Canadian National Railway Co (CNI) 2004 Q3 法說會逐字稿

Thanks, Bob, and good morning to everyone. It's a delight to be here live in New York again for the first time in several quarters. Particularly when we can stand up before you with the kind of results that were produced this - - our third quarter. I trust by now that you have seen our press release and seen some of the results. I think this quarter clearly further exhibited the leverage of our operating model. I would kind of describe it as a quarter of gains with no pain. There's been a lot of talk in the industry about capacity issues. We do not have those constraints in our system. I'm going to talk about that further with maybe one exception. What I would like to do is kind of highlight a few areas of the quarter before we recognize Jim and Claude to give you more details. It's certainly one of the more fun jobs of the CEO to stand before a group like this when a team has produced those kind of results. If you look at our earnings, you see that on an as-reported basis they were $1.19. That's versus 1.02 or up 17%. If you exclude the tax benefit and gain that we had last year, those benefits were up 29%. From a revenue growth standpoint, we were up 21% as reported. If you exclude exchange it's up a whopping 24%. $148 million I would point out if that have increase is from GLT and BC Rail which are going very well. And we will talk more about that as we go through.

[Audio difficulty.]

On the cost control front another quarter of outstanding operating ratio performance in the area of 65 and a fraction. That's to quarters in a row now. Probably would be I guess it would have been three-quarters in a row with the exception of the unfortunately work shortage that we had first quarter. Those same trends continue as we go into fourth quarter. One of the areas that I'm the most proudest of and even to the point there, this group impresses me, is the free cash flow, Claude will talk more in detail about that but $745 million through the third quarter. I think that we're probably going to blow through our previous forecast on free cash flow basis. Probably will exceed $900 million free cash flow which every time I say it I am more amazed. As a result of that this week the board approved a share repurchase program of 14 million shares which Claude will talk to you about in a little it came further. Detail further.

The integration of the GLT and BC Rail are well underway. The benefits are better than we expected. And the timing of them is even quicker than we originally anticipated. Here our network is fluid. Fluid, we have available capacity in spite of the fact in part of the leverage that you saw in these metrics that are produced is our train load continues to increase. It was up 8% third quarter. That's from a ton standpoint. From a length standpoint it increased 5% and we still, as I've described to you before, have available capacity on the existing network that we're operating. And that's part of the leverage of this operating plan is when you see, able to increase revenues 21% and effectively with no increase in train starts or train miles, that's why you see these dollars tumbling to the bottom line. We're clearly benefiting from the breakthrough hourly labor agreements in U.S. We recognize now we're learning all the time there's learning curves there. I think our experience says that initially you take one step back to take two or three steps forward and if you look at the various progress of the various properties and the timing, they're all making the progress that we thought they would make and probably even beyond that.

And last but not least, our -- we spent a lot of time in the area of loss control and safety on our train accidents and injuries and has such an impact on our operation and now we've got the lowest ratio in the industry, an improvement of 29 to 30% year-over-year and at the same time we're able to reduce our personal injuries to employees of by 15% so overall, overall an outstanding quarter. This model is hitting on all cylinders. We have even reached a point where we're impressing Claude and that's something to do. And so I'm delighted and with that let me recognize Claude to take us through some of the numbers.

Thank you. I am, indeed, impressed and it's great to be here in New York, physically to with you as we have done this in basically a year. We're here this morning to give you very good results and review them in detail and answer your questions. Bottom line we delivered $1.19 Eps. That's up 17% from last year as reported. For those of you who exclude last year we had a $30 million tax gain. For you who excluded in your base EPS is up 29%, very, very strong growth driven by operating income growth and performance that I'm going to take you through in detail. But before I do so, let me give you the three core drivers of the performance. First and foremost, solid top line moment tunnel. You're witnessing here core business growth. Solid volume and led by intermodal dal but good year performance. Discipline cost management is the second ingredient. This allows us to bring the top line to the bottom line and show earnings momentum. And also a pleasant surprise and that's the third factor. Strong accretion from our two acquisitions.

During the quarter BC Rail and GLT which were there for essentially the full quarter if I exclude 14 days at the beginning where BC Rail was not consolidated. Those two acquisitions have delivered 8 cents of EPS and are a clear base of support in terms of year-over-year Eps growth. The first and most important factor and Jim will give you a lot more detail -- is our revenue growth. Revenues grew by 21% and as I look a half is from the base business. The other half is from the acquisition. And if you look at the base business, half an and half is. Quality top-line growth. Controlled growth led by merchandise as I said but also during the quarter an uptick in our intermodal dal business which is demarketing we have done in the U.S. and rode rail of products. At the same time, we were able to contain the expense management of the business through a number of productivity initiatives. Our expenses overall are up $159 million against a revenue growth of close to $300 million.

If you look at it, our incremental expense as operating ratio of about of around 54%. That's operating leverage from strong margin starting point. This drives an improvement in our operating ratio which came down 2 1/2 points to 635.4%, the second quarter in a row that we're achieving a 65% operating ratio. Below the line, other income was a loss. a Loss of $9 million. This has been a trend over the last three quarters, it's a reduction from last year of about $22 million, driven by foreign exchange translation and left lanes the fact that we have lower land sales income. As I look forward to Q4 we will do better. We should be positive in Q4 in terms of other income but I got to tell you our run rate from where we stand with the progress we've made in managing our real estate land portfolio, I think it would be responsible for you to assume that our run rate going forward on a quarter-by-quarter basis will most likely be a slight loss, anywhere from five to perhaps $8 million not very different from what we've achieved in this third quarter. All in all a very good quarter. I think pretty much record performance across-the-board.

Let me spend a minute on the expense front. Good performance as I said overall showing our discipline, our total costs went up $93 million of that increase though or about 10% is due to the consolidation of GLT and BC Rail. We got some help from change which benefited us to the tune of about $30 million and overall, if you look at the components, I'm very pleased with the way we're managing the railroad. Our labor expenses have been contained. Our head counts and that's despite acquiring two businesses is up by less than a thou floats. That means the basic cm work force is down again to the tune 2 1/2% on a year-over-year basis as we continue streamline and get productivity doing things smarter without adding to the work force, able to accommodate the growth while we reduce our headcount in the base business. Purchase services are up, driven mostly by volume and inflation but also, you know, higher fleet or mechanical repair expenses. We're trying, we have a to reduce our bad order ratio because we're preparing for the fall peak season and everything comes with a cost and some of had a cost shows up in material which is in that category.

Fuel expenses are up a whopping 32% and that's despite a very good edge position. The reality is during the quarter, oil prices were on a per-barrel basis close to $45 on average 44 but that's up from $30 in 2003. Equipment rents were very well behaved. You can see there the clear benefits of our velocity and initiatives, you know the network was fluid and that is why we've been able to accommodate the growth while reducing equipment rates. Finally, casualty and other, this is up $25 million on account of, of course, GLT and BC Rail but also higher personal injury accruals for worker's compensation in Canada. All and all, very very good expense performance. If I turn to the cash flow, I think this is our most positive story. We generated $167 million during the third quarter, and that puts us as a record $754 million for the first nine months. Of course,, about $170 million that have free cash flow performance is due to the recapitalization of EWS our affiliate in the UK and the sale of our CANAC subsidiary.

