Canadian National Railway Co (CNI) 2003 Q3 法說會逐字稿

Good afternoon ladies and gentlemen. Welcome to CN's third quarter conference call. I would now like to turn the conference over to Mr. Robert Noorigian, Vice President, Investor Relations. Ladies and gentlemen, Mr. Robert Noorigian.

Good afternoon and thank you for joining us today. We apologize for we had having to reschedule this call on such short notice. As many of you know because of filing with the SEC that was made yesterday and because of human error by outside counsel, they inserted the wrong headline in our 6-K, namely the headline from our earnings release today.

So, as you can imagine, we decided very quickly that we would schedule our earnings release early and we'd also reschedule this call. Thank you for joining us again and we apologize for any inconvenience this may have caused. All the slides for the presentation today are on CN's Web site as well as supplementary schedules and notes, which we couldn't release immediately this morning, but they are all on our Web site now.

Also, I'd like to personally thank number of you who called me bright and early this morning to mention to me that there was an interesting headline out at about 7 o'clock this morning.

Before we begin the formal presentations today, I have to mention that we may use some non-GAAP financial measures for purposes of comparability. And Q3 statements and notes that are attached to the press release are available again on CN's Web site. In addition today, we may make and will probably make some forward-looking statements under the meaning of the US Private Securities Reform Act and other applicable legislation, as well as legislation in Canada.

There are a number of risks and uncertainties that may cause actual results to differ materially from what we present to you today. Some of those risks are outlined in the first slide that you see in the presentation today and reports we filed from time to time with Securities and Exchange Commission and the Canadian Regulators.

I would like to now introduce Mr. Hunter Harrison, the President and Chief Executive Officer of Canadian National.

Bob, thank you. And thank you ladies and gentlemen for joining us this afternoon. And let me also express my apology for little lack of attention to detail that we experienced this morning. But we will hopefully overcome those problems and issues and we have adjusted. I trust that you have seen our press release and the copies of our presentation to those you coming from net. I am obviously delighted, extremely pleased with the results for the quarter.

We had strong earnings of $1.53 versus $1.32 last year third quarter. Although I would point out to you that $0.16 of that was a one-time gain from a tax adjustment, which Claude will talk about further. If you take that adjustment out, our earnings increase was 4%. I would point out also that $0.07 of that decline was due to the exchange, so if we had not had that issue we could have been 8% or 9% quarter-over-quarter.

So, clearly the plan is working and I am delighted. Our revenues were down $90m or 6%, but if you once again exclude exchange they were up 1%, Jim will talk about that little further.

For the first time, thankfully since 2001, we did see our growing revenues up quarter-over-quarter. For the first time in several quarters now, we broke through 68% with our operating ratio. I was extremely pleased with that performance, especially in light of some obstacles of team had overcome dealing with some severe forest fires in British Columbia that were early in the quarter and then the blackout, power players in Ontario and Michigan that we also experienced, which put some real pressures on our, particularly our intermodal operations in Toronto area and tested our new model of IMA early on in our implementation.

We did record free cash flow for the first three quarters of 455 million. I was delighted there, you know, also I think you are aware that yesterday we announced the acquisition of Great Lakes Transportation subject to regulatory approval. This is the wise strategic report consisted of two class-2 route [inaudible] . We're already working on metrics for gross ton models available horsepower for those shifts.

As we speak, it also includes the class-3 switching carrier in Pittsburgh. The debt initiate started as a result of what was 18 months to two years ago, a real pitch-pulling from the lofty standpoint in our Western Canada, the Chicago corridor, we operate over the demeanor to the Duluth Superior corridor for about 17 miles, and this acquisition will solve that problem as well as giving us an opportunity to utilize 64 miles of their mainland which effectively parallels us, and will give us an opportunity to avoid some significant capital expenditures that we were looking at.

So with that acquisition there and with the new labor agreement that we signed on the DWP also this quarter, filed some real issues that we've had that have been challenging is operating much over the last couple of years. It's certainly fits well with our steel business. There are clearly some opportunities that we see for some significant efficiencies and synergies that outlined some of our risk practices and some of our models.

So, I'm very please that we would be able to add that to our portfolio.

With that introduction, let me turn things over to Claude to talk about some of the financial results for the quarter.

Thank you Hunter. I'm also very pleased with the results. Our EPS for the quarter was $1.53, which is up a full 16% on a year-over-year basis, but as Hunter mentioned, there is a $30 million tax gain which is worth $0.16 in those results excluding the dollar - these tax gains we have turned in an EPS of a $1.37 which is up 4%.

Our reported results are showing a 6% revenue drop and a $30 million decrease in operating income, but a lot of this is due to exchange and in fact if you adjust for the significant appreciation in the Canadian dollar, which is up 13% from last year, you actually have revenues that are up 1% on the strength of intermodal for its products and also grain, which is finally turning the corner.

Our operating income is flat on a year-over-year basis. Solid cost control is a key explanation for those results. You can see our expenses on a reported basis are down 60 million, but even without the benefit of exchange, they are up only $10 million on a year-over-year basis and that's despite inflation and very high fuel prices, which have been staying above the $30 range on the WTI basis.

Our operating ratio was a good new story; it's flat on a year-over-year basis, just under 68%. So, overall I think this is a good performance. It certainly marks a turning point in our results with the return to EPS growth on a year-over-year basis.

If I spend a minute and turn to the expense, their performance is a pretty strong story across the board. You can see our discipline in managing cost, particularly in the areas that are impacted by our war on bureaucracy initiative. We have intense focus on the detail and the reduction of discretionary spending.

It's showing true, with purchase, services and materials down quite significantly on a year-over-year basis. We're also seeing good progress on asset utilization with our equipment ramp down also double digit on a year-over-year basis.

The only two expense categories which are going up are casualty and other. This is not a new thing; it's been the pattern for the first couple of quarters this year. The explanations are legal claims, which are up on a year-over-year basis and our insurance premiums are also causing an increase in this expense category.

