Canadian National Railway Co (CNI) 2004 Q4 法說會逐字稿

Good afternoon. And well to CN's fourth quarter earnings conference call. I would like now to turn the meeting over to Mr. Robert Noorigian, Vice President, Investor Relations. Please go ahead, Mr. Noorigian.

Thank you. This afternoon, the slides for our presentation that we are going to give shortly as well as both press releases for the dividends as well as our earnings release are on CN's website and I hope you are able to access them easily. Joining me today is Mr. Hunter Harrison, President and Chief Executive Officer of CN. Claude Mongeau Executive Vice President, Chief Financial Officer Jim Foote, Executive Vice President Sales and Marketing, and, as with every presentation we do, the remarks today may contain forward-looking statements within the meaning of the US Private Securities Reform Act of 1995 and other applicable legislation.

There are a number of risks and uncertainties that could cause actual results to differ materially from what we present to you. Also today, we may refer to non-GAAP financial measures for purposes of comparability. Please refer to our website for reconciliation's to GAAP. The fourth quarter 2004 press release and the notes as I mentioned before, as well as the press release are available on CN's website. After the presentation, we will have a question-and-answer session and what we would appreciate is if you could limit the number of questions that you ask to two or three and please, no seven-part questions. With that, it is now my pleasure to introduce CN's President and Chief Executive Officer, Hunter Harrison.

Thank you, Robert. Welcome, ladies and gentlemen. Thanks so much for being with us this afternoon at Canada's late hour. I'm certainly delighted to be with you, especially when we can share such outstanding results. This team of railroaders here has produced some results here far beyond even my expectations. Before I call on Jim and Claude to give some level of detail for the quarter and annual results, let me highlight a few areas. I trust that you have received both of the press releases, one that deals with the financial results, and one that deals with the dividend increase.

First of all, let me look at record revenues. And I would bring to your attention that just about every metric we're going to discuss today are all-time records. I was talking to a few employees this morning and we kind of called it the ATB quarter, or all-time best. Our revenues in the fourth quarter were $1.736 billion up 19%. That's excluding the foreign exchange. Our operating ratio for the third quarter in a row was at 65% range. This would be I think right on, 65%. From an annual standpoint, the operating ratio dropped to 66.9, or 2.9%improvement. And I think that clearly demonstrates some of the operating leverage of this model. Extremely, extremely strong free cash flow and EPS growth; our free-cash flow was a billion 25 million, up a whopping 77%. Our EPS for the quarter was came in at $1.29, up 23%. And with that type of free cash flow performance, I think it encouraged our board today to raise our dividend 28%. I think that's the ninth consecutive year in a row, up to a dollar, and we have continued to aggressively pursue our repurchase program, which Claude will discuss with you in a few moments.

If I look at the growth side, we talked internally and we talked to some of you that were with us last May for the Analysts meeting about our philosophy of trying to obtain controllable, sustainable, profitable growth that was achieved both in the fourth quarter and for the year. Jim is going to talk about that. I would highlight one thing and I'm extremely pleased with, and that is, if you look at our 9% adjusted revenue increase for the fourth quarter, 3% of that was a direct result of yield or faulty revenue, our price increase and I was extremely pleased with that.

We saw smooth integration of the GLT and the BC Rail. In fact, BC Rail has gone much better than expected, and for all practical purposes, the labor issues there are settled and bind us and we were looking at not such a smooth transaction but a lot of people internally get a lot of credit for hard work there. Some of the new partnerships that were achieved in the year and the quarter, we had previously announced routing protocol agreements with CSX, UP, which we had talked to you about. I think about three weeks ago now, we announced a new agreement with Burlington Northern, which we were thrilled about.

We are in negotiations as we speak with Norfolk Southern, and I would hope that before the - certainly before the quarter is out, you will have announcements in complete routing protocol with all the major class one carriers in the US. Obviously, we clearly had, as we started that already with the KCS, with our last which continues to be - continues to strengthen and we have the same type of an issue with CP, and we have announced throughout the year a lot of new co-production initiative with CP and we expect that to continue. So all in all, I was delighted with the quarter. Outstanding results. And let me at this time call on Claude to run through some of the financials with you.

Thank you Hunter. Well, recapping 2004 with another great quarter. We just delivered a $1.29 of earnings per share; this is up 23% if I exclude the deferred income tax, which we had in the fourth quarter of 2003. Including the CIP here that we reported EPS growth of 65%. There are basically three key drivers, which explain this performance. First, solid top-line momentum. I mean by that core business growth of the organic business franchise at CN.

Second is the discipline cost control. We are able to bring the top-line to the bottom line again this quarter. And thirdly, a little bit of icing on the cake, strong accretion from the BC Rail and GLT acquisitions. As Hunter said, we have had smooth integration so far and those two acquisitions delivered 8% of contributions to our earnings during the quarter. Jim will take you through our growth performance in a lot more detail but overall I'm pleased to report 15% increase in our revenue growth on a reported basis, which is 19% growth excluding foreign exchange. About half of that comes from our acquisition, and the other half comes from the CN-based franchise.

We have accommodated that growth at very low incremental costs. Our expenses are up only a 129 million, which grew a record 65% operating ratio, which is 1.1 percentage point lower than last year. Below the line our other income came in at $25 million. This is up $17 million from 2003. We benefited from a big land sale in Vancouver, which explains much of the increase. Without this lumpy gain our Q4 income would have come in closer to about $10 million or a year-to-date loss of around $30 million, which is in line with the guidance we have provided you before.