[End audio difficulty.]

But even if you take out that amount our free cash flow is up $130 million on a year-over-year basis. And that's after a $23 million dividend or 16% increase in our dividend rate. This cash strength quite honestly is what I'm the most proud about. It sets us apart from the rest of the industry. This is what allowed us to digest a $1.5 billion investment to acquire the GLT and BC Rail and to basically not impact our balance sheet. If you look at our adjusted debt ratio at end of 2003, it was around 41%. At the end of this quarter, after the acquisitions, it is around 41%. Looking forward, with the strength of the first 9 months, we think we are going to be able to deliver on the order of $900 million of free cash flow for the full year. That combined with the strength of our balance sheet what is gives management and our Board of Directors, the confidence to announce a share buy-back program which we're doing today. Where this is going to be a normal core issuer bid in Canada. It's done for a one year period. 14 million shares which is roughly 5% of our outstanding shares. At today's prices or even taking into account a little bit of growing in the share price this is around $1 billion investment to reward shareholders. Of course, it will help us in terms of accretion also into next years and support our earnings performance for 2005. Order of magnitude, it should give us a benefit of about 15 cents of EPS. But I hasten to add that the dollar in and of itself at today's level is also going to cost us on the order of 15 cents of earnings next year. So you can think about the share buy-back as a way to offset the earnings impact of exchange into next year.

Let me say a few words just to recap on the outlook for Q4 and the full year. The fourth quarter which we're into as we speak will be lapping very, very strong performance in 2003. You have to remind yourself that 2003 had a very strong grain movement. And we also had strong iron ore movement. Good revenue performance in 2003. So we're lapping a strong quarter And we have to be careful not to get carried away on the strength of Q3. The dollar is at 82 cents today. Oil prices are at 1.55 which is much higher than what we had anticipated not very long ago. Nevertheless we are confident in Q4 that we will be able to deliver double digit EPS growth. It may be in the low teens, but we will deliver double digit EPS growth. And when you factor it all, that will allow us to turn in a full year 2004 with basically around 20% EPS growth and $900 million free cash flow. Clearly in my view stellar performance. Again, I repeat the 3 drivers: quality top-line growth, this year a grain rebound but the focus on yield and merchandise growth, low incremental costs from disciplined railroading and accretion from strategic acquisitions. That is how we'll have been able to deliver, if everything comes in place this kind of performance for the full year 2004.

And as we look out to the 2005 year, it's very, very early days and there's a lot of uncertainty out there. So I want you to take my comments there with those caveats. But this strength for the year will carry the momentum in 2005. As I said, we have a share buy-back which we're announcing which should help us offset the impact of exchange. If it stays around 80 cents. Next year we'll have the benefit from the strike recovery but also the carryover of the accretion from our 2 acquisitions. Those 2 elements alone should give us a base of earnings in the range of 5% to start the year. Our challenge is to add another 5% to 10% of EPS growth on top of that with the base CN business. You have to be mindful of a few headwinds. The dollar is at 80 cents and I think we have to assume it's going to probably stay above that. Fuel on the forward curve basis is at 50 bucks WTI.

Our tax rate next year because of our Canadian operations becoming more important is going to inch up most likely slightly you know slightly under 33% as an effective book tax rate. And we are facing the impact of inflation that comes from the strength in commodity prices, oil and fuel and energy prices and all these other commodities which we move but also purchase on an ongoing basis. When you look at it though on an overall basis, our guidance, our range with next year with the uncertainty that I described is in the range of 10% to 15% EPS growth. If we face a lot of headwinds particularly those factors that I've discussed we might be at the low end of that range. If we're kicking on all cylinders in terms of our initiatives, if we get lucky with the exchange or a few other key headwinds we will be at the top end of that range. That's our range of guidance with the uncertainties that we're facing at this point. And if we do that and deliver again $850 to $950 million of free cash flow, this will be a very good year again in 2005. With that, I will turn it over to Jim .

Thank you, Claude. Good morning, everyone. Pleasure to be here this morning. I'd like to take the opportunity to go through the numbers in a little more detail here from a top line perspective. Because they are a little bit confusing with the exchange and with the impact from the 2 acquisitions. So I'll try and take it apart just slightly to give you a little better perspective. Obviously a very good third quarter with a $45 million reduction impact on the top line due to exchange. So if you looked at these numbers and tried to understand what CN would have been without the BC Rail and without GLT. Just CN would have had on an exchange adjusted basis revenue growth of 14%. GLT and BC Rail then added to that an additional 10 percentage points growth. And that's how we get to the 24% exchange adjusted basis. Taking the business apart on a couple other - - in a couple other ways, merchandise, the strength, the heart of our franchise, CN only grew 18%. Bulk up 8%, intermodal up 8%. The impact of BC Rail and GLT because of the commodity make-ups of those 2 railroads really just adds to the merchandise segment. So with the core CN growth and the acquisitions our merchandise business would have been up 30%.

One more way to take a look at the growth in the quarter, volume grew 4%. Price took it up 4%. The impact of the fuel surcharge an additional 2%. And then we had a positive impact from mix taking it up another 4%. To get to the 14% and that mix change principally being the longer haul forest products business out of British Columbia which is a very good move good move for us. And the changes we continue to make in the mix of our intermodal business obviously having a more favorable impact as well. More specifically on a commodity business and again I'll try and help you understand how the CN stand-alone is doing. From a petroleum and chemical standpoint CN stand-alone was up 17% exchange adjusted. Very good manufacturing activity driving demand for plastics and all of the other chemicals that come off our railroad both in Alberta and in the Gulf Coast region. Metals and minerals driven by very strong demand for iron ore. Again excluding GLT metals and minerals on the CN stand-alone up 22% adding in the impact of the Great Lakes Transportation business. You can see that it was up - - we were up 60% exchange adjusted. And again strong demand for iron ore import ore through the Gulf of Mexico. Up on the Illinois Central line moving north.

Some favorable gain because Aloma steel business was not working in the third quarter last year. Steel markets, scrap markets very strong everywhere. In the forest products business CN stand-alone up 18%. Driven again this quarter by very good demand for Canadian lumber, especially out of British Columbia, lumber being up 25% in the quarter. [Hannel] up 18% and both pulp and paper being up 11%. The additional growth that you see on your chart then is the addition of the impact of the growth from BC Rail. Automotive also very strong in the quarter. Although we certainly had a month-to-month change with certain months being up and certain months being down. But finished the quarter up 14% as we had strong imported volumes through Vancouver offset by some additional business that was down. And the Nissan, new Nissan plant in Canton near Jackson continuing to ramp-up near full production.

