Canadian National Railway Co (CNI) 2004 Q1 法說會逐字稿

Welcome to the CN First Quarter Financial Results Conference Call. I would now like to turn the meeting over to Mr. Robert Noorigian, VP Investor Relations. Ladies and gentlemen, Mr. Noorigian.

Thank you, Nancy, and thank you for joining us today. With me is E. Hunter Harrison, President and CEO of CN, Claude Mongeau, EVP and CFO, and Jim Foote, EVP of Sales and Marketing.

Today's remarks may contain, as you would expect, forward-looking statements within the meaning of the U.S. Private Securities Reform Act of 1995 and other applicable legislation. There are a number of risks and uncertainties that could cause actual results materially differ from what we present today. Some of the risks and uncertainties are detailed in the first slide and in the reports filed from time to time with the SEC and other [inaudible].

Also today, we may refer to some non-GAAP financial measures for purposes of comparability. You'll find at the end of this presentation today, as well as the press release on CN's website, a reconciliation of these measures to U.S. GAAP measures.

At the end of the presentations, we'd like to-- we'll take questions. We'd like, if you could, to please limit the number of questions you ask to two or three so that we can give a chance for everybody to ask questions. And with that now, I would like to introduce CN's President and CEO, Mr. E. Hunter Harrison.

Thank you, Robert. Good morning to all of you. We're coming to you today from beautiful Edmonton, Alberta, where this afternoon we'll hold our annual shareholders' meeting here.

I want to make a few observations about the quarter before I ask Jim and Claude to go through detail with you. It presented some real challenges.

First of all, the first six weeks of the year we fought some pretty severe weather, which had some disrupting effects to our service which we were concerned about. We continue to see the effect of a strong Canadian dollar and some high energy prices but, in spite of all that, the most challenging obstacle, hurdle we had to content with the first quarter was the strike - unfortunate strike - by [inaudible] . When you lose 4,500 of your employees, it's extremely difficult to continue to operate with normal operations. But I can tell you, the other 15,000 employees of this organization came together and did one hell of a job. And with the exception of some particularly domestic intermodal, provided pretty well normal operations. I thought their performance was outstanding.

So let me just highlight a couple things. If you look at our EPS performance, in spite of all that, we saw a 6% increase year-over-year, $0.73. That was clearly better than we thought when we last talked to most of you with the conference call concerning the strike. We saw revenues down $58m or 4% as reported, which Jim will talk in more detail about. But, if you exclude the impact of exchange, they were up 4%.

Operating ratio continues to improve year-over-year - 250 basis points. Extremely pleased with that. Also extremely pleased that one, this work stoppage was put behind us. We quickly, quickly returned to normal operations and restored the service that our customers are used to. And continue strong free cash flow performance of $252m. So, over all with the quarter, I was delighted. I'll have a few comments later on about the unfortunate work stoppage, but let me call on Claude now to run through some of the financials.

Thank you very much, Hunter.

Let me take a few minutes to go over the details of our first quarter results and to also provide you some guidance on what we see for the balance of the year.

Overall, we're very pleased to delivery 6% EPS growth and strong cash flow, despite a month long CAW strike, represents solid performance. Actually, we came in a couple pennies better than expected a few weeks ago when we last talked on the phone to update you on the cost of the strike. The costs of the strike ended up to be in the range of $35m at the low end of the estimates we have provided you. That's $0.08 per share, so we gained a penny or two right there. We also gained another penny or two on the strength of a service recovery, outstanding service recovery coming out of the strike, and also very tight expense control.

In the end, our reported EPS was $0.73, or 6% higher in Q1 2003 on a post-split basis, and that excludes for 2003 the impact of the accounting change for asset retirement, which was booked in the first quarter of last year.

If you add back the impact of the strike at $0.08 and also the conversion of the appreciating Canadian dollar, our EPS could've been up by a full 27%. This is a strong operating rebound led by the return of grain movement and also good merchandise growth, as Jim will later explain to you in more detail. We were able to handle the volume growth at very low incremental costs, which improved our margins, a 2.5 percentage point drop in the operating ratio.

The strong operating performance was offset somewhat by weakening results below the line. First, our book tax rate went up 2 percentage points year-over-year to a more normal 32.3% on a book basis. More importantly, our other income came down $17m and was actually negative with a loss of $13m. This loss is partially due to some one time costs for the EWS capital restructuring, which was completed during Q1. We repatriated $141m of cash from this affiliate - and I'll give you more details in a minute - but also lower profits from sales of surplus land. Going forward, I expect our other income should hover up or down around a breakeven position.

Let me turn to expenses for a moment. As I said overall, solid cost control initiative during Q1. Expenses are down $79m on a reported basis and would've actually been flat year-over-year on at a constant exchange rate. This containment of expenses in the face of volume growth and high fuel prices is a clear indication of our intense focus on productivity. We continue to chip away at our labor costs with our workforce reduction of 1.5% on average. We also had the net benefit in the labor and compensation cost of a $13m net savings from the CAW strike.

Our war on bureaucracy is paying off more dividends in purchase services and that helped to offset some of the costs of the strike, like legal fees and also external mechanical repairs, which we had to do during the strike.

We also make solid headway on lowering equipment ramp and also reducing our legal claims which helped reduce casualty and other.

Overall, given the tough weather in January, I'm pleased with our progress in containing expenses and reducing our unit costs to handle business profitably going forward.

Let me say a few words about the cash flow. You know, with the strong start of the $272m, we have really a good base to work with in the first quarter. $141m of this cash was generated from the EWS restructuring.

CN and other shareholders have decided to releverage the EWS and repatriate cash. This is good timing for us. While the EWS equity pickup, which shows up in other income, will go down as a result, we will be able to use the cash to fund our upcoming acquisition of the GLT and the B.C. Rail. We have good news on this front. For the GLT with the STB giving us the go ahead, and we expect to close on the GLT transaction on May 10th or thereabout and fund this using our revolving credit facility.

