before. And the bottom line impact on our results is fairly minimal when it's all said and done.

OK. And then last question, the -- you've combined the -- I'm going to pronounce this wrong, I apologize, but the Montreal yard. I just wanted to know what your experience has been with that and if you were proceeding with the combination of the yards in Winnipeg. Thanks.

The experience has been very good. We did have some startup issues, as you do with a lot of changes. That's the risk. We are totally out of the property which was formerly our intermodal facility and Claude and his staff is working hard on monetizing that. We've worked through the startup issues, and we're very pleased with the potential operation of combining them.

We have moved forward with the Winnipeg plant, and I think I'm right that the opening is scheduled for June or July, depending on the construction. I think we're on schedule. So we will continue to do that in Winnipeg, and then the next issue is that given that we've moved these intermodal returns to the level that we need to return them, we'll probably look at doing a major investment in the next year or two.

Great. Thank you.

I think we have time for one more quick question.

Thank you. From Fulcrum Global Partners. Mr. you may now state your question.

Thank you, my question has been answered.

Oh, OK, thank you.

Thank you. This concludes the question period. I would like to turn the meeting back over to Mr. Harrison.

Thank you very much, Nancy, and thanks for all of you joining us. I hope this has been helpful to you. And see you next time. Thanks.

Thank you, Mr. Harrison. At this time I would like to thank all participants for joining us today. The conference has now come to an end. Thank you for using Bell Conferencing Solutions, and have a nice day.