On the bulk side of the business, take a look at coal. Coal up 16% coal Canada though down 48% and I'll talk a little bit more about coal in a minute. Down 48% as we saw a couple of the remaining mines there go out of business and stop shipping. But coal U.S. up very strong with both western coal moving through and connecting with our railroads for delivery into the east or into and around Chicago as well as strong demand for Illinois coal. In the grain business, Canadian grain up 15%, despite a very slow ending to the quarter as the grain supply began to be depleted while the new crop came in. And U.S. corn and beans both up around 7% with fertilizer being pretty strong but potash being down. Intermodal; our domestic intermodal business was up 4% despite the fact that we still are seeing the impacts from some markets that we exited - - smaller Intermodal markets that we exited in the U.S. As well as the road railer business that we decided to exit after the strike in the spring. So the numbers are very good. Let's talk a little bit about the outlook. On merchandise business, I believe we'll continue to have very positive outlook based principally on the fact that we provide very good service and provide a very good product to our customer.

Our product, our service continues to improve and while that happens the revenue growth will follow. We will continue to leverage debt service as we add in BC Rail and GLT. Our service out of Prince George as the result of the BC rail acquisition will improve 35% in terms of improved transit time as a result of that acquisition from Prince George to Chicago. As well the GTL continues to give us opportunities to serve new customers to like the ore move out of Minnesota that went off the West Coast as well as now the ore move coming up through the Gulf. GLT has really given us great opportunity to provide customers with new services. Strong bulk markets as well. We're not just a merchandise railroad although I continue to talk about it. We continue to grow and have a very strong bulk franchise. The Canadian crop is above a 10 year average. A very good crop this year. The U.S. crop both in corn and beans is also - - both are very good.

And as I said I wanted to mention coal. After a number of years of coming hearing and telling you about the closure, continually year after year of the Canadian, our Canadian coal franchise where it's now down to a very small percentage of our business. There are now 4 new mines that have already opened and are shipping coal in western Canada, 3 on BC Rail, 1 on CN. And have the potential next year to double the amount of tonnage that we will ship. Canadian coal again it's very small but has the potential to double next year that tonnage. And again double it the year after. So the prospects for Canadian coal specifically, although there is some thermal coal, mostly metallurgical coal being called for in Asia, is driving the development of many new projects out there that for the first time in many years is very exciting for us. Finally the benefits of IMX, the improvement in the profitability of our intermodal business continues and we still have great opportunity there for further improvement. As you can see we have grown the intermodal business this quarter in terms of quarter revenue 8%. But probably more impressively improved the profitability of that business about 35% this year. We are also not taking the principals of the smoothing the IMX plant as we have applied it to intermodal and have the potential to start to apply some of the things we've learned there to the car load business as well to drive further improvement and profitability in that business. Thank you very much.

Thanks, Jim and Claude. Let me offer these observations. I think this quarter represents the leverage of this service offering. This is a service offering in this plan is not unlike what we first started talking to you about in '98 when we put this plan in. We talked about in 'the 89 we could not take the price increases we could not improve the quality of revenue until we had produced a reliable service and had developed some credibility in the marketplace. And we have reached that point. These price increases that Jim talked about at 4% offer a lot of leverage. Those price increases, I would suggest in our case are not the result of huge demand. They're the result of quality first class service. We have more supply out there so we can deal with the demands. This is not a case of making a significant change in the price in the market with demand. This is based on service. This formula that we get, I get continually get asked about of why we're able to have the success, it's pretty simple. We put together a pretty good team of railroaders with a pretty solid well defined game plan and let them execute. And these are the results that you see.

A couple new initiatives, one that you heard a lot about, the last week or so from CP within some new coal production opportunities. We had another break through with our partners as well as our competitors in Canada. Some things out in British Columbia, or specifically Vancouver. Which they announced which is a very nice for fit for us probably has little more benefit initially for CP than it does for us. But good for both. The more important thing on our side I think for the ledger and also CP is there's some other initiatives. And I think it's fair to characterize that we're also close to that we probably would more even more significant impact than what was announced this week. Another initiative that I am very excited about, much more so than others have talked about, people talk about my - - when I talk about these initiatives some of my impatience with getting some of these things done in the industry. And I guess I do have to develop some impatience because I've only trying to sell this concept now for 15 years. Since 1989 we've been working on this initiative and this industry's developed appropriate routing protocols between the U.S. carriers.

And to oversimplify that initiative, let me just give you this example. It's effectively saying what if we merged? What if we merged with our partners how would we handle today's traffic? Where we would go the shortest route miles. Where we would avoid gateways that are high cost and have congestion. What would we do? And if you would assume that the revenue base stays the same what this is is expenses come down dramatically. So that all we have to do is decide how to divide the pie up of those additional synergies. So I'm very excited about that. We have signed an agreement and have it in effect with CSX right now. We signed recently within the last month an agreement with Union Pacific which is being - - will be implemented fully with - - before the fourth quarter was out. We are very close, very close to agreement I'm hopeful, of signing within the next week to 10 days with Burlington Northern. And we're also very close with Norfolk Southern. If those initiatives fit together, we have a lot of opportunity for us going forward. A lot of opportunity to control costs better, to improve our service. If we improve our service, we can improve our quality revenue further and improve asset turns so it's got some real opportunities for us.

We're clearly going to focus going forward on accelerating the opportunities with the integration of the 2 new acquisitions BC Rail and Great Lakes Transportation. And we still need to focus on a very disciplined approach on completing our labor agreement in Canada. We right now have 60% of those employees under agreement. 40% are still not completed. BMWE is in a representation dispute which will be resolved shortly. I think within the next 2 weeks. I am confident that once that representation dispute is resolved that we can come to an agreement with BMWE. That would effectively settle I think most all of our nonopts with the one exception of IBEW our communications workers. And I feel confident that we can complete that transaction. Also that leaves the 2 operating crafts that we're working diligently with the BLE and the UTU. So in kind of summary it's a helluva quarter. Outstanding results that Jim and Claude have described. Claude talked to you about we continue a strong finish in 2004. And I would emphasize to you different than some of our friend trends that we have the capacity for further growth.

We do not have capacity issues. We do not have pinch points with one exception. That one exception is chicago, Illinois. We do not have a issue with Chicago with flows from eastern Canada. If you looked at the railroad as we described it with the merger of IC it's a big Y, operating Y. We're fine coming from Eastern Canada, flowing down through Michigan into Chicago because we have a route around effectively around Chicago. We are having a difficult time coming off the Wisconsin Central getting through Greater Chicago because of the congestion with the switching carriers in Chicago and the route that we operate over. We do not have our own route that we can dissect and come right through Chicago. That's a strategic weakness. That's weakness we're continuing dealing on. That's is a weakness we'll continue to deal with.

We've worked with the customers and said the best way to do is avoid Chicago. And we're coming up with new routing guides and new operating plans. And I would further offer this issue with the capacity for growth two things that could be opportunities for us: You've heard something about some things about Prince Rupert. I think it has a huge opportunity with this Company. Now, it's hard for me at this point in time to put a percentage on the likelihood, but I'm telling you if it hits, it's going to be big. If you also I would point out, if you believe all the numbers with the trade with China, clearly in my view, the West Coast ports cannot handle that growth. So somebody has to. And so I think Prince Rupert would be a huge player. I think you would be surprised if you saw some of the trades from Asia now. Some of the ports they might be going through that you wouldn't recognize on our map. And there's another port on our map that would go unmentioned that has a huge opportunity besides Prince Rupert if this trade with the Pacific Land and China, Asia continues. So with that we'll be glad to answer questions of the audience and I'm going to let Bob handle the order here, the Q&A.