All in all, a very good quarter pretty much across the board. If I turn on the expense front, there's a very good railroading with a fluid network our total cost went up by 2 percentage point less than our revenue growth. We're continuing to contain our labor expenses, and that's despite higher stock-based compensation, which in some way is a quality problem to have. Our total head count is only up by a 1100 employees with a two-rail acquisition. That means our CN base workforce has been trimmed by roughly 3%. Our fuel expenses are up by a whopping 30% and that's despite a $40 million edging gain during the quarter.

Equipment rents are down significantly, driven by asset velocity but also a $5 million car higher income, which is generated by the DC rail fleet, which goes off line quite significantly. Finally casualty and other was up $29 million, principally on account of BC Rail and GLC consolidation but also on account of higher legal claims and derailment costs during the quarter. We are continuing to have an intense focus on basic execution and driving a pipeline of productivity initiatives.

Our top-line is firing on all cylinders but we're not taking our eye off the ball on the cost side. Our best performance during the quarter and for the year was on the cash-flow front. We generated $270 million of free cash flow during the fourth quarter, which puts at a record $1.25 billion for the full year. Roughly $200 million of that is due to the sale of the Canex subsidiaries, which we sold the bell pack remote control unit during the fourth quarter, and the recapitalization of EWS. But even if you exclude those amounts we delivered $825 million free cash flow, which represents a 40% increase over 2003. This cash allowed to us finance roughly two-thirds of the cost of our two acquisitions.

During the fourth quarter, we bought back 4million shares for $275 million, and despite all of that, at the end of December, our adjusted debt ratio was the best in the industry at 40% or so. With strong cash flow and a very strong balance sheet, our board of directors approved a 28% increase to our dividends. This is the 9th consecutive increase since the IPO and it's in line with our policy to reward shareholders with a gradual increase in our pay out ratio. I won't dwell on our full-year results but only to say that the year has been outstanding pretty much across the board. It's a good time to be in a transportation business.

With revenue growth of 11% and a record-operating ratio of 66.9, we drove our earnings and our free cash flow to a new level. I am pleased that the market reacted positively with a strong appreciation in our stock price. And from my perspective these results are clearly sustainable. Our challenge will be to maintain the momentum, and I would like to close my presentation with a few words giving you guidance on the outlook for 2005.

We have to be careful here not to get carried away with a strong finish. We do face (inaudible) with the Canadian dollar at around $0.82 and fuel prices well above$45 per barrel. But we also carry a lot of momentum in 2005. And our goal so to deliver 10 to 15% of EPS growth on top of a great year. To get there, we will need 5 to 6% top line growth. Given the exchange drag which next year could cost us $300 million on the top line it will take solid volume and continuing yield gains to get there. From a cost standpoint we aim to take our operating ratio down by point to 0.5 to 1.5 and reap a full year benefits in terms of accretion from the acquisitions GOP & VCL Acquisition of around $0.35. So overall we are quite bullish about our earnings outlook and we are confident to deliver another strong year in terms of free cash flow in a range of 900 million to a $1 billion next year. Jim?

Thank you, Claude. I would like to take the opportunity to break the revenues apart a little more so we can understand the strong performance that we experienced in the fourth quarter. First, the numbers that I will refer to exclude the impact of the Canadian dollar appreciation that reduced reported Q4 revenues by $60 million. I will also exclude in these numbers the $145 million of revenues from B.C. rail and G.L.T. so we can see the year-over-year performance of CN rail stand-alone. But I should say that both B.C. rail and the Great Lakes transportation are performing very well, both contributing above our original expectations. C.N.'s stand-alone revenues grew 9%. Broken apart, merchandise was up 9%, bulk up 8% and enter modal up 14%. Another way to look at that of the 9% growth 1/3 of that came from volume and mix. 1/3, as Hunter said, came from price. And 1/3 from fuel surcharge.

Taking the merchandise segment apart a little more, petroleum and chemical segment was up 9%, with broad-based improvement in chemical shipments as well as strength in the LPG and sulfur shipments driving the petroleum group. Metals and minerals was up 8%. Very strong steel markets for sheet steel and scrap drove that group up 10%. But it was offset somewhat by a decline in iron ore revenues as a result of a non-repeating move that we had in the fourth quarter last year where we were actually moving iron-ore from the Masabi range in Minnesota all the way to Prince Rupert and where this year that ore is moving but going a shorter length of hall down to the Duluth Gateway.

Forest products, which has been very steady for us over the last years continues with all commodities within that group showing double digits growth, again being led by lumber up 20% in the fourth quarter as western Canadian producers continue to ship into the strong U.S. market. Autos down 3% in the quarter as slower production at certain facilities offset growth from the new Canton mill or vehicle assembly plant and offset some strong import traffic coming in both the east and West Coast. The bulk side of the business, as I said, up 8%. Coal up 8% due to strong U.S. demand for utility coal as well as some imported metallurgical coal being used in the steel industry in the U.S. And the Canadian market being flat as the new Canadian coal mines that are coming on in the west. That volume increase has been offset somewhat as the last mine, which is shutdown in the fourth quarter.