Labor is up and that is despite very good progress on our workforce reduction initiatives. If you look at our workforce reduction, we are down in average employment by about 5%, but this benefit here was masked by higher pension expense, non-cash pension expense in line with our reduction in the accounting rate of return assumption and also a year-over-year difference here, in terms of bonus accruals.

Last year, in the third quarter, we had reversed bonus accrual, which make a jump on a year-over-year basis that explains part of this increase. Overall though, when you look at it, pretty strong performance across the board.

On the cash flow, very strong story here too. We are firing pretty much on all cylinders with $455 million of free cash flow year-to-date. Extremely good effort and resolve on work capital management, we're also making good progress on asset monetization. We had a few nice real estate sales, which helped us on other income during the quarter. And with these results after nine months, we are lined up to deliver record free cash flow again this year.

We should exceed our target and reach up to $550 million of free cash flow for the full year. We have been using this cash for the first nine months and the last quarter of 2002 to buyback shares and we have completed our program. We had announced in October of 2002, a $13 million share buyback program. This program has been completed and we bought the full allotment of 13 million shares at an average price of $66.

At September 30 our balance sheet was very strong. If you look at it on a book basis, our debt-to-total capital was at 37.8%, adjusted for all leases we were at the 42.5 and this bodes very well for the financing of the GLT. We are well positioned to accommodate this transaction and only increase our debt ratio slightly.

Today, you have seen a press release announcing that we have filed a shelf registration which would allow us, over the next couple of years, to raise up the $1 billion US effect in the capital market and this filing here is consistent with our preparation for the financing of this upcoming transaction.

Just a few words on the GLT itself. As Hunter mentioned, it's a very nice acquisition, where I think overall, if you look at it from all perspective, it is good news for our customer base. We are expanding our presence in the steel business, and we will also be able to deliver better service to our customer base on our western corridor. There are network synergies to the acquisition and is also an opportunity for solid value creation for our shareholders.

We are paying a, what I would characterize as a very disciplined price, $380 million US which is essentially six times the $60 million to $65 million base EBITDA of that business. If you fold in the synergies which we expect to be in the range of $20m US over the next three years, you get to an adjusted or synergized EBITDA multiple of less than five times.

So, that's the reason why the transaction will be accretive to us, it will be accretive as a matter of fact from year one to the tune of about a dime of EPS and it should increase in the range of $0.20 three years out. These synergies that we are banking on are on the cost side. We hope to get benefits over time on the revenue side, but the sole focus has been on the cost side, mostly from what you would expect of a small tuck in acquisition opportunities to consolidate overhead activities, significant benefits from procurements saving.

We also have opportunities, which will review for shop rationalization and also the rolling out of our best practice, which should bring in asset utilization benefits over time. There's also a lot of saving on the Capex side, this does not impact the P&L per say, but it's value nevertheless for shareholders, because we will not have to invest in siding expansion and CTC signaling which we were expecting to have to expand on our Western corridor to deal with the pinch point that Hunter referred to.

By going through directional running going forward, we will be able to save on the order of $25m to $30m of Capex, we would have otherwise asked to spend over the next couple of years.

So, all in all, a good transaction, well priced, and there's scope to deliver benefits both to our customers and our shareholders. In order to close on this transaction we need regulatory approval, we expect this to be treated as a minor and if it was treated as a minor by the SCB, we would be in a position to close on the transaction in the spring to mid-summer of 2004.

Over to you, Jim.

Thank you, Claude. Overall, a good quarter from a revenue perspective. Strength in most business units offset weakness in two areas. Total volume down in Q3 1% due to a 26% decline in the coal business and a 13% decline in auto shipments. This volume decline was offset by a 2% improvement in yield, about 60% of that improvement due to price increases, about 40% due to more favorable mix. And then more specifically on the revenues, and when I talk about the revenues here I will refer to the revenues on an adjusted basis taking out the impact of exchange.

So, it's more clearly understood how our underlying fundamental business is performing. Merchandize, say in the third quarter up 2%, petroleum and chemicals flat. As there's some strength in the sulphur area, was offset by the high gas price weakened chemical business. Metals and minerals up 2% on more sheet deal and pipe shipments.

Porous products had a very good third quarter. Lumber and panels continue to move into the US construction market and produced very good volumes for us, and also in the third quarter we saw very strong shipments of finished paper.

On the bulk side, coal down 26% due to an over 50% decline in Canadian coal shipments as a result of the previously discussed Western Canadian mine closures. But the real good news in the quarter, on the bulk side is that grain and fertilizers were up 8%. Canadian grain up for the first time in quarter while 18% as a good crop came in with reasonable yields and it was harvested early.

Fertilizers in the quarter were about flat with last year. Intermodal also up strong 5%, as overseas growth mostly through the Port of Vancouver offset some reductions on the domestic side as we have closed some facilities.

And automotive down 12%, but really that's the result of some delayed start-up in its plants due to model changeovers, a somewhat weaker market. But that being offset by the new plant outside of Jackson, the Nissan plant that is coming online and coming online very strong throughout the year.

The outlook. Well we certainly turned the quarter on grain, as I said early Canadian grain harvest essentially complete with solid yields. We're very optimistic about automotive. Automotive gained new gains in market share as we will be getting some new business in the Montreal area, as well as a new import facility that we intend to open in Vancouver, will help us in the future offset what could be a somewhat weaker market.

Solid force product, especially on the lumber side, we continue to add equipment and are searching for new ways to operate and improve velocity, and therefore capacity in that area. And I would comment as well, I believe that the GLT acquisition is a very good opportunity for us. It's a very good deal, it's a transaction that fits well with our merchandise franchise and our service story, and I believe it'll provide great opportunity in the future.

Just a comment about our IMX project, which we had commented now on the last few quarters.