We'll start with the questions from the audience and then we'll go to the call.

Good morning. Tom Water, first a question for you. On the capacity side, you talked about it certainly Hunter. But are there kind any metrics or - - how you can help us think about this? Perhaps if you look at the average train in the scheduled network. You know length of the train and how many cars and what it could be if you were closer to full line capacity. But what do you think might be a relatively metric for thinking about capacity? And then I've got another question on the cost side.

Sure. Let me kind of speak to that and give you some kind of order of magnitude. We run a fixed network. So we operate from a merchandise standpoint, a disciplined network those same trains generally speaking on a 7 day-a-week basis. And they have a theoretical capacity. And if you look at our overall capacity for all our merchandise trains on an average now, there's some ups-and-downs and puts and takes. The average size today is running, from a ton standpoint, is running about 6,600, 6700 tons. In most corridors we would from tonnage standpoint we could tell you we could run 10,000 tons on merchandise trains. That gives you some kind of magnitude. Do we have to add a locomotive for some that incremental tonnage? Certainly. But from a train start, train capacity standpoint. So there's a lot of leverage with growth. Now there are other places that we average higher and other places we average lower. But that gives you some type of order of a magnitude from a train start standpoint. From a line capacity standpoint, we're no more at 75%, 77%, 78% at most. But with adding trains starts now we can add even more capacity. We're not hiring people. In fact, we still have surplus people in Western Canada with the furlough board. Although I would hasten add in certain market in the U.S. we are adding a few heads from time to time. It's not a net addition. But with attrition going at a higher rate we've got locomotives, we've got people, we've got capacity, we've got train starts. And there's a huge leverage when you start running 8,000 tons of train. And you go to 10. That last 2,000 tons, to Claude's point, offers a lot of leverage. So I think we're in excellent shape.

Okay then my second question is on the cost side. Operating ratio very impressive in the quarter. Clearly doing a lot of on costs. I'm wondering can you give us a sense on BCR you have probably some constraints for when head counts would really flow out. And I'm wondering did you see a lot of the costs fall out for BCR in the quarter? Or do we look for that to take place fourth quarter or even next year? And then I guess on your protocol type of comment routing protocol, you know what's the potential looking out a year or two? Is that a 3% reduction in expense, is it 5%? Is it 10%? Just kind of order of magnitude how should we think about that?

Well, let me make these comments about BC Rail. The BC Rail was a - - as you can check the records and check yourself. A pretty efficient railroad when we acquired it. It was not bleeding. You'd have to look at the mix. They had a pretty good - - they had a pretty good operating ratio. Certainly we have the ability to add to that and to make some improvements and the natural issues of synergies. So we're pleased with BC Rail. There are more opportunities than we thought because there are a lot of opportunities moving forward. On the opportunity with the routing protocols. Now, I got to put a lot of caveats here. If people stay with the agreement, for example, okay. If we do what we think we can, with the other carriers. And I look out 2 or 3 years and say that hits, what kind of opportunities it has for this franchise? If you said is it 2 points on the operating ratio for lack of a better measurement, yes. Now is it the likelihood we're going to hit that? I'm not sure. I think it's better than 50/50. So a lot of potential. And part of my point is this story is not over. I mean, that is sound plan that we have laid out for some time for the future and it's got a lot of opportunities still to take the cost out. Now I think what's going to happen maybe is rather than taking cost out and going further and you all start doing the addition and you ask me another question like that. And you have me at 59 and Claude's going to have a heart attack, the issue is more about growth then. I think what really's going to happen is there's a point given what's happening to fuel and what's happened to our friends in the trucking industry and all that this Company can see huge growth increases going out 3 to 5 years.

Okay. Thank you.

Greg Burns, J.P. Morgan. Hunter, just a question you mentioned earlier on the labor, you said something like we had to go U.S. agreements sort of one step back to get two steps forward in terms of efficiency. Can you just maybe give us a little more specifically what's the step back, what's the step forward? And also how far into getting the full benefit of those agreements are you at this point?

The basis for those agreements as you remember as we talked about it was they're really a classic win win. It was an issue of the people challenging us and say what would take us to become the highest paid railroad. And we said you have to be the most highest productive railroad. So we did a lot of things for their quality of life, we did a lot of things for their comp, we did things for their security. They gave up work rules and gave us huge opportunities. And that's kind of a clean sheet of paper greenfield approach that very, frankly, people that have had handcuffs on all their careers sometimes don't know how to act when you take the handcuffs off. So day one we had to pay the rates. It wasn't like, okay: We'll pay you when we take advantage of the productivity. So we started paying those rates. And the first if you looked at it the first quarter Claude's popping out with sweat saying have you done the right thing. And you told me this is going to be good. And then you see a point where then productivity catches up to price increase to the wage increases and then productivity is going like this now. So that's happening in incremental steps on these properties. Wisconsin Central had a lower cost base and less rules than the others. It was the first one we did. So it had less benefit up front to gain. IC was the first larger opportunity. We took maybe 2 steps back there to take 4 ahead. Now I would say from that standpoint, that operation has started to show dramatic improvement from the step back. We're probably 60%, 65% there to where the full potential and we admit some of the full potential. The last we did was Grand Trunk. It's kind of in the war stage. And now it's upside to go forward so each one the them has kind of - - it's going to through incremental growth and a learning curve.

So it sounds like by full year 05 you'll be getting all the efficiencies that --?

No, I think not. I don't think we'll be there. And I can stand before the end of '05 and say we've got the Grand Trunk to where it can be. Or DWT which was right before the Grand Trunk to where it could be. And I think by - - what's going to happen by then is we're going to say at the IC we missed out on what the opportunities were. They're not a 100. They're at 118, and we're at 98. I think it will probably be 2006 til we reach what we think the full potential is, the full headcount implications and the whole thing.

And I was going to say the last leg comes through the ability to accommodate growth at low incremental costs and that continues for quite some time.

Jim, a couple questions for you. I know you're focused on the Intermodal side of revenues profits not volume. But I'm just care just the levels of profitability is it now at the level where you're sort of done pruning the unprofitable business? And from a volume perspective should we look for volumes begin to pick up there?

I think we're happy with this 8% run rate in terms of revenue. I think the volume break where it is now has the potential to tick up. But we're going to be very careful as we add capacity in the IMX model that we do it appropriately and we do it methodically. And we grow this business in this range that we've talked about going forward for the next year or two. If the volume is there and we can do it with the level of returns that we're getting today we will obviously add capacity and grow the business at higher rates. But right now I don't have that anticipation in my outlook.

Great, thanks.