Fertilizer is up7%. A very strong U.S. market for corn moving to processors and feed lots, offset a decline on a year-over-year basis in the Canadian market, but again that is more a reflection of the extremely strong fourth quarter that we had last year in Canadian wheat shipments. And strong fertilizer, especially Canadian pot ash movements as well. On the enter modal segment we saw 14%increase. Much of that increase coming not from volume but from the strength of the business. And we're starting to get more price increases in that business reflecting the confidence that our customers are now having with the IMX program, the enter modal excellence, which is bringing a better service to our customer. And as we go forward and smooth out the business we are discounting price on the days of the week that we wanted to move the business but are charging more premium prices on the days when there's greater demand for that business. Very strong growth through Vancouver as the china trade continues to drive the overseas business as well.

Looking forward to 2005, merchandise remains solid. Service is the key and the team is doing a good job of delivering on that-delivering that product. The steel industry provides good opportunity for us as the industry strengthens and we're poised to take advantage of that growth. Forest products continue to remain -- have a very favorable outlook for the rest of the year. The U.S. housing market is still hot. And we're continuing to gain share from trucks with the improved service with the B.C. rail acquisition. Bulk side of the business, both the corn & soybean crops in the U.S. are record. The corn crop in our draw territory is actually up 23% above the five-year average. And the soybean crop is up 10% above the 5-year average.

Coal, as we watched the coal market go down for so many years in Western Canada, now we get to watch the coal market come back. Four new coal mines began production in the fourth quarter of last year. Three of those four are already planing increases in production in 2005 and three additional mines are being considered in western Canada.

In terms of pricing, steady is the keyword. Our plan, as we started the year of achieving 2 to 3% price increase for the year, certainly seems achievable, with upside potential I believe as we go forward. And we will continue to focus on our assets. Driving the productivity that is coming out of the IMX program, we are continuing to refine our operating model. We have extended our reservation system now into the overseas customers. And we are taking what we have learned in the IMX program and applying it to the carload business's well, so we can take advantage of greater use of our assets as we smooth out the business from day to day, the day of the week, and drive the performance in that business -- the improvements in that business as well. Hunter?

Jim, thank you, Claude. Thank you. In summary, let me say this. First of all a stellar performance both for the quarter and annual standpoint produced by a strong team of railroaders from top to bottom. This certainly could not be achieved without the best group in the business. When you produce a record year like this, I think the next question is, what do you do the next year? And my response is that you do it again. And I think that is what Jim and Claude have indicated to you, that our outlook for next year is, and so with that, we would be glad to answer questions the audience might have.

Thank you, gentlemen. We will now take questions from the telephone lines. [Operator Instructions]. The first question is from Scott Flower from Smith Barney City Group. Please go ahead.

Good afternoon, all.

Hi Scoot.

Just a couple of quick questions. One is obviously BC rail and G.L.T. have been positives and surprising, even to you and you have done this before. Claude gave us an idea for next year, obviously and things are coming in quicker than expected. Can you give us some sense of perhaps, given what you have seen so far, what you think the longer term potential is in terms of long-term accretion given the things come in faster and stronger and you are seeing it seems like more opportunity and it's all coming together much faster?

Yeah. Go ahead, Claude.

We're right on track. I think we have the recipe here in terms of integrating those smaller acquisitions. You should know that our -- for instance, our system cutover for SAP on the GLT was done on the first of January and it went smoothly. We're planning to do the same at BC Rail for April. We are instilling a lump you know a number of new initiatives in each one of those two railroads and we are ahead of target, basically on all fronts.

As Hunter mentioned, we have agreements with the labor unions on the BC Rail. We are fast implementing our operating plan on that railroad. The GLT is also running smoothly with very strong volumes as Jim mentioned with the steel and iron ore being very strong in terms of demand at this point in time. So our guidance for next year of 35-cent is at the top end of what we had provided you before, and we continue to see ourselves on that same path for the following year.

You know, on the order of 45-cent of EPS accretion would not be a bad number to shoot for in terms of 2006. So pretty strong accretion from two small deals. And we will get good cash flow generation out of the BC Rail tax losses in 2005. You know, these tax losses will come in handy to help us shield income tax in Canada. So overall we're very pleased and, you know, we're on target, if not ahead of target, pretty much across the board for those two deals.

Okay. And then just a couple of other quick ones, maybe for Jim and the last maybe for Hunter and Jim. You mentioned the strong outline for forest products. I am just wondering given some of the time where we now have the Canadian dollar is where it is, are you hearing any commentary from particularly the pulp customers or otherwise where it's having an impact to their business? Obviously you're giving us a favorable outlook. I am just trying to get a sense of when you hear back from both of your comments with the customers as well as what you're seeing; is there any sign that the strong Canadian dollar is having any impact in your volume particularly towards products where both bi-product will start to have an impact at these levels?

Well, in this. Scott, in this 82-cent range we're certainly hearing from our customers that they're not happy with that Canadian dollar price, as it relates to their financial performance. But we have not, as of this point in time, seen any reduction in our shipments as a result of the Canadian dollar. The capacity issues in this issue are still being taken out in the US because the low-cost producers are in Canada. And still have a favorable advantage, whether at 85-cent -- you know there's still a 15-cent advantage selling into that market place.

Okay. Then just last question, which is sort of tied into both you as well as Hunter, is. Where are you in carload excellence and where do you expect to be if we come back next year at this time. I mean obviously IMX has been successful, more to do there. But carload excellence is a whole new opportunity and I'm just trying to get a sense broadly of what you expect this year to come out of that opportunity and what actually you expect to actually change in the next 12 months?