For the B.C. Rail, we are working on the Competition Bureau approval. It would appear we may be a month or so late on this review, which was pushed at closing to end of May or early June, at which point we will be in a position to go out to the market and do a jumbo bond offering and finance both of the transactions - if they are both approved - using money and using the opportunity to finance both of these transactions at very low interest rates on a historical basis.

Let me wrap up with a few words on guidance for the balance of the year. We have a reasonably good Q1 in the bank that provides us a good earning base. Barring major issues with the [Porter] Vancouver strike, which Jim will talk about in a minute, we expect a solid second quarter on the strength of continued grain rebound. We will all face tougher comparison in the second half of the year because we have very strong finish in 2003. But overall, we are still aiming for high single digit EPS growth for the full year. We have our eye obviously on watching fuel prices, which are high, and also monitoring exchange rates. But on balance, this is where we see the year at this point in time.

On the cash flow side, positive start, very strong results, and we are set to achieve our full year goal of $575m to $600m of free cash flow after dividends for the full year.

Jim, over to you.

Thank you, Claude. Our first quarter results finished very solid after a rollercoaster ride of bad weather, the CAW strike, and then a very strong rebound in business levels in the end of the quarter. All references that I'm going to talk about here to the numbers - I've normalized this results for exchange, which gives us a better understanding of our year-over-year improvements.

Revenues in the quarter were up 4% while loads were down 3%. That equates to a revenue per car improvement of 7% and a revenue per revenue ton mile improvement of 5%. Our merchandise revenues were up 5% on car loads increasing 2%. Bolt business up 13% on a 2% increase on car loads, and our intermodal business down 11% on a 16% drop in car loads.

More specifically in the merchandise group, the petroleum and chemicals revenues were up 1% on an increase in shipments of chemicals and dry sulfur. The metals and minerals segment revenue were up 16% as a result of shipments of iron ore from the Missabe Iron Range in Minnesota to Prince Rupert for export to China, as well as just a very strong underlying steel market.

Forest products up 6%. This is the area where we saw the most problem in the early parts of the year, the first six weeks of the year - related to the weather. But, we came back very strong for the remainder of the quarter and finished with lumber up 9% and panels up 18%, continuing to be driven by the strong housing markets in both the U.S. and Canada. Panels - I'm sorry - paper shipments were also up 5%.

Our automotive business in the first quarter was about flat with last year. And the new business - but up slightly - and the new business that we have brought on was more than - was somewhat offset by some business lost as a result of diversions occurring during the CAW strike.

In the bulk segment, grain and fertilizers, up 17%. The expected rebound in Canadian wheat continues, actually up 77% in the quarter. This being offset by slower shipments in the U.S. of both corn and soybeans. The year-over-year decline is due to the very strong corn shipments we had last year, especially near the end of the year, which took some of the business away from the first quarter of this year, as well as very low soybean inventories.

There have been recently some discussion about weather issues related to the Canadian grain crop. I could tell you that, at this point in time, our discussions with the Canadian Wheat Board indicate that they are still planning for about an average plant this year. And by average, I mean the five year average. And we see at this time no indication of any weather related conditions which would cause us to not believe that there will be at least an average crop in Canada.

Coal was up 1% as strong U.S. shipments of thermal coal to meet utility demand in the U.S. more than offset the expected Canadian declines in metallurgical coal shipments due to the Western Canadian coal mine closures.

On the intermodal side, intermodal down 11%. Overseas in the quarter down 5%, but domestic down 21% in the quarter. Most of these declines are due to the fact that, during -- this is the one area of the strike that we were vulnerable during the CAW strike and we saw diversions of shipments where the CAW drivers would not come in to our terminals and pick up the containers or drop off containers. Those business levels rebounded immediately following the closure of the strike.

We also did take the opportunity during the strike to assess some business and did exit certain markets. You may remember that I spoke about us exiting some markets in the U.S. and small intermodal terminals in the U.S., which has had an impact on our loading performance year-over-year. We also took the opportunity during the strike to exit the road railer business in Canada, assessing its profitability with more management workforce on the ground and decided that was the right thing to do.

An issue related here is something that we're watching very closely that is developing as we speak is the tugboat operators strike in the Port of Vancouver that is having an impact on the ability of the overseas shippers, the steamship companies that dock at Delta Port. And at this point in time, we are not taking traffic into Delta Port, trying to assess the outcome of that labor dispute. A mediator has been appointed and there are ongoing discussions between the operators and the Port of Vancouver but, as I said, at this point in time, we are not taking traffic out to the west to drop off in Delta Port and Vancouver, but we are continuing to pull traffic on the ground out of there. Again, we'll watch them very closely and hope that that's resolved quickly.

IN summary, the outlook for revenues, as I said, our service levels recovered fantastically during and after the strike as we moved away from the weather issues that had hampered us in the first six weeks. Our customers were extremely appreciative of the job we did during the strike and we are now performing at normal or above normal levels.

The impacts of exchange going forward. Hopefully, I won't have to go through this elaborate discussion as we move through the year, explaining the impacts of exchange on a line-by-line basis. But at least for the next quarter or two, that will be a problem that we will deal with. But we will normalize it near the end of the year.

As I said, our strong improvement in rebound improvement in service industry leading service levels, combined with the strong commodity prices leave us with the opportunity to continue to give price increased.

And one last point I'd like to make before I pass this back to Hunter, is the changes that I've made in the sales and marketing organization, creating a new sales department and a new marketing department, collapsing the organization structure that we had that was organized by business units in the merchandise segment. I believe that this new structure will allow us to serve our customers better, make decisions faster, eliminate much of the bureaucracy that we had in the department, and will continue to allow us to move our service and our performance to our customers to a higher level while, at the same time, making sure that we understand their individual and unique needs and meeting those.