Greg, if I could add to that. One of the things that we've said about this growth that has been misunderstood to some a degree is controlled, sustainable, profitable growth. It is very difficult in this type industry to go out there and have 25% growth one year and put the resources in place to accommodate it. The economy softens on you a little bit and what do you do next year? And so that's why we have worked very diligently to find out what the right combination is. If it's growth that we see is going to stick, it's going to stay there. But to go out and to kind of staff up for the peaks, to grab that 25% growth and then you look next year and things are going to soften up. And you look down in the valley and it doesn't look too good. I mean, I think 8% run rate for growth at the kind of profit that Jim has been able to develop with the seam with that business I'm tickled to death with.

A couple questions, Scott Flower, Smith Barney. One thing that Jim mentioned and maybe it's a question for Jim as well as you is: looking at some of the smoothing techniques of IMX relative to the merchandise network. And I'm trying to get a sense of is more of this going to be operational change or is it changing the behavior of customers how they look at our product and using pricing mechanism to send signals as to you you want volumes to flow? So I'm go trying to get a sense of is it more commercial or is it also operational in how you --?

Both and that's the and I'll let Jim speak to it. That's kind of the strength of the integration of this franchise which is Jim's taken to another step. Clearly the last 4 or 5 years in the schedule precision railroading concept, there's an effort, a smoothing effort. One of the big issues there is balance. You need balance. You don't need to run 2 trains south and 1 train north. Huge cost there. So, the first thing is you're looking at balance. Then the second thing is you're looking by day of the week. You don't want to be running 1 train on Monday and 3 trains on Friday. So operationally people have been trying to design with only operational implications to that. Now what Jim, the next step he's taken it to: is now to take a relatively new group tease that's going to be created or is created as we speak. Which will be service group that he will speak to and another group that has been typically we thought of sales and marketing. And take the price and the sales implication to integrate with the marketing to create the balance through IMX like pricing and other mechanisms. So Jim, do you want to add to that?

Our biggest challenge and our biggest opportunity with the intermodal IMX program was to get the traffic that always peaked on Wednesday, Thursday and Friday and then was nonexistent on Saturday, Sunday pushed into those low days and smoothed out. So we could balance out the network and improve service and lower costs. We have basically done that now with our intermodal network in that we are very smooth by day of the week. The carload business, the merchandise business right now has probably about 75% excess capacity on the weekends. And it is our goal both through operational changes and commercially to get that business shifted over to the weekend. Our operations are changing as a lot of our customers are also changing their operations. So as the for as an example, as the forest products of industry consolidates. As the Camcourse, [Spokanes] merge and want to have bigger production and output at their facilities. They want to run those plants 24 hours a day 7 days a week. That fits exactly with our model. That gives us the ability to move this product without adding any additional asset to do so. And allows us us to get significant improvements in service and improvements in profitability. So we're just starting now as Hunter said in our infancy. What we did is we took the scheduled railroad concept that we had done on the carload side to improve the service and profitability of the carload business, we applied that to intermodal. Now we're going to take the lessons learned from the IMX project in terms of smoothing and improving that product and take it back and apply it to the carload business. And it's a never ending process a never ending quest to improve and we think it provides great opportunity.

And then 2 other quick questions. One for Jim, one for Claude. On the grain crop I know you talked about the volume. I'm just wondering could you give us some sense and maybe this is too earlier: was the quality of the crop, what implications might be there about how much export versus feed lot, especially in Canada relative to the late harvest? What's your sense there? Will you have a normal export mix might you have a little bit less of an export mix relative to the quality? I'm trying to get a sense on that aspect.

It was a late crop, as you know, the late crop due to the wet fields to get it out and get it out so soon enough. So some of it got damaged. That obviously doesn't reduce the amount of grain but as you know, it reduces the quality. The quality of the crop will be lower than average. And, therefore, more of that will more than likely move into the feed markets by truck. But it is really I would say, has an insignificant impact on our outlook.

And then the other quick question, it maybe just a function of timing and lag effects on what the experience is. But Hunter talked about the good accident experience good PI experience and yet you talked about casualty rates in terms of your accrual rates going up. Is that just a function of settlement inflation lag effects of experience versus how you actuarially account for it? I'm trying to get a sense for it.

We trued up our worker's compensation accruals. And that's an really an actuarial exercise. Looking at all the employees that have been injured over the past 20 years. And what's the cause going forward? So we're getting inside of our overall safety and loss control initiatives. We're getting the benefits from the reduction in injury the reduction in severity and frequency of those important drivers of costs. But at the same time we have a base of employees who have been hurt over the past few years. And we have to accrue for the cost of that going forward.

And that was, correct me Claude if I'm wrong but that was 100% in Canada.

Absolutely, yes. And there is even more so in the U.S. with FELA. You save an injury today, you see the results, and the bottom line financially 18 months out. You know, there's some lag there. Because the accidents we're paying for today in a settlement are typically 18 months to 3 years in arrears when they occur.

Dan Dexter from Merrill Lynch. What kind of derails this great move to lower 60s or 59 as you noted is it CapEx on side --?

Dan I knew you'd pick up on that.

Is it CapEx on side? Is it the handoff to the U.S. rails or is it some of the co-production agreements? And is none of it is a worry to you as far as derailment is now the time more ripe for U.S. - - major U.S. acquisitions?

That is quite a question. There's no capital implications. You know, the only that issues that we're dealing with at all from a capital standpoint is the project that we put in place 4 or 5 years ago to extend to extend sidings. When we originally put the plan in our siding length in Canada was - - standard was 6,000 feet. Now we're moving to a 10,000 foot standard. That is effectively on the main line - - that is effectively complete at the end of this year with the exception of over the Lakes. Now there's a different set of implications there. So that's only issue there. This is just the Canada extension of the existing network and what we have today. We have a model today that says, you know, on an X line capacity with 35 trains a day you need siding spacings of 10,000 feet with every 12 miles you can handle that. So we know clearly where we are. So the first thing you can do is you go from just to pick a number 75 cars a train you can go to a 10 cars a train that has no impact on line specs. on sidings or what. Then when you reach the point where you have to add train starts then there's implications of either one of two things. And I'd like the other thing first. You add speed because speed adds capacity. So if you take a 40 mile an hour railroad to a 60 mile an hour railroad, on average speed you do it without capital implication from sidings. So that's the next step we'd like to take so strategically what we've talked about with the hourly agreements. So now we can leverage and lower labor costs by having an hourly agreement. So this growth or this issue to reach or lower some threshold is all just the basic fundamental plan that we've been executing for the last 5 years going forward. If I answered that --?

You did. Second part would be nothing is a major threat to that then is now the time right for, in your mind if you see something that you could [Inaudible question - microphone inaccessible].