Scott, let me make a couple of comments and then Jim can cure some of his. You know I think this is going to be a real learning experience. You know first off, we started off and we said we are taking this. IMX came about by taking the scheduled railroad, precision railroad principles and applying it into IMX, creating IMX. We learned from IMX and the carload people said we should take some of the earnings from IMX and create TX. I think for the first time we have a group of marketing and sales people looking at managing trains and flows and networks rather than cars, individual car loads, looking at capacity management and looking at various markets and are making a huge contribution that ties in with the routing protocol. And I'm not sure, to be honest with you, Scott, that we're smart enough yet to realize all the implications from a positive standpoint just potentially could have. Do you have any other comments?

The IMX initiative, improved the profitability of that business by about 35% to date, and we are certainly not done with our initiatives there. The opportunities on the carload side are equal to that, I would think, although probably more challenging as the challenge to spread this business is spread out all over the network and not located at the centrally operated hubs like they are in enter modal. So enormous opportunity but probably more of a challenge for us to get to all of it.

Great. Thank you very much. Good quarter, guys.

Scott, let me one other thing to your first question. I don't want this to slip by without -- when you're talking about these two acquisitions, and those opportunities there, I can't let this opportunity pass to mention Prince Rupert. There are huge opportunities Prince Rupert gives us to. I'm obviously the first to tell you that I am getting a little bit inpatient with this whole process that we're going through now trying to get Prince Rupert going.

But we have obviously made commitments. There's obviously huge opportunity. There's been a terminal operator selected and we have got a little bureaucracy that we need to deal with, but I am convinced we're going to make big break troughs' and Prince Rupert will be a big plus of these two acquisitions.

Thank you.

Thanks, Scott.

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

Thank you. Good afternoon.

Hey, David.

Hi. I just wanted to make sure I didn't miss something on the GLP and BC Rail acquisitions. What would have been the accretion for the full year 2004 from those deals?

About $0.19, $0.18 or $0.19.

Okay.

And the reason next year is $0.35, and if you do the math you might be surprised by that, the GLT in the first quarter, the lake freezes and so there's no, very little movement, and it's a quarter with a loss that we didn't have to carry in 2004. So you know, we're making good progress, and you know the guidance I have given is our best shot at this point.

Okay. So, in other words, another $0.16 in '05 roughly and another $0.10 in 2006?

That would be right.

Okay, perfect. Your -- Jim, in terms of your volume, sorry your revenue guidance, you talk about 5% to 6%, I'm just sort of curious, I mean, it seems like a very conservative number. And you know if I look at that you know how does that break out in terms of volume, yield and surcharge or if you want just volume and pricing. Is it conservative because of currency or just because you want it you know keep a sort of an even Kyle going forward?

The, that certainly is conservative reflecting the impact of currency. As I said earlier, just the currency at $0.82 is head wind of about $300 to $325 million. That's close to basically 5% revenue growth. So 5 to 6 against that is --

So, currency-to-currency assumption is well kind of cuts the number in half.

It does, exactly.

How much of the 5 to 6 would be volume then.

1 to 2.

Okay. That's all for me. Thank you very much, guys and actually a very good quarter.

Gotcha.

Thank you. The following question is from Thomas Wadewitz from Bear Stearns. Please go ahead.

Yes. Good afternoon. I have got two questions for you. The first one, I guess Jim or Hunter, as you look at the enter modal business and, you know, post IMX, you have got the significant improvement in profitability, and I think we expect to see the volume growth pick up. Is that a catalyst for reconsidering putting some further infrastructure investment in place and, you know, is that necessary in terms of more terminal capacity, you know, if we want to see kind of, I don't know, mid single digits, low double digits type of unique growth in enter modal.

We have the capacity in place today to continue to grow this enter modal business without any issue. Track capacity is certainly there. Equipment can easily be obtained as the market dictates and labor availability is not an issue. As we go forward with our strategy and our plan, we could certainly see where we may need some terminal infrastructure in the future, but what we have done in transforming the profitability of this business, there would be no issue as it related to the return that we would get should we decide to make that investment.

I just make two comments, Tom. Controlled, sustainable, profitable. And the other one is that we got some pretty -- I think very exciting internal project going on dealing with yard configuration and what we're calling a smart yard, which could create some capacity and could do some exciting things for us. So, you know, I think that we're going to continue to see this type of growth, this type of profitable growth, and then I think that we can buy some time and certainly we're prepared three, four years out in a much better position than we were a couple years ago to make investment in the infrastructure, which would probably have to be interminable if we decided to pursue that.

Is there a portion of the international business that might have been in longer term contracts that is priced perhaps well below the market that you think you can really ratchet up the price significantly as you access that, or do you think the pricing on that portfolio is in decent shape, again, the international side of the enter modal?

Let me Jim, can make comments also. I wouldn't characterize it as far below the market. I wouldn't say it's not the most profitable business that we have. And given that we have worked very hard in that area that we expect to see the quality of revenue on the international side of the business maybe improve more than domestic.

I think the market is what the market is. The business that I priced today, hopefully as we go forward a year or two from now, we will want to be raising that price up as well. But we have certainly -- we have certainly changed our perception as it relates to the overseas import, export container business, from one which I think everybody thought of as a commodity that went to the railroad and the port based on the lowest price to a business that is in search of service and capacity, and based upon those two elements, we think we're in a good position to get returns in the mid-range to above range for that service.

Okay. Great. Now I guess I'm going to push the end of Bob's two to three-question range a lot. But Hunter, I guess someone is going to ask you this, is there any kind of update you can give us with respect to the union negotiations? And thank you for the time.