Hunter?

Thanks, Jim, and we both appreciate your observations.

As all of you know, one of our core values at CN is safety and our efforts toward control risk management. Let me make a couple of observations about that. You see in the presentation that in the area of injuries we made a 10% improvement in the quarter. In the area of accidents, we made a 17% improvement. I guess that's the good new/bad news story. I like to see the improvement, but we clearly are not where we need to be, where we have the ability to be. I guess the weakness is [inaudible] so they both deal with frequency and not severity. And I am proud to report that, if you look from a severity standpoint, particularly on the accident side of the ledger, it came down even more significantly than the 17%. But, I guess the good news story here is that there is continued opportunity.

Turning to the maybe what I would characterize as the lessons learned from the CAW work stop. Number one, there are always lessons to be learned when you get closer to the business. For the leadership and managers, the office to out on the ground, there's always opportunities. So, I think that we will see significant productivity initiatives and achievements in all of the areas with our mechanics in both the car and locomotive side and the people that deal with our clerical functions.

Number two, I think that we have agreed with the CAW leadership that this is not the end of the process, it's only the beginning. We both agree this work stoppage was unfortunate and it should not have happened, but there were certainly lessons learned. We have had recent meetings with them where we've agreed to move forward and try to forma more positive relationship, to move away from adversarial confrontational because that clearly worked for us. So, I hope going forward that our efforts along these lines will not go unrewarded.

A second thing is with the other collective bargaining units, in Canada, we are in negotiations with I think every one of them now. I don't foresee any issues there. I think that those will go without [inaudible]. I would note that - and you probably observed - that the hourly agreement on the grand trunk in the U.S. about a month ago was not ratified. But, there were some issues there, some technical issues that were misunderstood and we did put that agreement back out for ratification. And all of my forecasts indicated that that agreement will be ratified and that will complete that strategy in the U.S. of converting away from this old antiquated mileage system to an hourly rate. That's good that that can happen for us.

Claude mentioned the B.C. Rail and GLT initiative. Looking forward to those being closed in second quarter and taking the opportunity of the benefits that are there. Continuing focus on the war on bureaucracy and what it brings to us.

And I guess in closing, this group continues to face challenges and continues to deliver results. I think it demonstrates the strength of this model that sometimes we overlook these core values and this platform of schedule railroading I think has started to fair well. And it gives us opportunities to continue to identify ways to grow shareholder value. So, the game is far from over.

So with that, we will be glad to - Nancy - address questions the group might have.

Thank you, Mr. Harrison. If you have a question, please press *1 on your telephone keypad and you will be placed in our [inaudible] queue. If you're using a speakerphone, please lift the handset and then press *1. If at any time you wish to cancel your question, please press the # key. There will be a brief pause while the participants register for the questions. Thank you for your patience.

A first question from James Valentine from Morgan Stanley. Please go ahead.

Great. Thank you. A very impressive quarter given all the circumstances. I guess first would be to ask Jim, could you talk about pricing in the sense that we know you've been working on this probably more aggressively than any other North American railroad and getting some success. But, given the currency, fuel surcharges and mix, it's almost like it's a strike to be in the mix with intermodal being weak. It's a bit confusing in trying to figure out what's really going on there. So, can you give us some kind of a feel for, when you look at the contracts that are rolling over, if you took just the straight average of what those are going up and added that all up or looked at the average, are we talking 2%, 4%? I mean, I'm just trying to get some order or magnitude taking in all these other events.

I think, Jim, the guidance that I tried to give over the last few years in this, what I thought was realistic and sustainable, was in the 1% to 2% range. And we have been getting that and we are moving higher and closer - I would say to the 2% range now. In addition to that 2% flat increase that we're asking, we are getting these fuel surcharges on top of that. So, you know, I'm optimistic that we can move above and I'd like to be saying as we go forward into the 2% to 3% sustainable year-after-year range and I think that's achievable. Anything beyond that, I think just causes you longer term problems.

Okay, great. And that's an impressive number by the industry's historical standards. That's great.

Maybe, Hunter, this other question would be for you in the sense that - if I've got my numbers right - I think was about 2,000, maybe a little over 2,000 managers were doing the work of about 4,500 people, CAW employees, during the strike. And clearly, I'm sure some things were falling between the cracks in terms of the details. But, it seems like a pretty wide gap there considering what a strong quarter you still accomplished. And so, you know, when I do the math here, if I say ultimately when you reengineer from all this that maybe you can take out 1,000 people, is that kind of the right order of magnitude, the way to look at this? And are we talking six months, a year, two years? I mean, how much really needs to be done to kind of rethink these processes?

Jim, it depends on several things and let me address that. Clearly, you have to keep in mind that the 2,000 managers were working awful hard and working awful long hours, 10 and 12 hours a day, 7 days a week. So to some degree, it's not kind of a fair comparison of the 43 or 400 compared to 2,000. But, your point is well taken and we've already recognized that it points out a lot of opportunities. I guess the wild card here as to how much the opportunities are depends on the further dialogue going forward with CAW. And if we're able to develop a better working relationship and deal with some of the issues like, for example, contracting out, there would be one result. IF I had to place a number on there, I would say probably within the next 12 months there will be probably in the order of 500 less positions. We will see how the new relationships work out. We've got some new projects that are groundbreaking. We'll see how they work. But, I think it's not unrealistic to think that through productivity and some of the learning we've done here that possibly in 18 months that we could see a point where we would be down about 1,200, in that category.