No I think not and I think not because of this. You know, to do a merger acquisition you need a partner. Okay? You can't do it by yourself. I guess you can. We're not that style to do it by ourselves. I don't think the appetite's out there now for that. I think there's concern rightfully so in the industry about, you know, issues are cropping up from shipper basis about some form of reregulation. Which I think will die out. And will not happen but I mean, things, there's a little unrest in Washington. Although I think, I think it is not a hurdle from a STB standpoint. I think it is right that the law is the law. It is what it is. I think the surface transportation board would take a look at it and say if you met the criteria that we presented. But I just think right now the industry as a whole. And I don't like to talk about the industry as a whole because people don't give me much credit for that is a little unstable. And so I think people think let's settle down, let's get the total act together in the industry, you know. Let's get our feet back under us. And then if at sometime in the future there's the time for the acquisition or the merger, fine. You know, I think we're postured very well. That not something we focus on. Although we keep our eye out and we keep our ear in the ground. Although we put our ear to the ground and we hear messages coming back that it's us. Okay. And you kind of get ringing in your ear. You're trying to listen and they say it's you, it's not us. Trust me I with they would relax. Be've got BC Rail and we've got GLT and we have got our other little things that we said we'd pursue. And we're just happy running this railroad and having good quarters like this.

Follow up on something you mentioned Port of Prince Rupert there was some announcement that that might be making investment to help you out. Is there any further updates on that?

The selection process and Jim can add to this and he's more in the details than I am. The operator has been selected of the terminal if there is the terminal expansion of Maher which is one of the top terminal operators from an intermodal standpoint I guess worldwide. As we speak, the Port of Prince Rupert is out trying to obtain financing. And so once they get the financing in place, Jim and his staff are working very diligently with the Port and with Maher with some partnership alliance or whatever arrangement. If that that all comes together we're still probably, Jim, 2 1/2 years away from full operation.

From full operation.

So anything to add, Jim?

Other than in addition to that, there is very high customer interest in the development to that Port.

Yes, that's clear. Jim and I met with one of our largest intermodal shippers last week and it's fair to say that there's a lot of interest in Prince Rupert.

Hunter, Jordan Alliger, Deutsche Bank. Just a couple of quick questions. Just on the IMX thing you mentioned that the intermodal piece is largely smoothed out. Is there any way to get some sense for how much has actually occurred sort of now versus before? How much excess capacity might not be there in the low demand days versus what there was before you struck in the program?

Well, I would say that it's difficult to quantify exactly off the top of my head. We've taken out significant numbers of trains. We've reduced significant pieces of equipment. And I think it's safe to say that most of this improvement in terms of profitability that you see today is as a result of that smoothing and balancing of the trains. That is - - and while it took us a while and it's had significant improvement that was really the easy part and probably one of the smaller part of the opportunities. The next phase of IMX is smoothing, balancing and improving the interface in the terminals between the truckers coming in and their interfacing with the train and the truckers going out. And so that's the challenge there. So there has been a significant reduction in the assets, the locomotive, the crews, the cars, et cetera, to date. We could get you a specific number on that.

And the terminals phase working with the local guys, that is underway now?

Absolutely, absolutely. We are going to a reservation system. No longer are the trucks backed up on Monday morning 42 miles down the road and again refuse to come in on Saturday, Sunday. They've got to have their reservation. Just like the hottest restaurant here in town when Derrick Jeter wants to go and watch the ball game tonight, he'll be able to make a reservation and get in.

And just a quick second question. On the accretion for 2 acquisitions next year, sort of what's your current thoughts on that? And secondly obviously it's been revised upward in terms of the timing of it. Has that been more a function of top line? Or synergies ahead of schedule?

No the big driver is be the fact that those 2 railroads are performing very well as we take them from the get-go. The forest products are moving very, very strong on the BC Rail. We're already talking about moving coal off the BC Rail so the volume is there. The same story is true with the S-stack having come out of bankruptcy on the GLT. So we're integrating from the get-go railroads that are performing very well, and we are rolling out the synergies. Those synergies will come through in the next couple of quarters. To give you a sense of things, we had said to you earlier that we thought those 2 acquisitions would give us on a 35 cent to 45 cents range of EPS accretion. I think next year we'll be at 35 cents. And I think we have scope over the next couple of years to get to the top end if not slightly more than the top end of the range for both acquisitions combined.

Thank you.

Now we'd like to take a couple questions from the call if we could.

Thank you. The first question is from James David of Scotia Capital. Please go ahead.

Thank you very much. Good morning. Couple questions Claude. Just curious for the third quarter of last year when you reported your numbers why was the $30 million tax gain not treated as a nonrecurring item?

Well, you know the results are the results James. At the end of the day, you know we can discuss the key items. But our reported results include whatever estimates we made of our tax expenses and so our results last year was $1.02. We think it's fair that most analysts took that $30 million because we explained to them the nature of it. And said that may be not be recurring. And I agree with that. And so when you take it out then the year-over-year is closer to 29%.

But you're not uncomfortable with us backing that out for last year as a sort of a way to reflect what your underlying earnings growth was in the quarter?

No. I think you always look to have the lowest possible tax rate. But last year's was in the - - if I recall 24%. That was clearly a nonrecurring out of trend tax rate for that quarter.

Sorry, I missed a couple of parts on the call. The sound was tough. But if I understood your guidance for '05 at this point was somewhere between 10% and 15% on the EPS line. And you did go into some detail. But I didn't catch - - what kind of Canadian dollar and what kind of WTI would you be using when you make those assertions?

Well what I said is that: we're looking at the dollar today. And it's been going up every day by a cent or so. So I'm getting a little bit nervous about that situation. But assuming the dollar settles in at 80 cents for next year which would be a full 4 cents or so increase versus 2004. And assuming the fuel price which on the forward curve basis is close to 50 bucks, WTI if those to 2 headwinds stay ahead of us we will have a challenge next year. And we will be happy to grow at the lower end of that range. Lower double digits. If our initiatives kick in if we get a little bit of a break on one or two of those items we clearly have the potential to come in closer to 15% EPS growth over what is already a strong year in 2004. So that's the guidance of the caveat of the uncertainty that we're facing that we're providing to you at this point.

That's very clear. And finally a question for Jim. You talked about the - - there were 4 mines potentially 3 I think you said BC Rail and CN's lines potentially coming on stream obviously driven by high net coal prices. Could you just give us a sort of an order magnitude of what that might mean from a revenue perspective for '05 and '06? And secondly, you know, there's talk of JSM pricing potentially doubling the Japanese steel mill chemical benchmark doubling in April '05. We'll see what's going on with CP but I mean in terms of your own situation would you be privy to any type of upward pricing on your net coal should there be some good volume in April of next year?

Well, your first question in terms of order of magnitude, say, you know, we had generated roughly, you know, $40 million in business moving Canadian metallurgical coal this year or will this year. We could double that next year and double that again in '06. So it has the potential there. And that's just would be 4 mines and there are additional developments that are currently under exploration in consideration. So there is, you know, as I said, it's a very small at this point in time piece of business. But it looks like it's got great growth potential in the future. As we sign up these contracts it is not my desire to tie them to some external factor like the prices of steel in Japan. So, you know, I'm pricing rail transportation in Canada to the, not steel in Japan.

So you wouldn't look to trade any kind of pricing trigger just price this where you think you can make a decent profit?

That's correct. And I'm not interested, you know I'm not interested in extremely long term contracts. That's the normal case where you tie it to the external basket of indicators. I like short term arrangements that allow me to be a lot more responsive to my needs as opposed to as I said the Japanese steel manufacturer.