For those of you are unfamiliar, this is a program designed to improve the service and profitability of our Intermodal service offering by operating with the same discipline as we do in the car load business, since we introduced the schedule railroad. We rolled out the first part of this program early in the year in February. August 11, we added in the western half of Canada.

So, now we are completely implemented across Canada. It is producing considerable improvement in profitability, train costs go down immediately as we rationalize our train set, to smooth out our service offering. This is the quickest area that we get profitability improvement from this program, as well as terminal cost improved both in terms of productivity and efficiency, as we add in discipline there.

I should say that at all of our terminals now, our dwell times within the terminal and our gate weights are down to levels probably not seen in quite a while, especially at the volume levels that we are handling in our terminals today. Our profitability in Intermodal is up quite significantly as I said, and we expect to roll this out in the US soon.

Hunter?

Thanks Jim. Looking forward, let me bring a few things to your attention. We continue to work aggressively a pipeline of breakthrough initiatives. Jim just mentioned IMX, which has been a very successful process that he and his Intermodal group has put in place. The new labor agreement, just to mention a couple.

On the labor front, if you are not aware all of our agreements are collective bargaining agreements. In Canada, it would expire at the end of this year, we have already begun the process and dialog with our collective bargaining units in anticipating no problems in that area, and I am looking forward to a smooth transition there.

Let me highlight again that in the quarter, we did make a major breakthrough when we got the New Labor Agreement, the operating agreement, the hourly rate agreement. With the DWP that was finally ratified after, I guess, this was in the third opportunity. Though that only leaves us with the Grand Trunk, which we're now actively pursuing in the US, that will complete the whole US under this new agreement.

I'm encouraged that we have already begun with our labor relations group, a dialogue with the operating trends in Canada, that potentially we would pursue, the same type of agreement this negotiating process.

Let me remind you that we are anxiously awaiting the results of the bids for PC railing in British Colombia. We were one of the three finalists, we have our name in the hat and we expect that within the next two or three weeks. The British Colombia government will be announcing the successful acquirer of that franchise.

So, overall I'm extremely pleased with these results. I think the results clearly reflect that the business model is working. We continue to advance our strategic agenda, i.e., the JLT, our pursuit of PC rail, this puts us in a good position to rebound next year with double-digit growth.

I look forward to that and with that Nancy, we would be glad to respond the questions the audience might have.

Our first question is from Mr. Thomas Wadewitz from Bear Stearns. You may now proceed.

Thanks, good afternoon everyone. I've got a couple of questions here. Let's see, on the headcount reduction side, Hunter, I know you pushed very hard with Warren Bureaucracy and other measures to really control costs and that has helped out, it's seems accelerating headcount reduction in the last couple of quarters.

Can you give us the sense of how long you can continue that kind of 5% year-over-year headcount reduction, when does that slow down and if it doesn't may be what are the next steps that really keep that going?

Well, clearly the next big potential break through is with the TNE, the operating crafts. In the US, when we get fully implemented with the new agreements and we've talked about that that has the potential, and we certainly expect it would take 30% to 35% of the headcount out there, just from the TNE crafts and US. Once again, if we're able to make the breakthrough, that we expect to make, the issue is the timing.

In Canada, the model has the same potential there. I think non-TNE from a Warren Bureaucracy; I don't think we will continue to sustain that 5%. I think we've gotten most of the fat out of this organization. So I think most of this will particularly be on the TNE and operating side going forward.

And what do you think is the most likely timing for when the US agreements would really start to kick in with significant headcount reduction?

Well the biggest issue then becomes the some degree business levels obviously. Right now, if you look with grain being as strong as it is in the US right now, there is some pressures on the present work force. And if we had not had these new agreements, we would have to bid in the hiring mode. But if you take the peach in grain out, I think we're comfortable in over the next two years.

Going forward, that we would reach those economies that we talked about in the US. And from a Canadian standpoint, it's the timing issue, of whether we get this agreement. I guess I'm being a little optimistic here, whether we get the agreement this negotiation session or in three years.

Okay great, that's helpful. One other question for you on the acquisition side. The Great Lakes transportation, can you give us the sense, how much of that business is actually with US Steel and give us a sense of whether there is any concern with respect to how that customer does, it seems like it's probably pretty concentrated.

Then also are there more railroad to your incremental railroads that are out there for sale? I'm thinking of one in the Chicago area that you talked in the past about, you know, capacity in Chicago area generally being a good thing, so I'm just wondering if your sense, is there any more to go there aside for BC Rail.

Let me let Claude, he has been very close to this power coming on the percent of basis in the one customer end and we have done, we have done a great deal of time on some risk substituted the analysis, let me let him address that and I will talk about potential Chicago issues.

Tom, the answer to your question is US deal is a little bit over 50% of business but there we are very comfortable and actually we are quite excited about the opportunity to expand our relationship with US Steel. We feel like the part of the business of US field that we would handle on this network, whether it is the Minntac mine, which is the lowest cost mine in the US or [Inaudible] or the steel plant that we serve out of those mines that Garry works and some of the other major plants that they are served out of the DMIR are the best plants that US field has and we feel good about US Steel's effort there. With their new collective agreement, they are significantly reducing their cost structure and we feel like they are there for the long time and we will be pleased to serve them on that basis.

Tom, on your question let me make a couple of observations. Number one, as we all stated we are delighted with this GLT transaction, we are, I think in state to state we are very hopeful about the potential opportunity with DC Rails. We have said that we think we do a pretty good job in running rail roads so that we can get one for the right price we would be, always be interested but I would caution that I do not want to get ahead of ourselves.

So we want to do this, very light transaction, integrate it, get it adjusted, we will see what happens with DC Rails, if we would happen to be successful that's the large undertaking and then we will see how we are, how we stand and how we are positioned to be able to deal with other opportunities, but in a very, very disciplined manner.