Wow. And these are all-- these are net-- these aren't replacing simply with contractors and saying that fewer people here. You're saying these are fewer people being paid whether they're on your books or someone else's.

Yes, that is a net reduction.

Great. Great. Once again, great quarter in the face of quite a bit of adversity. Thanks, guys.

Thanks.

Thank you. The next question from Fadi Chamon from UBS. Please go ahead.

Good morning. I just have one quick question. Given the outlook that we're seeing on the demand side, is this going to make any change to your cap ex outlook here? Are you looking to pull forward the sum of the car purchases or any reason to track capacity here?

I don't know of any issue. I mean, I think our capital budget and outlook remains the same. It's around a little bit over $1b. Claude, you have anything to add?

No. Indeed, we have capacity to grow, whether it's track capacity or car capacity. We've ordered and discussed in the last quarter the fact that we're going to go for 30 more G locomotive in the latter part of the year. Overall, our cap ex envelop for the full year, including the 60 locomotives that we have planned, will be more in the $1.1b to $1.2b range, which is a slight increase from last year.

Thank you.

Thank you. The next question from Thomas R. Wadewitz from Bear, Stearns. Please go ahead.

Good morning. I've got two questions for you. One on the operating ratio improvement side. Pretty impressive results again. About 240 basis points improvement. And I guess in the environment of softer volumes. As you see volumes pick up in second quarter and perhaps the second half without the strike impact, can that margin improvement expand or is it partly a function of you had a favorable mix in first quarter, which helps. So, can you give me some sense of how to look at margin improvement in a better volume environment?

I think that the first quarter is a very good quarter in terms of our opportunity to grow at low incremental cost. You know, the first and the second quarters are the two quarters where you'll see a more significant grain volume up-tick. And obviously, that helps on the margin side, given the low incremental cost of getting back that business.

You have to realize last year was a very strong finish, Tom. And so I think a 2.5% operating ratio in the first quarter is very good performance. We expect to see our margin continue to improve in the second quarter, but we have tough comparison in the back end of the year. So, I don't expect the back end to see such a significant step-down in the OR for the last two quarters.

I think-- Tom, let me add to that. Sometimes the problems with year-over-year comparisons you've got to think about what you're comparing it with. And if I remember back - and Claude can correct me - that we had an awful severe winter. A real tough winter in 2003. And so as a result, our operating ratio was not where we would like it to be. But the fact is, we continue to improve the operating ratio. With a [inaudible] factor, my guess is - I hadn't looked at the numbers as close as Claude, but the operating ratio for second quarter will be significantly better than first quarter, at least this significant amount. I think we'll break through 70. We'll probably do better year-over-year but, once again, when you get to the back end of the year, now you're comparing with an awful [inaudible] fourth quarter, but you can't just take this 2.5% percent and say that's gonna be some kind of run rate of improvement.

Okay, great. That's helpful. One other question. This is I think for Jim. On the road railer, you mentioned you're really stepping away from that business. Can you give us a sense of how much on a units basis or revenue basis that business is and is there some equipment that you're left with there that you can sell, or how do you make your exit from that business?

It's about $20m of revenue annually. And we have some equipment. We're in discussions right now with some potential purchasers for most of that equipment. And we're looking to redeploy that equipment in other markets where the equipment would be used on a commingled basis on the regular merchandise trains in kind of niche markets. So, it's not just sitting around going to waste.

Right. Okay. Great. Thanks very much.

Thank you, Tom.

Thank you. The next question from James David from Scotia Capital. Please go ahead.

Thank you. Good morning all. Jim, I just wanted to ask you. You touched on the outlook for grain and the Canadian Wheat Board had made some noise recently. They were sort of looking a bit pessimistic. Sort of ignoring what they're saying at this point, in terms of your own planning, you talked about average. Can we kind of put a number on that because I think last year it was-- we looked at Western Canadian grain production was 41, 42 million tons. Trend lines probably 50 to 52. Where would you suggest CN is thought in terms of planning? Where about are you on terms of tonnage relative to that 41, 42?

We have taken the five year average for our planning purposes, which is about consistent with where the Wheat Board is.

Whereabouts was their most recent number? Because Agriculture Canada seems to be still a little bit more optimistic than the Canadian Wheat Board.

Well, the Wheat Board-- when we talked to the Wheat Board this week, they were still saying that they were - from a planting perspective - forecasting a above average plant this year. And the average being closer to the 50 number than last year's number.

Okay, so this is clearly some growth still in terms of what people are-- in terms of what they're thinking about and what your planning is.

Yes. Last year, you know, we were-- you know, I think-- don't remember off the top of my head. I think it was in the 8% to 10% below a 5 year average. So, for planning purposes this year, we wouldn't bumped that up that 8% to 10%, like I said. And I don't think anybody at this point in time wants to put a dock in so they're trying to give general guidance. And the general guidance is that it's expected to be above that, especially based upon the prices the way they are right now. One would be led to believe with the worldwide demand for the products, not only the Canadian wheat, but the U.S. corn and beans, that everybody's going to plant everything up to the front door.

Okay. Hunter, if I may, there's been a bit of a noise around the B.C. Rail transaction in the media. And I really-- sort of cutting through the shaft, is there really any implication for CN in terms of either getting the deal approved and/or execution risk relating to some of the political discussion going around the transaction?

I think that some of that chatter has quieted down. I think we have come to - and Claude can help me here - but we've come to agreement I think fully with all the participants, with the exception of the competition here obviously. We have reached agreement with the other three rails involved, CP, UP and BN. And I think all the issues - I think - are resolved with the B.C. government. And we are hopeful now that, given that-- and that's a rather recent development, that within 30 days or so we'll have a positive decision from the Competition Bureau and will be able to close the transaction.