We've eaten out of that sack and it's not fun.

Learned that lesson.

Another way of saying it.

The following question is from James Valentine of Morgan Stanley. Please go ahead.

Great, thanks. Congrats on a good quarter. You know, if I look at the quarter and we take out the impact of the acquisitions and foreign exchange, it looks like you had about 14% revenue growth and about 21% operating income growth. And 21% is still great. But I guess are you a little bit surprised that we aren't seeing more operating leverage? Mainly that there's a railroad growing at unprecedented revenue levels, and we're getting 21% operating income growth. Was there anything in the quarter that I guess held back that 21% or anything else I should be thinking about this in terms of operating leverage?

Well, Jim, you always have up or down, you know, an issue I talked about, for instance, on casualty and other, we had accruals on personal injury.

How big was that?

What I'm saying is, you know, the same way you would also have a one time that happened to be of benefit. I think the way you should look at it is from the margin that we start with at CM to be able to grow inclemently and accommodate the acquisitions and grow inclemently with a 54% operating ratio is pretty much good leverage. We faced a number of headwinds. You mentioned them exchange and fuel prices. And we're very pleased with the leverage that we see there. Our challenge is to maintain that position going forward as we lap the grain rebound.

So I guess part of the challenge is because you've got the industry leading margins it's kind of tough to keep doing that again and again especially when you're adding aquisitioned?

Yeah, if I take - - that's one of saying it. If I take it the other way. We'd be pleased with accelerate the growth even at 65% operating ratio. But so far what we've been able to do is have very solid growth. And also have an incremental operating believe ratio that's materially below what we're already achieving. And that's why our OR is coming down 2.5 points. And our operating income is up 30% if you include the 2 acquisitions. And around 20% as you pointed out if you exclude them.

Right, it was once again it was an impressive quarter. If I could ask one more question based on Chicago. First based on some shipper conversations and surveying we do it looks like you had some problems there over the past few months. And wanted to know if you feel confident they're truly resolved and behind you? And second Hunter you'd mentioned something about kind of the strategic weakness in Chicago. Is it possible that you could resolve that with let's say the purchase or some kind of alignment with a local beltway railroad here?

Yes. Jim there are 2 questions there. And I would suggest that this is very sensitive and delicate. I suggest to you we didn't have the problem some of our shippers had the problem. And the problem was we had one individual line of business that represents a lot of shippers and we had the embargo there. We had the embargo because they had to back up to 400 or 500 cars in Chicago with no place to put them. And we're not in the storage business. So their customers were a little upset because they were saying we had couldn't handle it. And we'd embargoed the them. And we embargoed them because we don't have a place to store 500 or 600 cars in Chicago. Now we put the embargo in place. We put went through some emotions and that's hopefully behind us. But I would say that 90% of any problems you heard in Chicago were repercussions from this issue with the embargo. And not having a place to put the - - store the business. We're not yet in the warehouse business we're in the transportation business. We move stuff. The second thing is I can assure that I have been focusing on and I will continue focus on looking at every opportunity to make a deal in Chicago to go around, through, up or over. And that effort will continue.

Great, thanks, Hunter.

Yes.

I just want to ask, in the create program that was announced last year and is still waiting to be finalized, can that solve your Chicago problems? Can you talk about it?

Tony, it's probably 5 to 8 years away. Number one I'm concerned if it's going to ever happen with the tax implications in Washington and budgets and so forth. Number one. Number two, there's environmental implications that a lot of humps to get over. The final operating agreement and settlements are not done. So I'm not waiting on create. We can't afford to wait on that. I hope it goes in I spite of the fact that it wasn't designed as we would have designed it. But you have to compromise in those type issues. We need to find a way to either get through Chicago efficiently or not go to Chicago or get around it. I mean, we can come, we can come some days, I am embarrassed to tell you from Prince George to the outskirts of Chicago and it takes longer to get through Chicago than it did to get from Prince George. And that's an indictment and people have to wake up that Chicago cannot continue to exist in that type environment.

Thank you, the following question is from Ted Larkin from Orion Securities. Please go ahead.

Thank you. Hunter, with respect to your routing protocol agreements I'm just wondering it the bilateral agreement you currently have CSX and the potential deal with Norfolk Southern could these become a trilateral agreement and ditto with the 2 biggies in the west?

Yes, they effectively are. There's not - - you know, railroads don't have much intermediate traffic any more. So there's not a lot of cases where you say that 2 or 3 different people are handling a car. Like it used to be in the old days where somebody started out West and somebody carried in the middle intermediate and somebody ended up with it. If we take a look at our book of business, interline business. The bilateral agreement with all of our class one partners, and I mean, we have started with in effect an agreement back to KCS back to the alliance back to '98 I think it was. But bilateral agreement with each one of these class ones will effectively deal with, you know, 98% of the issues we have.

Okay. And there's no concern that that might stir a cause for open access at all?

You know, I don't know why it would. I mean, what we're doing is this: We are effectively saying that we are surrendering and moving cars in the most effective way regardless of length of haul or division we're doing in the interest of the shippers. We have to have some interaction with the shipping public. We have today's shippers that we have on our line that are shipping cars to storage points. And then we're shipping them back to where they originally came from. And then shipping them around the world in a route they choose to have a warehouse on wheels that creates terrible inefficiencies. Now, those people with due respect have no right to be talking about access. So, you know, I think the improvement that we've seen on most carriers particularly with the exception of a couple little baubles that have happened. And the potential to move forward with these agreements that there's no need in my view to raise the issue of access. And that just would create what I would call artificial inefficiencies.

Okay. And north of the border there still seems to be some rumbling that the Federal Government is listening to people that are pressing for that opportunity who have open access. Any further progress or news on that front with respect to the Canadian Federal Government?

Look, I'm not scared of access. Access doesn't bother me. Access is for the strong. If somebody wants to come on my franchise with my cost structure and put in infrastructure to compete with the lowest cost railroad North America, come on.

Okay yes. Alright then, one final question. Could you tell us the name again, I couldn't hear it anyway, if terminal operator that has been selected for Prince Rupert?

Maher. It's Maher Terminals from New Jersey. M-A-H-E-R. I get criticism because of my accent so I let Jim pronounce it.

The following question is from Jacqueline Boland from CIBC. Please go ahead.

Hi, guys. For capacity can you talk about you mentioned that 4 or your carloads you're still looking at 75% capacity reduction on the weekends. Can you just talk about - - you mentioned line capacity et cetera. Can you divide that up between weekday and weekends then in that case?