Yes first, we right now we have settled with all of our bargaining units in Canada, with a couple of exceptions. One, the running trade and second is the IBEW. We, last week, week before last, signed an agreement with the steelworkers, which covers our track repair people. That went very smooth. It was very short in duration. Both sides exhibited a degree of professionalism that was very pressing. It's a four-year agreement. I think it's the only four-year agreement that we have done. It is now out for ratify indication, and I feel very, very confident that, that agreement will be ratified. That leaves us with maybe the discussion of the running traits. I would first of all refer you to that last week, Mr. Paul Thompson, who is President of the United Transportation union and myself issued a joint press release, which said that we were both optimistic about the opportunities to reach an agreement. I still share that. We also agreed that the place to negotiate that agreement was not in the media. So I'm going to honor that commitment, and I just cannot go further than that about the negotiations except to say that as we speak, we are in negotiations with the UTU. I'm optimistic, and the last thing I did last night was say a little prayer about getting an agreement.

Any thoughts on the BLE or is that just follows UTU?

Well, I think it's I mean I think it's pretty obvious we have not had a lot of dialogue as much with the BLE and I think that I don't want to put words in their mouth. I think that's by their design. My view is they certainly you are going to probably wait to see the outcome of the UTU and that will lend some guidance for what might happen with that group of our engineers.

Okay great. Thank you very much for the time.

Yes, sir.

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

Great. Thank you. Congratulations on another very good quarter.

Thank you.

I just first can you try to quantify some of the benefits these interline agreements and I think you mentioned it earlier that it's a little bit tough to get the hands around it. But when these are all said and done let's say three years from now we are looking back, do you think we can go back and measure these and say they were you know 10 million or less or 15 million or more. I'm just trying get a ballpark picture on how big these things could be?

Well, first it's relatively hard for you to see it. It's going to be in the numbers but its kind of you find it. I think, Jim, I talked to some of you before, maybe on these calls estimating I think it's clearly more than 50 million if you want to put a number on it. I talked about it being better than a point on the operating ratio. I think that there's a timing issue. We clearly made the first agreement with CSX and they have had clearly some operating issues since then so we have not seen the benefit as a result of some things that they're working their way through, and I think they're doing much better. The next agreement was with Union Pacific, and we all know what the Union Pacific has been battling the last year or so, and we all are hopeful that they're going to make a rebound. I'm confident they will and they have. And that's a recent agreement. And so we're going to see significant shifts as we speak we're seeing significant shifts away from Chicago to Superior for one example.

Within the last couple of weeks, we signed an agreement with BN, and it's a pretty simplified agreement. If you look at the flows of traffic, and it basically says, to give you one example from the Canadian side, business coming out of Western Central Canada that wants to go into what I call the I35 corridor down to Kansas City, Oklahoma, Texas and west, should not come to Chicago, should not go to Superior, it comes over a Gateway due south of Winnipeg that some of you haven't heard of called noise, which is only 50 miles or so south of Winnipeg which take's lot of miles out of the traffic, a lot of time out, it improves asset utilization. At the same time business coming out of Eastern Canada that wants to go into the Memphis or South East market, East of the Mississippi, certainly should not go past Chicago and go west then turn south and then come back to Memphis and run four hundred miles a car or so at a route.

That's big. And we are right now as we speak, very close. I think it's fair to characterize with Norfolk Southern and I would hope that as I think, as I said earlier within the first quarter or maybe sooner, then I think we will have an agreement with Norfolk Southern. I think timing of all of this starting to come together, you know, we're probably-- we won't see all of it in 2005. It will probably be mid 2006 until we get started with the full benefits. I just -- I think and I probably, if you ask others, I just -- I'm more excited about it than some of my counter parts. But I just think it's real important if you look at the car miles, if you look at the asset implications, if you look at the service, without even taking into account quality revenue, I just think it's big and I got to stop because Claude is stopping me here a bit.

Okay good. No, right, that's helpful. Known as over 50 million. I wonder if I could switch gears for a second to Jim. Jim, you know what circumstances, I guess, would play out or scenarios that would put us at the low end of that 2% to 3% pricing range that you're talking about and then you also mentioned you know that's probably conservative, you can see a scenario where you actually did better. So, let's say you do 2% or 4%. Is it going to be simply where is the economy, is it going to be where is truckload capacity? What are the factors going to be in '05 when we think through especially -- what are the factors going to be and where do you see them?

I think it's more a question of the condition of the economy. The conditions you know the customers, etc., and what it is that we think is a reasonable price to ask our customers to pay for our service as we go forward.

As long as we have a fairly strong economy, that 4% is achievable?

I would say yes. The marketplace, the capacity as such right now is not nearly as much as a factor as it is the health of the -- you know the gas producers and the plastics producers and the priories and the paper manufacturers in (inaudible) etc. And what we think is a fair and reasonable price to charge for our service as we go-forward.

If I can ask a third last question here. Hunter, we see now that two of your competitors hired multimodal to create, in effect, I guess scheduled railroad or more disciplined operating system. Can you share with us for a minute you know the difference between bringing in someone to kind of lay out a new program versus all things you need to get to a 65% operating ratio? Because you know I sense that they're not one and the same. I guess my point is, if you had hired multimodal a few years ago, would you be where you now or does it take in something beyond that?