And I would add to this, James, that you have narrow stakeholder groups at B.C. who are looking at angles to attack the transaction. That's to be expected in a privatization. But as far as we're concerned, the transaction with the government is a binding contract. As Hunter said, we have made very good progress and have now worked out an agreement with the three connecting carriers and so we're working to garner support from all those customers who have yet to come onboard with us and hopefully get the Competition Bureau approval in the next several weeks.

Okay. Very much appreciated, guys. Thank you.

Thank you. The next question from Scott Flower from Smith and Barney. Please go ahead.

Yes, good morning, gentlemen. Hey, Hunter, I was just wondering a couple of things. One is, are some of the problems among several of the U.S. carriers, some greater, some lesser, having any flow-through effect on your interchange business? I mean, obviously, you've done well despite the CAW strike and holding up your end of the bargain. And I'm just wondering in terms of your flow-through business, or some of the hiccups in the U.S., you know, making it tougher to show consistency to your end shipper in terms of final destination delivery.

Scott, I think you know probably better than I which ones are doing well and which ones are having a tough time.

Oh, no, right. I'm not trying to get you to comment on those. I'm just trying to get a sense of is it hurting some of your interchange?

No, let me-- clearly, some of our [inaudible] have increased as a result of the problems that a couple are having in the U.S. But, at the same time, two of them are showing pretty good improvements. So, on one side of the coin we're seeing some improvement with some, the other side, there's some deterioration. That's something that we monitor very closely. Jim and his staff do a wonderful job and they've done a wonderful job of doing some analysis of finding out the specific lanes and gateways where those [inaudible] have increased and, to some degree, start to reflect that in pricing or where we do car supply. So, yeah, it's having-- it's causing some issues with us - not major issues - but it's something that we're monitoring very closely and look for that to improve, which would give us even more traction.

Okay. And then I know that you talked about it and Claude has talked about growing a very low incremental cost. Where are you, if you look at your car fleet or the locomotive fleet in terms of what you said. And I know it gets much more complex in the high level I'm trying to look for here, but where are you if you look at your car fleets and/or the locomotive fleet or track capacity in terms of how much more room do you have within the existing asset base?

Well, first of all locomotive fleet. I think that we are-- we're in position that we bought locomotives early that we had originally planned and, very frankly, we bought them because there were some compelling deals out there. And worse case, if we make a mistake, we bought them a year early. But, we thought the opportunities, the prices that we were being presented just presented a wonderful opportunity so we went on a little bit ahead of the five year plan, if you will, and did that. We're in a position right now under what I see as a recovering economy and things being well the next two or three years, not able to make any locomotive purchases, number one.

Number two, in the car fleet, we're in pretty good shape. I would mention two areas. One is clearly there's a high demand right now for [inaudible]. That's something that we're acquiring-- 300 this year? Jim? [Inaudible] this year. That part of the fleet that's under strain. It's also been impacted by the additional cycle times. And there also is the issue is what will happen in Canada with the [cover hopper] fleet for grain. That fleet is getting pretty old and I'm not sure at this point that the federal government has made a decision about if they want to remain in the ownership of hoppers.

But, with those two exceptions in the car fleet, pretty good shape. There will be some specialty boxcars that we'll be looking at. [Unintelligible.] You know, we could increase our car load business 20% - 25% without having any pressure on line to pay.

Okay. And then just one last one, and maybe sort of a combination between yourself and Jim. Could you give us some update where you are perhaps in the fine-tuning process with Intermodal Excellence. I mean, obviously, this is something in the Western part of your network. You did more in August. You blended that through. I'm just wondering, have there been any further changes or tweakings or additions? Did the CAW strike, and particularly some of the affect on intermodal have any effect on the things you may have been doing to further implement that? Or are you basically where you are and it's just status quo?

Well, I think the strategy is still where we saw it. Clearly, we go through a little learning curve here. Clearly, we've seen some additional opportunities. In fact, Jim was on the ground during the strike at most of the intermodal terminals. And clearly, we see some opportunity there to further lower costs. But generally speaking, I think we're kind of on the timetable that Jim has set out 18 months, 2 years ago. Jim might want to add some other observations.

Scott, I think the first step of that was what we call IMX the trains, which is to redesign the actual train operations, terminal to terminal, balance those out and get the assets allocated appropriately. That is done. The final step of it will be completed in a couple of weeks when we change a few trains in the U.S. But, the bigger opportunity and the bigger challenge is the terminal interfaces. We have put in a lot of operating plans and policies to make that more efficient and disciplined. But, we've got-- you know, that's going to take some time and we'll keep working it out, but that's where the real bang for your buck is, too. So, we'll keep working away. I would say, if anything, we're slightly ahead of where we thought we would be. And as Hunter said, we learned a lot during the strike.

Great. Thanks very much.

Thanks, Scott.

Thank you. The next question from Ken Hoexter from Merrill Lynch. Please go ahead.

Hi. Good morning. Just if we could follow up on the strike out at the part of Vancouver. Can you talk about the percentage of volumes that this has the potential to impact, Jim?

Well, I mean, it's potential to impact is a difficult one to assess, depending on whether it's a two week strike, two month strike or two year strike and what the changes will be, if any, as this progresses. There will still be commerce flowing between Montreal, Toronto, Chicago and the West Coast for import and export. And whether or not that goes through Vancouver, whether it goes through Delta Port, which is struggling, whether it goes through [Senterm] or [Vanterm], that aren't struggling, that are operating, whether it goes through Prince Rupert that is being looked at, or whether it goes through one of the U.S. ports which we handle some of the way, most of the way or none of the way, all of that reconfiguration needs to be looked at. So, you know, it's difficult for me to try at this point in time to really get a handle on it. And I can tell you that our customers, at this point in time, are doing the same thing, trying to figure out how they're going to move commerce, import and export off the West Coast if they can't get in and out of Delta Port.