Yeah, this gets very complex. Keep in mind when you look at cycles of traffic, length of haul and cycle times, Saturday and Sunday business, depending on your cycle moves Wednesday and Thursday. Okay? So Saturdays and Sundays from a ton mile standpoint are very high because that business from Wednesday, Thursday, Friday moving on Saturday, Sunday and Monday. So you have to be careful when you look at loadings as opposed to ton miles and when they're happening and occurring. It's clearly the weekend impact issue opportunity. As we go through and try to put the type of discipline into merchandise as we did with IMX. But keep in mind it's an opposite model with IMX. IMX a days of the week we're at 100%t, because we run 6 times. We're sending one plane to that market. We're sending one 747 and we're trying to fill it up. If we get a 747 plus 10 passengers. 10 people aren't getting reservations and aren't going and the market knows that. So it's much easier under today's model with IMX to deal with capacity. Because you're dealing with fewer players. In the merchandise area and this is what we're trying to deal with from business unit, when you look at merchandise streams you're talking about forest products, you're talking about metals and minerals, you're talking about a lot of different lines of business. That's why we've been selling it as business units. Okay. And it hadn't fit when it gets to the networks which is trains. That's why Jim is creating a group that will be selling trains which is what our vehicle. Which will be selling seats on a 747, if you will, rather than by selling by line of business. So the weekend opportunity is a tremendous opportunity for us that we're trying to leverage. Cars that we have a huge high demand on today for an example, a wonderful example would be center beams. People say we have a demand for center beans and you're only meeting 85% of the demand. We get to British Columbia, we arrive on Friday, the people that get the cars are the ones that load on the weekends. If you're not a weekend loader you're not getting a car. So it starts to change behavior and it's just, upside opportunities that we go. And if you look at it, you're absolutely right, you'd say, well, are you at higher than 77% on Tuesday, Wednesday which is a high day based on the weekend? Yes. Are you a lower percentage on potentially Monday which is Saturday's loading? Obviously, yes there's some puts and takes there.

Thank you. We have time for one last question from Randy Cousins of BMO Nesbitt Burns, please go ahead.

Jim, I wonder if you could comment, you talked about the outlook for coal. I wonder if you could comment on the prospects for GLE and more iron ore movements? And linked into that do you see any fall out positive or negative of the merger with Ispat - - the Mittal Ispat conglomerate with the ISG guys? And just to sort of sum up in terms of the terms of the total bulk business could you give us a sense as to sort of what you think we should say modeling for sort of growth in your bulk franchise in 2005?

Answer in reverse order. You know, I think we've given the guidance of 5% for bulk. I think that's a number we would use for modeling although as I said, there looks like there might be some potential for upside with coal. I'm not sure that, you know, what the Ispat - - how the Ispat transaction - - or what the Ispat transaction will mean to me yet. You know, they certainly have the largest glass furnace I think at least in North America if not in the world in Gary which we serve through our Great Lakes fleet. And out of the [Mastaba] iron range based upon their negotiating stance and their contracts it's nice to know that they have a lot of money to be out buying that company. So I'll bring that up in our next contract discussion. And in terms of upside for GLT it's just amazing. In terms of in terms of the global changes that we're seeing for iron ore. I wish I had the vision and the foresight that Claude must have had when he negotiated the price for GLT because we didn't see this much opportunity and upside in that transaction. You know, the investment, the capital investment that's going into these mines and facilities is amazing. We had a phenomenal first quarter in terms of the amount of iron ore we were moving from the [Masabi] with the fourth quarter and the first quarter with the ore we were moving from Minnesota to Prince Rupert for export to China. The pre did not stop moving. The only difference is that ore instead of moving on our railroad to Rupert is now coming down 62 miles to Duluth for export by vessel. So the ore is still moving into the market. It's just moving into the U.S. market as opposed to export. And my estimation is that that kind of change in sourcing and logistics will happen all the time. And we are positioned perfectly right now to take advantage that. As I said for the first time we had iron ore coming into our bulk facility in Convent Louisiana. For movement up the Illinois Central line again feeding into the U.S. market. So perfectly positioned in a very, very strong and dynamic market and that will result in future upside.

So the prospects for that metals and minerals category which I guess includes the iron ores is looking pretty good for sort of maybe higher than that sort of 5% you're talking for the overall bulk?

Yes. Iron ore in the metals and minerals business in the merchandise segment. And we have talked about the merchandise segment being a stronger business than bulk. So - - and that specific - - iron ore specifically has potential to be much higher on an annual basis than the 5%. We're looking at 20% kind of run rates now. Obviously we'll start lapping some of these numbers but much greater opportunity there right now than in many some of the other business segments.

For Hunter, your capacity to drive productivity just always constantly astounds me. Can you guys give us some sense as to sort of a headcount guidance for 2005? And by implication, again what your expectations for product - - unit productivity growth would be for next year?

In spite of the fact that what we talk about in the past, I mean, I'm not - - I don't get real headcount focused. I think that can drive sometimes bad behavior. The headcount focus is probably more a function of the relationship we had with our collective bargaining units related to insourcing and outsourcing. Clearly the hourly agreement had some leverage that we can do more with less. And through those agreements it will be done through attrition. I think with the growth that we are looking at, I don't see with the exception of dealing with the furlough issue in Western Canada, you know, I don't see huge changes in headcount. Claude I think talked earlier about 2.5%. I think something like that. Something that I would consider rather modest. There's not going to be huge changes there because of I hope and what we see with growth. There's a lot of leverage left though in spite of that to continue to reduce unit costs. Now, and the reason people try to relate that and they miss it, they try to relate it to revenue per employee and I don't think that's a great number that drives me. It drives others. The leverage is in what we do as we run trains. And when I can take a train and get the same labor costs and put 25 more cars on it, without adding any capital, without adding infrastructure and effectively the only thing I have is some fuel costs and some ownership costs and maybe a little switching the leverage of that business is huge. And so hopefully the issue is this all fits together we could have a win win with labor that we're not out here trying to cut a thousand heads. We don't have the ability to do that. But with these vehicles that we use called trains there's a lot of leverage if you fill them up. And when you fill them up you lower unit costs. And when you lower unit costs then you open up new markets that you couldn't get into the past. And it's enough to get me to my grave that we will not have the efficiency rung out of this system.

So 5% plus productivity growth for 2005 is that achievable?

Yes. I think that's modest. Claude would tell you otherwise but I think it's modest .

Final question for Claude, the fuel issue. You got surcharges going in, you're renewing contracts, your hedges peel off. Can you give us a sense of a dollar drag in 2005 on the fuel side net of what you're doing in terms of repricing and surcharges and whatever if oil prices stay where they are today?

The million dollar question, Randy. Let me give you a few of the components because, you know, these are moving pieces. We have for this year we have a hedge position as you know of around 56% of our consumption which is just above $25 per barrel. For 2005, our hedge position is at 51% and it's at $29 per 30 cents or so WTI per barrel. So we will you know get our hedge position increases on a year-over-year basis. And the spot rate which today is at 50 bucks next year is also going to increase. So we will - - however, you look at it we're facing up a huge expense increase into next year. Offsetting that is the progress that Jim has made with his team to implement fuel surcharge that lag a little bit this fuel price increase. But that covers us for, you know, a good portion of our revenue base. Net-net, we think that the fuel price increases or movement are less of an issue for us but they are still a highly volatile element and it's clearly headwind for us at the moment.

Can you give me a scale of some kind? Like dollar scale? Like if prices just stay where they are?

You know, I don't have that from my computer right at the moment. But we can work tonight and get back to you.

Thanks so much for joining us. We look forward to seeing you in general with hopefully even better results.