Okay, great Hunter and Claude thanks very much.

The next question from Mr. James Valentine from Morgan Stanley.

Great, thanks. I guess the question comes down or else my first question comes down to I think extension of Tom's question, that is potential labor agreement being applied in Canada labor negotiations, especially this early on, but let's just say that, they accepted it. Would it presumably be as front end loaded as the deal was in the US namely that, you guys had to feel a little bit pain for a year, year-and-a-half before you kind of hit that crossover point?

Yes, I mean I think, yes Jim. Clearly, although, the dynamics have changed here a little bit, most of you are aware that we have had this issue with the Furlough Board in Western Canada, although, we've taken a significant amount of those people in [Inaudible] one of our friendly connections in the US.

Clearly, if we're going to offer some types of job security and we've a 'surplus' already, it will take us little more time than it has in the US to be able to hit the sweet spot.

From an attrition standpoint, qualified by and I hope we can accelerate that with growth. And so I think it's just moderately start to kick in, I think it start to get high gear, I think we will start to see some reflection in the improvement in the economy. The IMX model, we had some more strength to West. So, given that, I hope that it would accelerate that -- those update.

Okay, good and I don't know how many is down to 200 to 300 people in the Furlough Board that I think in the beginning of next year come back on your income statement and trying to figure out, do we need to remodeling for the additional cost there or is there some plan for on a charge or buyout or something you might be able to talk about now?

Let me make an observation and Claude can get more to the technical question of the reserve and so forth. That number announced, keep in mind that that number is very dynamic with business levels as we go forward. But right now, that number one-time was as high as 600 people or so. Now, it is down in the 200 range with the loading out of the people.

So, the potential exposure from the reserve is not as severe as it should have been. And you can bet that that'll be a part of the dialogue in the labor negotiations, we'll be able to try to deal with that issue. We've already had a great deal about [log] and as we explore and we'll continue to explore with them potential opportunities to take some people out through severances absolute.

Claude, if you could add anything there?

Yes, I was just going to add that there were drain coming back full theme in the fourth quarter and to the early part of next year. A lot of these Furlough Board are in the West. So, we'll be able to utilize a lot of these employees and is coming down to a very manageable number.

Okay, good and the last question was for Jim. If we look at the past two weeks' trends on CN in terms of some of the commodities, these things have kind of soften to your I guess especially related to some of the US players and I am trying to figure out, in everyone's service matrix it's slipped a little about, yours are not as much as others. But trying to understand if one leads the other and if this is more of a temporary phenomenon and do you think that we're going to kind of resolve this as we go into the fourth quarter or if it's going to beat you as last quarter?

No, I don't see anything fundamental in any of our business units that will lead me to believe that there is anything that I should be concerned about from a market perspective, the underlying strength of the business is still there. Our service is still very good, and I think if you are seeing some areas where the car loadings are down that's just an anomaly.

Okay. Great.

It's been a deal of discussion, the dialogue about the service measuring. I can't tell you about the carriers, but I can tell you this. Our train size for an example is up. It's been now in the quarter of 10 to 12 and in some quarters 15%. The size of gross turn miles per train, number one.

Number two, our grain this year is significantly heavier, obviously than it was last year at this same time and the operating agreement to flexibility, we have with this agreement.

The new agreement in the US, allows us to do a lot of the work on land that we would previously have had to do with additional trains. So, there has been some deterioration of 26 miles an hour to 25 miles an hour and if you look at quarter-over-quarter there is some things like the power outages, then the forest fires, and so forth that impacted this. We have not seen any deterioration in our services.

Great, great, thanks Hunter.

Thank you. Our following question is from Mr. Randy Cousins from BMO Nesbitt Burns.

Good afternoon. I guess Claude, just in terms of, sort of guidance on a go forward basis, I'm looking at this purchase service number that you've come in with, is a $151m and what kind of run rate should we actually be using. Is this like a permanent reduction that we are seeing here in terms of purchased services and materials per RTM?

The answer Randy is yes. We have a structural reduction in the purchased services and there is no real big bang here, it's a series of small initiatives you know, our communication costs are down, our consulting expenses are down, we are reducing significantly all the cost associated with employees, whether it is office leaves and any other activities that are with employees.

Having said this, remember that there is seasonality to our purchase services. So, you shouldn't take $150m and then straight line it going forward. But on a year-over-year basis, we expect to continue to make good progress and in fact in the fourth quarter for instance to see very significant reduction from last year in terms of purchased services.

And for Jim, I guess, you covered in a sort of, number of topics and I going to give a sort of general question, but you are talking about grain coming back and dramatic improvement of productivity coming from that. You talked about the change in the new inter-modal model contributing to profitability.

Could you give us some sort of sense as to sort of what is the dollar impact of sort of the grain having come back in Q3 and this improvement in your inter-modal business and sort of extending forward, if we are shipping this crop this year moving in Q3 and moving in Q4, is that going to cut into the Q1 and Q2 grain volumes for next year?

Well, towards the grain to the extent that the grain moves slightly earlier in the year, it will have the impact of taking something away from the first half of next year. However, the Canadian grain numbers in the first half of next year are still going to be up in the range of 30% to 35% improvement year-over-year

And that is just simply because there was such a dismal performance last year. So, as we lap those periods and as we lap the fourth quarter this year we will have the significant improvement in the fourth quarter in grain and significant improvement in Q1 and Q2. Even now we are moving some of that early.

And then in terms of the contribution that you have gotten from the new IMX model and from the pick up in the grain business. Can you give us some sort of sense at what this actually means in terms of dollar?

Well, I think the guidance that we have provided in the past in terms of the improvement in the profitability of the inter model business is in the 25% to 30% range. I think, based upon what we have seen today that's probably conservative based upon what we think we can get out of the terminals as we improve productivity there.

Okay. And the impact of the grain business?

All right, Claude.