Let me rephrase the question. I guess I saw a release that you've stopped picking up containers destined for Delta Port. So, if-- I guess what percent of revenue-- or of your carloads were heading there currently, you know, just for a near term effect and then how quick can it take the customers to swap to a different port to get their goods moving again?

I think we were saying it's about 500 containers-- 500 containers would be-- let me think here, two trains. It's about 500 containers both ways daily if everything is operating at 100%. You know, that's the total flow back and forth. So it's, you know, it's a lot of volume. Our customers are sitting there now trying to determine what it is they should do and everybody's just looking and waiting.

Great. And then if I can switch topics over to velocity. Hunter, I know you get asked this a couple of times before, but as year-over-year we continue to see velocity declining to a decent extent, yet you're still able to post cost improvements. Is there a point where you need velocity to start picking up to continue to see these kind of cost pullouts?

Ken, I'm not sure what velocity numbers you're looking at. For example, right now if we look at our internal statistics, year-over-year, our train fee has increased the last year. We're about 24.5 to 25 mph. I'm talking about current data, as we speak. I would point out to you a couple things. Number one, I don't think necessarily that train speed, as measured by these numbers, are a good indicator of operating efficiency. Let me give you an example. Just year-over-year, grain increases negatively impact the velocity numbers because, once the grain train leaves it's origin and is on the way to destination and the market says we don't need it, which is about 75% of the time in Vancouver, the train stops, the clock is still ticking. So, for that train to be sitting there, we're collecting [demurrage] or whatever the case might be, it makes the overall number deteriorate but, at the same time, the efficiencies are improving. So, you know, for me to look at that number, I have to peel it back and look much further to understand it.

At the same time in the U.S. our strategies have changed a little bit in that now we might have one job doing what two were doing before because they don't have the [inaudible]. So through trains to some degrees are doing setting out and picking yup that were before done by another job. And our train size, measured in both length and ton on a year-over-year basis-- and this has been pretty well annual for the last couple of years - has increased about 15% to 20%. So, all things in, you know, I'm pretty pleased with the numbers are true, raw velocity. If you start looking at car miles per car days, locomotive miles and other things, I think it's positive. When someone in all their wisdom decided when railroads got in trouble with gridlock that he was going to pick five key numbers to see how they were doing and they picked average miles per hour as one of them, I don't know that I agree with that observation.

Great. Very helpful. And then just a last one real quick. You gave great detail on B.C. Rail and the status and you said GLT should close by mid-May. Is there anything left on the Great Lakes regulatory wise or anything else before closing?

The answer is no. There's a 30 day period following the decision of the SPD and unless there was a judicial review of the case, which I don't expect, on May 10th we are able to close.

Great. Thanks, Claude. Thanks very much.

Yes, sir.

Thank you. Your next question from David Newman [ph.] from National Bank Financial. Please go ahead.

Morning, gentlemen.

Morning, David.

Just on the West Coast with the stress that the intermodal is under, does this expedite your plans at all in terms of Prince Rupert? It's obviously a big opportunity for you guys, looks like a little earlier than planned.

Well, it certainly reemphasizes the opportunities that Prince Rupert might present to us. And I can tell you that we're working diligently, internally and with others, to explore the opportunities that Prince Rupert can bring. And I think-- I'm very, very optimistic and hopeful that we're going to see something happen there within the next year or two.

Very good. And on the grain side, Alberta is obviously a little drier than Manitoba and Saskatchewan. Geographically, the way your network is laid across the prairies, is that a strength or a weakness or how does that work out?

Let me get the weatherman to answer that one.

Is that Bob? No, the-- Alberta's obviously a significant-- but of the three prairie territories, it's the smallest of our draw territory as well as the largest one. It is feed market oriented.

Okay, very good. And just any update on your fuel heads at all or are you still pretty much where you were last quarter?

Yes, basically we are at 57% as for the full year, at $25 per barrel. And our position for 2005 has grown to 42% of our expected fuel consumption at $27.50 or thereabouts per barrel.

Excellent. Thanks, guys.

Thank you. Your next question from Jordan Alliger from Lazard Freres. Please go ahead.

Hi. Just a quick follow up on some of the expense stuff. Aside from the head count that you guys spoke about in some detail, what are some of the other, if you will, block and tackling or productivity types of things that we should look for in the expense line items in the quarters ahead that will keep the positives going on the operating ratio?

Well, let me just mention a few. Number one, this whole issue of our business platform and schedule railroading. It's got a lot to still draw out of this system as far as efficiencies. For example, right now we've been, I guess May 1st, they'll effectively put a new operating plan in between Chicago and Memphis, which will - there, on that territory - reduce expenses about 25% to 30%. There'll be some directional running, be a total redesign. Those type of initiatives will continue.

Jim has talked about IMX, that we're a long way from completed with IMX and those opportunities. Claude mentioned earlier the war on bureaucracy. We've still got a lot of areas to improve in this area of lost control, i.e., the personal injuries, a train accident, clearly the labor strategy that we've completed in the U.S. We've just scratched the surface with the opportunities that that can bring to us on the Wisconsin Central, Illinois Central. That's to name a few.

Thank you.

Thank you. Your next question from Randy Carson [ph.] from BMO Nesbitt Burns. Please go ahead.

Good day. On the Great Lakes transportation, you're in a fortunate position that the demand for iron ore has taken off. Iron ore prices have moved up quite nicely. Do you guys see an opportunity to raise rates on the transportation of iron ore? What kind of volume growth do you see for Great Lakes. And sort of all encompassing related question, do you see the accretion from that acquisition being higher than you've initially indicated?