James just look. Number one, let me qualify this. I'm not sure I'm qualified to say because I don't know what multimodal is really doing. I'm just confident that we had internally the expertise, to be able to schedule our railroad. I think we know more about scheduled railroading than anybody. We didn't need a third party to tell us how to do it. It's not about software. It's not about models. It's about execution. It's about doing what you need to do. And so, you know, I think it's one thing-- look, I think it's wonderful that people are making those efforts. I just think it's something that we didn't need and didn't work well for us, and I think that it is difficult to take the scheduling portion of it and integrate it into the whole operating plan.

That's a difficult step. And so, you know, look, that's its in my interest, our interest that we see all of those roads do very well there. So I hope it works and I hope multimodal does a hell of a job for them. I am just I don't - I just don't know how they do it.

Right. Okay good. Thanks so much. Good quarter guys.

Thank you.

Thank you. The following question is from Bill McKenzie from CD Securities. Please go ahead.

Good afternoon. Just a couple of financial questions for Claude. I was wondering if you could give us an update on your fuel hedge position, where it stands for '05 and '06 at this point and if there have been any changes to your hedging practices with you know fuel up there with oil up around $50 or if you're continuing with sort of a disciplined hedging strategy?

Bill, we have, for next year, for 2005, we have 51% of our fuel consumption hedged at the price per barrel on a WDI basis just north of $29, I think it's 29.35.And we have an edge position of about 17% of our 2006 consumption, which in this case is a bit higher at $35 WTI. We have been monitoring the situation. We build those position using our systematic edged approach. But we have also at the same time made some progressing I know in these troops in increasing our coverage with the fuel surcharge that we have with our customers. So we have to be careful not to be over edge. And so we are taking a breather as we speak, and we will decide in the next few months where we want to be for 2006. And if you had to ask me today I would say our goal maybe to edge you know on the order of 30% of our fuel consumption for 2006 and we will do that later in 2005 as we approach the budget time for the fall.

OK, great. Just related to that, I was wondering, can you give us any feel for what the coverage is on the surcharge program both for the full year in 2004and for Q4 and what the coverage would be expected in 2005?

Well, all of our customers have some methodology for us to cover, you know, fuel expense. The direct surcharge at this point in time applies to about 65% of our business. Our goal obviously is to get that to 100% of our business. And that's going to take a while. But we have gone from about 30% at the beginning of the year to 65% at the end of the year. So I'm reasonably confident that I will continue to move that up in 2005.

And that 65% number that -- is that where you're exiting Q4 or -

That would be where we exit at the end of the year, correct.

So on a wanted basis for Q4, 55, 60%, does that sound reasonable?

That sounds reasonable.

Claude, just one other sort of housekeeping issue on the land sale in Vancouver, the tax treatment on that, should we assume similar to the consolidated tax rate or were there any sort of is there any unusual tax treatment on that gain?

This is a capital gains so we do get a slightly lower capital - slightly lower income tax rate on that gain. But this is, you know, basically less than $20 million sales. So on the total book of the business, it doesn't really move up or down.

Great. Thanks very much.

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

Good afternoon.

Hi, Ken.

Hunter, I noticed there was a force (inaudible) over some of the terminal operators in port of Vancouver. Is there any impact, is this causing any kind of backlog, and I guess this goes to Jim as well?

There has been a so-called backlog that is being worked off as we speak. Let me just give you a little bit of how that gets created. And it happens each year to varying degrees. The collective bargaining agreement with the longshoreman in the west has a requirement that after they get in so many days or hours per year, they no longer have to work. They go home for the rest of the year. That typically happens somewhere around Thanksgiving, right before Thanksgiving. And so for the last six or seven weeks of the year, there's this casual labor that is called in to replace the experienced hands, and productivity goes down. Pretty significantly, but the in-flow of boxes is the same. That starts to create a backlog. Then the second thing that happens is we go through what we try to avoid. We go through the holiday period, where people want to go for a couple of weeks for the holidays and not do anything. And so we go through that period, which can creates a backlog on top of that. And then all of a sudden, when everybody is through with the bowl games about January 4 or 5, here comes the experienced held back and take are ready to go and of the shifts are waiting and boxes start coming over faster than our hands can handle them. And we're not going to build the church for Easter and put additional traffic there.

So that's how backlog got created. And as well as -- in fairness to say, business is awful good as Vancouver. So this year, probably a little more than most years. But I think the operational people tell me and maybe Jim can give us a better update. We have made real headway there and I think our people are indicating within a couple of weeks that backlog will be hopefully worked off.

Great. And just one other follow up, I don't know if Jim touched on this earlier, on the met coal subject, Jim you mention add couple of times there would be some mines opening with the strong pricing that we have seen. Any updates you are going to provide on this I don't think you mentioned this earlier.

There's a mine capacity coming on in Western Canada. And there are four new mines that have already opened and there are three currently being developed. So the demand for metallurgical coal in Asia continues to drive those programs.

Jim, are any of these that are being developed trying to temper the negotiations C.P. is having with -- valley or this kind of indifferent of those negotiations this is just based on the market demand itself?

My understanding and opinion is that it is all based on market demand.

Great. Thanks a lot.

Thanks Ken.

The following question is from Randy Cousins from BMO Nesbit Burnss. Please go ahead.

Claude, I think in your remarks you mentioned that you were looking for a point to a point and a half of operating ratio improvements for 2005. I'm looking at the pro forma that you put in the release, and thank you for including them. In terms of sort of looking at that improvement, should we see it for the first half of the year rather than to the back half? How should we see this trend in terms of cost reductions' flow through the system?