Yes, basically next year, we will be able to accommodate the grain business at low incremental cost. That has been the thesis we have been trying to focus our investors and the analysts on and the way we are thinking about it is the following. We have the crews, we have talked about that earlier and they are available to get into service. We have the locomotive and we have the cars because, and the cars don't cost us anything for the most part, because we are talking about government owned cars.

So, you are able to handle the surge in grain traffic next year, which will be significant at very low incremental cost, at an operating ratio that is much lower than the average operating ratio for the company. So, a rule of thumb would be assumed, we can get the business up on the order of a 40% operating ratio incrementally from where we are in a grain business.

Okay. Thank you.

Thank you. Our following question from John Barnes from Deutsche Bank Securities.

Hi, good afternoon guys. Claude, you've spoken in the past of wanting to maintain liquidity and keep your patter dry to get opportunities and seems like a one of those fantastic tuck in opportunities. But now with the shelf registration with the way the railroad is performing, with the cash you are generating, have you begin to rethink your use of cash and would you look more aggressively at either or more aggressive share repurchase plan or upping the dividend to this point?

No, John. I will use your word, we will keep our powder dry on share buyback for the moment. The first call on cash is to finance these accretive transactions like the GLP, and we do have a binding offer in for the BC rail. So, our thinking is we will wait to see where the BC rail comes out before we make any other decisions on share buyback.

As it relates to the dividend, we have announced last year that we have a policy to increase gradually the dividend payout ratio and so this is the decision here that ultimately is the responsibility of our Board, but the policy is the one I have just described and in January we will be reviewing all the facts and most likely increase our dividend so that we have indeed an increase of a payout ratio.

Okay. Thanks Tom.

Thank you. Our following question from Mr. David Newman from National Bank Financial.

Good afternoon gentlemen.

Hi, David

With some of the backlogs you are witnessing in the intermodal, what was the status there and what action has been taken, and more importantly above and beyond that with your IMX program, how are you getting the discipline with the truckers, your partner there?

At Brampton intermodal terminal in Toronto? That was really is the culmination of our series of events driven first by the high volumes and then by the blackout and then by the holidays and then by some governments ethics telling the truckers not to work. So we kind of had a build up there and had to take some radical steps in order to try and improve that situation which we did.

As of today, there is basically no wait time at the gate, current rate at what we have always had in the past, early in the weeks as - - the trucks are lined up at the gates with our gate reservation in our slot, reservation system in place now, there is no wait at the gate, the trucker pulls right up with this reservation and pulls right in. The turn times in that terminal which had been during the crisis period in the hours are now down into the 40 minute range, and will continue to improve as we put in discipline there.

Really the simplistic way to look at this is we are going instead of being a terminal-to-terminal operation and then being at the whims of other parties to come and pickup and take away the containers or deliver the containers, we are going to go more towards a door-to-door operation like we already do today with a significant part of our operation, we are having our own retail trucking fleet. But we will go out more and more to door-to-door operations with all of that business.

So we can control the throughput through those terminals, which is so critical to two things. One, the service, which comes from having the fluidity that we give with the trains all the way through the customer, and the cost that are avoided for not having to double handle, triple handle and quadruple handle equipment associated with the truckers coming in there whenever and where ever they want.

And are they agreed to start working on weekends and or is that something that's still under negotiation?

We have reached arrangements with some trucking companies to work. Number one, during the week in the evening, we have a large percentage of people that are eager to work with us during the week at night, you know pick it up two, three o'clock in the morning, they figure out how to do this and save themselves time and money as well.

Secondly, we have a large group that are working with us, more and more to try and do things on Saturday, and that's working. We are having a difficult time getting people to do things on Sunday, in those circumstances we will take the necessary steps to do that ourselves. That's the right thing to do.

Just a last question on the BC Rail itself. I feel it has some flooding and you are picking up some additional business, is that some thing that is material or you can quantify that?

As a result of the bad luck they had with the flooding, and a couple of bridges washed out, we are detouring three trains today, I think each way for BC Rail. We anticipate that to go for probably 10 days to 2 weeks, given that the rain stops. But I wouldn't certainly call it material.

Okay, figured. Thanks gentlemen.

Thank you. Our next question from Mr. Ken Hoexter from Merrill Lynch, you may now proceed.

Hi good afternoon?

Hi.

Just wanted to ask, earlier we had heard from another rail talking about moving forward some CAPEX because of bonus depreciation on the US side as well as 2005 locomotive emission standards changes. Just wanted to know if you've thought that far ahead as far as your '04 CAPEX budget, if we should see it spike up perhaps because of that and then obliviously result in depreciation?

Then secondly, Hunter, I don't know if - yes you mentioned that service metrics that everybody seems to be talking a lot about lately. Can you talk a little more in detail; obviously, we've seen velocity is down almost 9% year-over-year, just in the recent couple of weeks. Is there something that drives that, that's aside from volumes or is that as we get more volume and fluidity that just spikes right back into normal speeds? Thanks.

Claude, you want to talk about the capital?

Well we have 30 locomotives, GE locomotives that are going to come on stream for our network late this year and early into the next year. That's the only locomotives we have on purchase at the moment. As far as capital expenditure, we are doing what it takes to maintain our plans, but we don't have any plans to accelerate because of the fiscal situation at this point.

I'm not sure about the other rails with their service metric. I've heard and read comments about miles per hour, I have never been a big educate of that miles per hour is a big indicator of service because people can run very fast and miles per hour and velocity could be wonderful when it comes to the terminals and wait two to three days and that doesn't accomplish a lot.

It's my understanding and what I hear is that the biggest issue that's impacting North America as far as miles per hour is the lack of crews. And I think the lack of crews is to some degree related to some issues that business levels are pretty good in some areas and so I think it's generally affected -- the most area affecting it is probably the availability of crews.