Well, you're absolutely right. We picked the perfect time for us to move into the GLT transaction. The industry has rationalized, the minds have rationalized and suddenly the demand has grown tremendously. So, there is a great opportunity there. And I wouldn't expect that Hunter would keep me around here very long if, based upon all those dynamics I didn't do everything possible to try and raise our transportation rates accordingly. So, the opportunity there exists.

In terms of the accretiveness of the transaction, you know, there are certain developments that have occurred since we acquired it. The reopening of the Avtak [ph.]. That mine had been closed, not expected to reopen. We did not assume that it would reopen in our modeling. That mine is now actually reopened after a bidding war by people to try and get their hands on that ore deposit and we are shipping ore out of there now. So yeah, there's upside to the deal that we had not expected.

Clearly, Randy, just to add to what Jim said, other fuel prices being higher than what we expected and obviously had impact to the fleet, the vessel, you know, part of that business that it's really all positive news across the front on the GLT. Avtak [ph.] volumes, our synergies are being confirmed. We're ready to move in our step-by-step integration of that property starting May 10th. So, it's all positive news overall.

Best described, Randy, as good luck.

Okay. Can you give us some sense of a scale as to sort of what the incremental pickup has been? Like, in terms of when you look at the plan, how you've got it in place, what's the additional pickup potential here?

Well, when you look at the transaction on the scale of the GLT, a very positive news is a couple pennies for the year, so that's what we're expecting to see this year and then going forward.

Okay. My second question has to do with labor negotiations. I realize they're totally impossible to predict. But, are there sort of specific timelines that we should be looking for? Some sort of like, you know, you hope to get a deal with the UTU by this date and the DLE by this date, or is it just simply beyond prediction?

Randy, I assume you're talking more about Canada now?

Yes.

Well, I think that there's been a lot of turmoil over-- in Canada with the various labor organizations and they've had some disruption and they've had some disputes internally and they really hadn't had time to focus with us on a collective bargaining agreement. I think we have had initial dialog with all of them. I think they would agree that we're awful close, we just haven't had time to work the details out. I would think that, within the next two months, three months, from a Canadian standpoint those issues will be settled. I thin kit's too much to hope that we make any breakthroughs on the type of strategy in the U.S. I just think it's complex. It's a big change. I'm going to speak this afternoon about change. People are resistant to change. But, I do think that we will see a rather maybe simple agreement that is the kind that you would maybe expect. And then during the close period that we would take the time to sit down and go through new concepts or ideas and see if those units in Canada would like to pursue those ideas. But, I think it'll be settled in the next two, three months.

So we should have an announcement saying you've got a deal in place and that we can put all this stuff behind us by, say, July.

Yeah, I think that's reasonable. Now, have I ever been wrong? Yeah. But, I think the probability of that is probably higher than 75%.

Okay, good. Thank you.

Yes, sir.

Thank you. Your next question from Daniel Hemme from Prudential. Please go ahead.

--From another round of consolidation or do you believe that-- this can follow through with the current strategy of tactical acquisition to get you where you want to go?

that's quite a question.

I hate to do it late in the call.

No, let me just-- let me make these observations. The better we operate the better position we're going to be in if something does happen. Number one. So, it's in our interest to keep our nose to the grindstone, keep this thing moving forward, keep our low cost carrier reputation, the service and those basic fundamentals. We will continue to look for opportunities. Claude and Jim have done a wonderful job with I think GLT, although they had a little luck there. B.C. Rail. And there could be other opportunities in those kind of ranges that could come up for us. And if we can get those properties at the right price, we would certainly look at further expansion.

From a major consolidation standpoint, I'm not sure if I'm bright enough to address that. I do think this. I do think we're well positions that, if something happens, we'll be a player. We will not be hurt out of it. I think when you're the low cost carrier, when you're the most successful operating company, you know, you've got things going for you.

I guess the only other issue that I would ever raise to think about that is that - I hate to say this, but my experience has been that consolidations come more out of weakness than strength. So, given that, you can interpret what you'd like into it.

Thanks very much.

Thank you. The next question from Tom Farish [ph.] from Canaccord Capital. Please go ahead.

It's actually Bob Fay from Canaccord. Couple of questions. First of all, a quote. Could you go through a little bit more detail on the sort of strike impact. Revenue-wise, I think it's pretty straight forward. But, on the cost side, you were indicating that the labor and the equipment rents were down but that was offset by other costs. Can you sort of give us an order or magnitude of those different cost factors?

Yes. Basically, as we said before, the cost of the strike ended up being all on the revenue side because the savings we made, the net labor cost savings that we made on the order of $13m for-- because of the CAW striking workers, has been offset by increased legal and external repair costs and security costs and, you know, travel expenses to reposition our employees, which show up in purchase services and a little bit in casualty and other. So, the net impact on expense is one offsetting the other. And then you have the, you know, the roughly $35m impact on domestic intermodal, which is the story for the cost of that strike during the quarter.

Okay. The second question, there's a lot of discussion that there's been some, I guess, movement of manufacturing capacity into China and parts of Asia in the last little while. Have you seen any impact on any of your flows in and out of Mexico? There's been some talk that there's been some migration there.

Well, I think that the manufacturing move to Asia versus Mexico continues. It certainly has not caused any kind of a reduction, closure of any facilities along the Mexican border. And I think that continues to be an opportunity for us. I mean, we're positioned both to take advantage of NAFTA North to South trade now, as well as positioned well to take advantage of the huge growth in the Chinese East/West trade.

Okay. But, you're not seeing any impact in Mexico right now in production?

No, our Mexican business continues to grow significantly year after year.

How big is that right now, what you see in your overall revenue base? How important is Mexico?

Well, it's still a small factor. You know, thinking off the top of my head, which I hate to do on these calls with numbers. It's about $100m. It's been growing at about 20% a year.

Okay. So it's very, very small at this stage.