We're getting to a point, Randy, where our progress on margins is just as much revenue as it is cost driven. But you're right to point out that there is seasonality and some of these initiatives on the cost side do take place during the year. Last year in the first quarter, we had work stoppage, so we should be doing well, you know, against that tough comparable. And generally speaking, the front half of the year is stronger than the back half. Just because we are lacking very, very strong. So we see a little skew toward the front -- you know, six months.

Okay. My second question for Jim, I want to get a better understanding of sort of the pricing versus Canadian dollar relationship. Obviously there's a translation issue. But I'm wondering, do the changes in the Canadian dollar affect your ability to get price increases or are the price increases independent so if the Canadian dollar goes to the 88-cent it won't affect your ability to get 3 to 4% increase; conversely if it comes back down to 7 or 8 percent. Is there a relationship between your ability to raise prices and the Canadian dollar?

As I said earlier, I think to the extent that the Canadian dollar would have an impact on the financial performance of our customer that might have a some sort of a correlative effect on liability to get a price from him. But there's no direct relationship between the Canadian dollar and whether or not I think we can give 4 or whether or not I think we can give 1. I think that the range that we put out there, 2 to 3% is reasonable. I said that I think right now, especially based upon last quarter and the fourth quarter's performance, the high end of that range is being achieved now. And if the economy and the other conditions stay what we expect for the remainder of the year, possibly we can over achieve that.

OK, thank you.

Thank you. The following question is from Greg Burnss from JP Morgan. Please go ahead.

Hi, guys. Good quarter. Just a couple of quick questions for Hunter. I believe you had mentioned that your head count on the pure Canadian (inaudible) was down 1100. Was that in anyone area or in the maintenance area or was it spread around? What is the opportunity looking forward?

Claude was trying to give you the same story. We were up 1100 with the acquisitions.

Right..

But with internally, just CN, it was about 2,000 down.

Down 3%.

Down 3.

Right. That's what I'm referring to on the same-store basis. You're doing more with less on a same store basis. Correct.

Yes.

Is that a one time thing or taken up the easy low hanging fruit or is there more opportunity on that same store sales situation.

I think that the -- clear live the low hanging fruit is gone or I would be grabbing it. I don't see anytime right now. I think that we will continue to see productivity improvement but at the same time we're predicting growth. We can see a situation where we're growing but we're not having to add head count and not at the same time having to cut and slash jobs. We buy philosophically and there's exceptions to all rules, our inn sources. So I would prefer, if we can, and continue our relationship with labor and do progressive things there, to try to in source some more work. You know, we see -- we have natural attrition work at this company probably in the 5 or 6% range or so. So you know, I don't see significant moves there as far as just focusing on head count. I do think you will see continual metrics of productivity improving as the operating ratio.

Great. And on the acquisition front, I think I understand what Claude is saying about bringing forward maybe some of the savings but still not changing the overall path. But are there are potentially additional smaller acquisitions out there, I mean, as you guys get bigger and the revenue base gets bigger, it's harder to have a impact. But Hunter could you find additional acquisitions or do you think that opportunity has largely played out as well?

No, I think that there's still some opportunities out there with potential regional railroads and short lines and potential terminal companies. I mean, not a lot. But I -- I won't. But I could name, you know, six or eight that we have potentially from a strategic standpoint would have interest in if they were the right price. We are positioned here and we can tell you wise things. If there's an opportunity, you know, we will pound upon them and if there are not, don't come up; we have a good hand to play. We were dealt.

Great. Thanks a lot guys

Yes, sir.

Thank you. The following question is from Jordan Alliger from Deutsche Banc.

Just a couple of quick questions at the IMX plan is pretty far along. How do you envision the inter modal volume outlook sort of shaping up roughly speaking? And then secondly outside of the enter modal network where you talked about capacity, the rest of the business, presumably there's still plenty of room to add some volume?

First question, in relationship to the enter modal, I think our guidance is consistent, that we think we can grow that business profitability in the 6 to 8% range. That could change depending on the market conditions but that's still a reasonable outlook. In terms of the capacity, across the network, we still have a significant amount of capacity to grow the business to both in terms of existing terrain capacity, in terms of track capacity, in terms of available equipment: So there's not about issue there in terms of any impediment to physically to our growth.

Thank you.

Thank you.

Thank you. The following question is from David Newman, from National Bank Financial. Please go ahead.

Good afternoon, gentlemen.

Good afternoon.

Great quarter.

Thank you..

Just in terms of the BC rail and I know we talked about the mines that opening, what would be the incremental dollar opportunity that would be attached to that?

The new mines opening up, I think what we have said in the past is - first of all I have said that we watched the Canadian coal business go away. That portfolio got down to something around 40 to $50 million. As this capacity has now ramped up, we think that that number could potentially double this year. And that in '06, if the production expansion comes on as is talked, that number could again doubled again. So you know, $50 million or so each year there.

Wow that was great. And in terms of Rupert, obviously this will be a huge opportunity for you guys on the enter modal side but is it the infrastructure in place readily available to grow in line with your other segments?

Yes, from a rail capacity standpoint?

Yes. In terms of the port itself, can they handle the growth in coal and other segments that you might see?

All of the above, yes.

Excellent, thanks, gentlemen.

Thank you. The following question is from Jacqueline Boland from CIBC World Markets. Please go ahead.

Thanks. That was a good quarter, guys.

Thank you.