You have take this into account when you talk about heavy grain and grain in the numbers, there's no use in running 25 or 30 miles an hour to go to the port to sit right for two or three days. So as I've talked to some of you, you'll really have to peel back the miles per hour to see really what it means and what the indicators are before you can put a plus or a minus on it. Our schedule railroad, we have a theoretical miles per hour.

So we're not going to pay a price for fuel and for additional locomotive and horse power for trailing ton to run 30 miles an hour instead of 27 to get to a market an hour earlier that won't pay for it. So that's my comment about the service metrics.

I would add to Hunter's point -- the driving productivity measure for us at the moment is trainload, and in Western Canada our train low because of our siding investments in some segments is up 14%, 15% power. You're saving bundles of money with longer trains, heavier trains but they may end up being a mile or two per hour lower as a result of the weight behind the locomotive.

And generally, they are because of the grain and we're moving the grain to the port to wait. So there's not a big driving issue but, on a miles per hour. When you're talking about one mile or mile and a half an hour difference.

Great and just one conceptual question if I may. When you talk about obliviously breaking the 68% barrier on your operating ratio again? I'm sure you get this question all the time, but what can you see right across a conceptual level, can you really drive this still with your programs like intermodal excellence? What is your ultimate goal? And then secondly just to confirm. No meeting in the morning, I take it, uh?

Right. You better get surprised again. I was shocked this morning when I saw a lot of people in a dead run, and I was trying to figure out why they were running, I knew about the good news.

It depends on several things. Yes, if I knew what fuel was going to be and if we had normal `rain` levels, and economic conditions approaching where we think will be in the short period of time, I mean all you have to do is go back and look at our past track record, if we had fuel at $22-24 a barrel today, if we didn't have the $50 million year-over-year fixed expense, if we didn't have the fuel increase, could I run the numbers and say we're the greatest to produce 65 absolute. Is that the ultimate? I doubt. But I would also hasten to add and I've said this before and I know you all hear me, but just you will get love with operating ratio as I've grown to love it.

I'd like to convert this step to growth but look the story is not over at 68. We did not break a world record. That's not the best we can do, and we'll continue to get better with this war bureaucracy, with sticking to the basics, with delivering the service. With just following this model, we'll get better and better I'd hope.

Great. Thank you very much Hunter.

Thank you. Our following question is from Ms. Jacqueline Boland from CIBC. You may now proceed.

Hi, thanks. On the acquisition, I was wondering you mentioned that your sale is over 50% of the customer base. What percentage are you of US Steel's Rail services then?

Well, post acquisition, we will be the largest ore carrier in North America and probably the biggest rail service supplier to US Steel. They have some facilities that are off of our network, and therefore require the use of other carriers, which is pretty long haul, (inaudible) facility, we just don't go there. So, they used another railroad for that and it's a pretty long haul, but my guess would be, we will still be their largest rail service provider.

And they recently purchased national scale, will we be able to benefit by that kind of thing or ...?

Yes.

Okay.

Yes, as the integrated steel mills have rationalized and strengthened, US Steel has certainly come out as one of the stronger players. Similarly on the other side, when we were talking about US being an ore player, the ore mines likewise are rationalizing and becoming more efficient as well and at a perfect time for us to step in between these new reengineered efficient mines and these new reengineered integrated steel mills to provide them with the service, especially while electricity costs are going up and the mini-mills are not going to be as competitive.

Okay. On the intermodal, I know, as you talked about, you had some issues with brand [Inaudible] them down, which is good. We still saw some volume in the quarter kind of come down near the end of the quarter at the same time the CPs was ramping up. Do you think with some of these occurrences that you lost some business to CP, did any of that happen temporarily or do you think you've some longer term?

We've not lost any business to the competition. Now, there are certain shipping changes that take place principally on the West coast in Vancouver there. One of the vessel operators just changed his port of call and stopped making a port of call in Vancouver, and when that happened because of the alliances in the consortiums among the vessel operators, often times there will be some volume that shifts over to one of the other alliances, and that may end up on the other carrier.

I am very, very happy with the volume growth that we have on our railroad and intermodal. It is not a question of growing intermodal volumes; anybody can do that and it has been proven in the past years that it's easy to do with price. We're trying to grow intermodal profitably and are doing so, I think, well ahead of what we expected, and if you'll see some of the domestic business, our trailer business hit down, because we have actually closed a couple of facilities in the US, which has had an impact of the volumes going down, but I can tell you we've closed some facilities. Loss in revenues there will have a positive impact on the earnings per share.

Okay, so because I know you're kind of changing some of the metrics in the demerge and at least in the [Branton] facility again coming up in November 1st, when you do that, do you go to some of your larger customers at least to kind of discuss it through with them and get their impressions as far as ...?

We have a constant dialogue with our customers about what we're doing in terms of chargeable services. We've had a constant dialogue with everyone about the need for them to not use our facility as a storage place.

And we have a constant dialogue with them if they would continue to keep their boxes stored in our facility for four, five days, that we are going to charge them to do that. If we need to charge them $75, if the market is $75 and the container doesn't move, then we raise it to $100. If that's the market rate and if container still doesn't move, then we raise it $200.

We are in the business here just to make money in railroading, not in storage and if we need to be in the storage business, we are going to charge what it takes with the market out there.

Thanks, and on your tax gains with the $0.24 impact adjustment in this quarter, you had some slight tax adjustments I believe in the previous quarters.- For the nine months, what would be the change in taxes there?

The tax impact in this quarter is $0.16.

All right $0.16.

Yes.

Not including the $0.24 in Q1, I was thinking on that, but you had the $0.16 this quarter and I believe there were some slight ones in first and second quarter. What total would that be?

We have provided guidance at the beginning of the year that our tax rate on an annual basis would be in the range of 32.5.

Okay, so on a normalized basis for the full year, it would be 32.5 anyway?