Yes, but growing.

Okay. Thank you.

Thank you. Your next question from Gregory Burns from J.P. Morgan. Please go ahead.

Hi, guys. A very strong quarter. I guess, Hunter, just a question on the interchange. Norfolk indicated that some of their auto equipment was coming back a little slow. And Jamie Hunt [ph.] indicated that they were seeing some slippage on the intermodal service outside of the UPM. I'm curious what your interchange is there and are you seeing any impact at all.

Yes, we're seeing impact and the automotive fleet is under a tremendous amount of pressure. Business is good and the velocities are down and so, yes, there are pressures there that we're seeing.

Are you concerned? Do you think they've turned a corner or the-- I guess, how concerned are you? How big a risk is this, that it could get worse?

You know, I don't know if I'm in a position to say. You know, I read just like you folks read. I think we all make mistakes. I think some mistakes were made, obviously, and I think that hopefully there's the opportunity--. We have certainly offered to do things that we could to help assist, as we did when the problems existed several years ago. And so I'm very optimistic and hopeful that six, eight months the thing will straighten itself out.

Okay. And I guess, Claude, turning to the acquisitions, Great Lakes, it sounds like things are going better than expected. If I recall, the earnings accretion in both those acquisitions was going to be somewhat back end loaded, you'll get more accretion over time. Does this mean that the earning accretion at Great Lakes becomes sort of smoothed out? Are you still looking at sort of more backend loaded? And also, could you speak to B.C. Rail. Obviously, it's not a done deal, but are your expectations there unchanged as well or better looking there?

No, I think on balance, that both the B.C. Rail and the GLT are generally positive. Their stories, our pre-integration planning in both cases is confirming the synergies that we had anticipated. And because business levels are good, as we discussed earlier on the GLT and also good on the B.C. Rail, we think overall the situation looks pretty good.

Our philosophy, Greg, has always been the same. We will not make a mistake by trying to go too fast to save a penny and then cost us, you know, difficulties in execution that impact our customer base. In every acquisition we've made, we go at it step by step, we're cautious, a very rigorous approach. And, you know, if it takes a month more to get to the cut over on a system integration piece of the equation, or if it takes a little bit longer to do what we have to do to get the GNA or other types of synergy, that's what we do. In the end, it is much better to get to the run rate a month later at a higher level than it is to try to go too fast and then make mistakes. That's been our approach and that's why we say don't-- you know, with both acquisitions are going to be accretive from day one, but expect us to gradually get to the run rate over time.

Great. Well, great job on the cost side. Very impressive. Thanks.

Thanks.

Thank you. We will now take our last question for today, Mr. Gary Yablon from Impala Asset Management. Please go ahead.

Hi, guys. How are you?

Morning, Gary.

Claude, can you go back and talk a little bit about the issue with EWS? I was a little confused as to what's exactly going on there.

Well, basically, we have-- with the other shareholders at EWS, we've decided to raise the level of this affiliate and distribute cash back to the shareholders. We distributed $141m to CN during the first quarter and we also swapped equity into a loan note that is worth $58m to CN on our books, which is something that carries interest and will be paid back over the next couple of years.

So basically, our position, having taken out $141m, our position in EWS is now sitting at 31%. We got Keith Taylor [ph.], who was our former SVP of Eastern Canada, now being the CEO of EWS. He's doing a great job of implementing a lot of the same interests that you've seen at CN over the years. And I expect the business to really go well over the next couple of years. And we will see when we have an opportunity with the other shareholders to either repatriate further cash or find an opportunity to get to a new ownership structure in the next couple of years.

Okay. So, we-- should we think about further cash distributions on a go forward basis, or for awhile that's probably it?

I think there, that the loan notes here, if everything goes well, could be paid back to us sooner rather than later. But, after that, I think we'll let Keith do what he has to do and wait for the opportunity to create itself for either a change in ownership or a further cash repatriation to shareholders.

And the reason for the reduction on an other income basis relates largely to the reduction in your ownership stake?

Yes, that and the fact that EWS now has debt to work against, yeah.

Debt to work against. Okay. But, that being said, you didn't seem to move off any of your forecasts for the full year in terms of bottom line CN earnings, growth rate, all that kind of stuff. Did I hear that correctly?

Yeah, that's where we are. Other than the fact that we lost $0.08 in terms of the strike in the first quarter, we have issues and challenges to work with, but we're still reasonably bullish about the full year.

Right. Okay. Can I ask you one more question? With regards to B.C. Rail, I forget a little bit about how some of the tax structure works in this deal, because it sounded like it was, you know, a terrific deal from a cash-in, cash-out standpoint. But, I forget some of those details.

Well, you remember the important big picture, which it is indeed-- you know, our focus on cash flow showing through on that transaction as well. Basically, because the B.C. Rail has had over the years very significant net operating losses, we will be recovering those net operating losses going forward against the CN base of earnings in Canada. Typically in Canada, you need to do the restructuring and it is only in the following year, which would be 2005 for us, that you actually get the cash back savings. So, we will be starting to reap the benefits of the cash back savings starting in 2005 for the next several years.

Had you talked about what those numbers might mean? The numbers might look like?

Yes, indeed. We have set up a time, just to give you an order of magnitude of the $1b purchase price, $750m is for the railroad and $250m is for the net present value of the cash benefit.

Okay, fair enough. Okay, thanks a lot.

Thanks, Gary.

Thank you. There are no further questions at this time. I would like to turn your meeting back over to you, Mr. Harrison.

Okay, thank you very much for joining us. We look forward to seeing some of you in May in Chicago at our next analyst meeting. In Toronto, excuse me. Have a nice day.

Thank you, Mr. Harrison. The conference is now ended. Please disconnect your lines at this time. Thank you for your participation and have a nice day.