That is for the year, if you exclude what happens when you actually close your results. That is a point down from the previous year. We see our sales continuing to go down on the book tax rate next year, maybe a point again or so. And so that is the range that you should be working, but in any given quarter, you'll have the results a little bit up or little down based on the actual statement.

Okay, thanks.

Thank you. Our following question from Mr. Scott Flower from Smith Barney Citigroup. You may now proceed.

Good afternoon all.

Hi Scott.

Just a couple of questions, and I think I know how you'll answer this first one, but I do want to ask it. With Great Lakes closing, admittedly not a sizable transaction, you also have some irons in the fire on BC Rail, is there any stretch that you see in the operating side if you have the happy good luck of having both come, to fresh, you know, similar times?

I would be thrilled.

You'd be thrilled, but not a big enough deal on GLT necessarily to what you meant to do operationally on BC Rail that you'll pushing your operating guys all over the place.

There's a plan there. Certainly would be [Inaudible] , we will be able to with their presence of their management team there, integrated with our people that are [Inaudible] superiors. Certainly we will be able to manage that very, very easily. Now, from a BC Rail standpoint, we have a plan, I don't know - hope we are successful.

Right.

But we have Dave [Anderson], who most of you know, who was the Operating Vice President of Western region, who had planned on retiring, who had been working on some special projects, and Dave will stay with us, certainly at least for the first year to manage the transition. If we're successful there, and certainly they have some good management team themselves, so Scott, I am not concerned if we are going to stretch this management team beyond their capability.

Okay. And then just the other question, probably it's best for you Hunter, and the answer maybe that you are focusing on other things because you've not necessarily run the gamut but the relative lower hanging fruit is gone and, - as we used to obviously to hear a lot about the productivity side on locomotives, the utilization miles for day etcetera, and the over the car side, and also just some of the capacity metrics, if you look at the merchandize network, where are we when you look at some of the things obviously the car effort in terms of breaking free some of the old paradigms was not as far along as the local [Inaudible], but where are we in the processes of sort of where you want to be on that and is that why obviously, you are talking a lot more about the war and bureaucracy and IMX and new breakthrough opportunities, because, I won't say you are done, but you've done a lot of what you can do there or maybe it's not, you can just refresh us on where you are and some of the things -

No, no. We talked those five core values. One of those is asset utilization. When we over the first year and a half - kind of talking from memory now - First two years in the service plan, we took effectively 35% of the fleet out. We are not going to see that happening again.

Right.

We continually right now, and I am kind of talking a little bit from memory, but we are probably right now at a run rate of about - this quarter of about 290 to 295 gross turn miles available horsepower. I can remember when there was concern that we couldn't break the 275.

So, are we still making progress there? Absolutely. Is it at a slower rate and are we going to be able to get the 400? I don't know how but we might get there. If we continue to improve this model, and if we continue improve the velocity and raise the bar as far as the velocity, some of the planning we make, those metrics continue to improve, though the locomotive is probably get increased this year 6% to 7%, year-over-year, given that, that's from a pretty strong base and I am pretty pleased with that.

Okay, what about on the car side?

Car side, we're really starting to make some big headway.

I think right now our centerbeam velocity is close to 250 miles per day. One of the things that we looked at if you see, if you look at most carriers, you'll see a great difference between the loaded velocity and empty velocity and our plan is that you don't see difference. Because if they are moving on the same train, the velocity should be the same or you get too many cars into queue or into pipeline. At the same time, if your velocity for centerbeam based on demand of the 250, your box car the other cars type if it is demand should potentially be able to reach that level.

So, we are making stride on the car fleet. Once again, don't know how we do this. But I think probably this year 12% to 15% at miles per day. So, I guess my bottom line here, Scott, is that we continue to work on all these issues of asset utilization little bit here and little bit there. The effort is still there. It is some of the low hanging fruit, gone, the fruit I can see is gone.

Right.

There is some other on the backside of the tree; maybe we'll find it tomorrow.

Great. And then just last quick follow up is and I know that it is a very complex equation and it is no one number but I'll ask you to try to some where down to that. If you look at the merchandised network how much available capacity really is there and again I know that quarter specific. But I am just trying to get a rough sense, if you look at your network how much merchandised capacity, is there in terms of the strength in the economy and what can you really comp on an average basis, perhaps understanding that it is more complex in that more quarter specific?

Well from a line capacity, certainly 30% conservatively. Of a line capacity standpoint, now if we try to grow 30% with the locomotive fleet that is a little bit of our stretch that we would have little issue there. In certain car types, certainly, we cannot grow the centerbeams to 30% because there is huge demand on centerbeams and we are being negatively impacted to some degree because our cycle time with our brother roads in the US are not returning the cars as quick as we'd like to see them return.

Line capacity probably 30%. Locomotive flat on the merchandised side probably 15% to 20%. On the car fleet non high demand cars centerbeams probably 12% to 15%.

Okay, great. Thank you very much.

Thank you, our following question from Mr. Vick [Kaitan] from Deutsche Asset Management.

Yes, thank you. Claude, based on your recent acquisition of Grand--Great Lakes, as well as potential for BC Rail, what does that do to the balance sheet in terms of how far can you take the debt?

Vick, the GLP is a small impact on our balance sheet. It's on the order of two percentage points in our adjusted debt ratio, though it is not a material debt issue, as it relates to the BC Rail. I guess we would have to wait to be selective, but if we were selective, we could accommodate that as well, as a transaction and do it with a debt financing.

So you don't see any need for going back to the equity market for the acquisition?

Absolutely not and we have always said that our goal is to keep our adjusted debt ratio in the range of 45%. All of them with leases and that we are able to use the cash flow first and foremost to make acquisitions that are accretive, and add both to our customer service and to our shareholder return. And what we are faced with here with the GLT is exactly that opportunity, if we were so lucky on the BC Rail it would just fit that model perfectly, and all of this can be accommodated if you look at it from the perspective of our balance sheet with the debt transaction.

Yes, and could you also refresh our mind as to the financial criteria you used to acquire this thing like a--is there a particular hurdle rate you used or what do you use to decide?

We try to buy the railroad at the lowest possible price, given the competitive dynamics, and our approach has always been the same thing. We think we run a pretty good railroad and when we do our due diligence, and we are becoming somewhat of a core competency of reviewing an opportunities.

When we do the detailed due diligence, we try to reply our business model and see what comes out in terms of efficiency and performance, if we were to acquire the railroad. Our experience is that we see huge opportunity and that certainly allows us to generate synergies and pay a price, which hopefully beats the competition.

But we never paid a dollar more than what we think the competition is able to offer and we never paid more than what we believe is the threshold that generates real shareholder value to our shareholders. And the criteria as this is a hard and fast rule but in the past we have said we like transaction that are accretive to our earnings in the first year.

If they can be accretive to our earnings before synergy, that's better. That's the case that we face with the WC, and it is the case we have in front of us with the GLT.

Okay and one more question to Jim of our de-pricing environment in terms of looking at net price increase, what are they running at right now say year-over-year in your third quarter?

Well, as you know, as I've said all along I think that our plan is to get the 1-2% price increase and that's exactly in the range we are doing -- real price increase.

And that's just for the third quarter or for the year-to-date?

That would be consistent in the third quarter and for the year-to-date.

Okay, great. Good job. I thank you.

Thank you. Our following question is from Gregory Burns from JP Morgan.

Hi guys, a couple of quick questions. I guess on the intermodal, I'm sure you are on the focus on profitability or volume, but this quarter your outlook is given from volume perspective it looks like you have got a couple of tough comps coming up. On the other hand, it would seem like the competitor or the trucking companies are probably raising rates pretty aggressively right now. So I'm just curious; how do you see the volumes of the next couple of quarters, looks like you are up against tougher comps?

I think that the current run rate in terms of volume growth that we are looking at on an annual basis going forward is in this kind of 7% to 8% range. We think that a reasonable kind of growth rate that you can do and do that profitably.

Okay, and then just on the financial side, just sort of interpreting what you said, should we look at a multiple BC rather than to be something similar to latest transaction or might that be more competitive?

Can I make just a brief comment? The government has not yet decided to sell the BC Rail and so we have put in a bid. We hope that the government decides to move forward and that we are selected. Every transaction is reviewed on it's own merit, and the criteria is we want to apply; we'll bear on that acquisition like every other.

Okay, just one final question that - would you do a dilutive deal or no?

I don't see how we would get there on the BC rail, but we can never say never for the future on any transaction. It all depends on the situation. At the end of the day though, we are here in business to create value for our shareholders and make acquisitions that make sense from that perspective.

So, we have been and will continue to be extremely disciplined in the way we approach any transaction. As I said, we typically have scope for not just merger synergy, but also significant best practice implementation, and typically that's enough to get us the selective bidder without having a situation that is dilutive.

Okay, and then finally just on the financials. Is there a range of debt-to-cap where you are either uncomfortable at one end or the other either your leverage would be too low or potentially too high, is there a range that you could give us?

We've been consistently in the leading position in the industry in terms of our balance sheet strength. We have the lowest debt-to-cap ratio among our peers, and we believe it is consistent with our strategic agenda of making a tuck in acquisition and having the ability to invest or support in the network growth, customer service, and shareholder value creation

In numbers terms, at this time in point that means an adjusted debt ratio in the range of 45% to 46% all in with [Inaudible] in -leases.

Okay and then as you go below that, I presume that share buybacks look more attractive than paying down debt and as you go above that, paying down debt would be more attractive.

When we get to those numbers in the past, we have always used the excess cash to either increase dividends or conduct a share buyback. That has been our practice, and when we do this acquisition here, we will have a slight increase in our debt ratio, as we work the debt back down, we'll be in a position to reassess the best use for cash. But final position at 45%, we see the cash going to shareholders.

Okay. Thank you.

I think we have time for one more question.

Thank you. Our last question from Loren [McCallan] CBC. You may now proceed.

Yes. I was wondering earlier on in the conference call, you mentioned there would be some changes in Montreal that would help with growth, you are optimistic. I think it was Jim who mentioned it. Optimistic about automotive, new business in Montreal? Can you explain where you are telling from? I am a reporter here in Montreal local news.

Yes. We are expanding our facility out there near our Montreal yard and bringing in some new business to all railroads that's formerly moved on the competitor. Because there is some rationalization going on with some of the auto assembly plants St. Therese to be specific.

Can you elaborate as far as perhaps job creation would go in terms of CNI potential deals with the auto industry in Montreal?

Well, that's something that we are working through right now as we ramp up the operation there and look at what the needs are. But I would not want to be specific at this point in time.

Perhaps a brief summary just because I work in a radio. Overall, perhaps Mr. Harrison, your overall view of the latest figures and what do you generally attribute the increase in your revenues to?

Well, if I can understand your question correctly, as I said earlier, I think we have got a pretty good model here. The business model has worked. I think the results reflect that. It is a pretty simple model. We stick to the basics, we run a very scheduled disciplined railroad and it has served in the past and I think it will serve as well in the future.

You mentioned grain was up. What kind of role did that play in your overall results of this quarter?

That's on percentage basis or -?

In general, we are looking for a summary given that we can't get too technical in radio and I am trying to look for an overall general clip if you will, an overall view of your results now and generally, what does CNI attribute them too?

On the revenue front, we are very happy that the grain has returned. As we said, it had been a number of years where we have been down to the drought conditions and the rebound in the grain definitely had an improvement on the revenue in the overall performance of the company.

Okay. Thank you very much.

Thank you very much. Also thank you very much for the quick response in being able to do this conference call on short notice. Now we will not be having a meeting at New York tomorrow, and thank you very much for your understanding today.

Thank you. 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 evening.