Can you just -- I'm looking at some of the -- some of your pricing for next year that you're talking about and can you give us a break down of what percentage of your long-term contracts, just even two years or more are coming up this year and what percentage of your overall revenues those long-term contracts are?

Okay, well, my long-term contracts in this day and age are about two years. We have not done -- we have gotten away from the long-term contract and are more inline with a shorter terminate. So if I have got a portfolio of contracts now, let's say, in the two- to three-year range, I get a third of them every year. You know, it's -

I'm just trying to figure out what percentage of your overall revenue news those contracts are now?

100 percent. Well, Okay, so -- all of my business would have some relation to a contract. My tariff business that is out there that can change on a time with 30 days notice is a small percentage of the business, maybe 10% of the business. The rest is covered by some contract in some way, shape, or form, and they would range in duration from, you know, one year to two year to three years. With the majority of them being in the shorter range.

Okay, so if I'm looking at the number of contracts with the amount of pricing that can come up next year, you're still talking about 1/3 of some contracts being two to three years. What percentage of your revenues would the two-year contract business be?

Let me see -- everything in, considering some of them can't be changed next year, Jim's guidance is it will be a 2 to 3% increase in price, all in. Now, if -- Jim, I think and you correct me if I'm wrong here, if what comes up each year is probably given the numbers about 30%. But we have got that factored in with the 2 or 3% for you.

Two-income contract that we're revising for 2006.

If I have a three-year contract, it doesn't mean that is outstanding out there now. It already has escalation in it of some way, shape or form. So all of my business is going to a degree escalate and it has no relationship what so ever to when the contract expires for what the escalation should be. I could have a contract today in place that has a 4% escalation in it for the last three years that expires this year that suddenly has a 1% rate increase on it, because of market conditions. So I think that you need to step back and take a look at the overall portfolio of the business and say that based upon this portfolio, we're going to get about a 3% increase in terms of price next year or in '05 similar to the range we got last year.

Okay, I'm just trying to figure out what you're trying to ask for each customer. Like if you're saying two to three percent overall are you looking for 5 percent plus and in what areas are you looking most in you already mentioned international enter modal for example.

It's all across the board. It might range from -2 to + 16. There are some market conditions that have changed, that businesses that we can no longer be in that haven't had the right remembrance and we might get a 15% increase because of where it has been in the past. There are other businesses we might be taking a discount on. And it ranges in that full range of across the board. So it's not that we're going out there and say, Okay, we want three percent out of all contractors or everything is renewable. That's not the game where in. if in the market conditions you have given the service offering that we have got is relative what the competition is in their service offering what the trust to do in those market and what the market will allow and bare.

Okay. On your volume growth, the 1 to 2% growth, would that be a conservative estimate by any chance? I mean, are you including -- you have got right now some unprecedented demand that you're seeing across the board. Lots of interest from trucking customers, etc., that you have talked about, and you're talking about new coal coming on as well. And then we're going back to kind of more historical volume growth numbers of 1 to 2%. I know we had some big growth this year. But it seems to be going to historical numbers quickly again.

I think you know in terms of the 1 to 2% we're looking at, that is - going back to my discussions earlier, talking about the growth in the core rail road you would then have the acquisition effect next year as well. So that 1 to 2% does not include the additional volume that we will have again in the first half of the year from B.C. rail and G.L.T. that we did not have last year so we would probably be looking at 5% next year including the impact of the acquisitions.

Thank you.

The following question is from Ted Larkin from Orion Securities. Please go ahead.

Good afternoon, gentlemen. I just want to ask, Mrs. been some consolidation within the maritime operators within the Great Lakes. Looking in your ship operations that you inherited with the GLT acquisition are those deemed to be core operations going forward or is there an opportunity if someone came to you to divest those?

At this point in time, they are an integral part of the supply chain that we have with the ore business moving down to the U.S. steel facility so we do view them at this point in time as core to our operations. We're certainly aware of the capacity issues on the Great Lakes. As a result we have been picking up some business with our fleet. So that makes us, you know, even more interested in holding on to that. But with everything else like that, if somebody comes along and asks, we're certainly not going to not talk to them.

Right.

You should note that we also have a multiyear contract with our operator at keystone.

Okay, that's fair. Claude, you have a great habit of unearthing these little gems and this real estate sale in the most recent quarter was that north Vancouver territory from BCR?

No, it was not. This was selling a silver of land -- a sliver of sand to help build the road in Vancouver.

I was going to ask if there was other real estate available from BCR but it may be ever relevant. I'm looking out of the wind right now and it's snowing, of course, there's been a fair bit of snow down east. I'm wondering how that --if there's been any impact of your operations. I'm thinking of Quebec and the Halifax line that we could see operational difficulties for the Q1 period as a result of unusual weather conditions?

Ted, I don't think there's any doubt about that. I don't know what the weather is going to be the rest of the quarter. If it remains like it has been, it has been in pretty severe conditions from Chicago to Western Canada to Eastern Canada and, you know, once again the snow doesn't bother us near as much as the cold where we can't get air through trains and it affects the capacity of the trains and length and so forth. Once you start looking at last year it was a quarter that we had a work stoppage. But all things in, the weather is hurt.

Then the final question, with respect to Halifax, there's been a lot of chatter about what is going on the West Coast and I know that Halifax is on the wrong cost as far the Asian. But still can you give us some flavor, maybe from you on the traffic growth of the Halifax to Chicago corridor through 2005?

Oh, we're -- we're very optimistic about Halifax like we are about the West Coast. I mean, two, three years ago, nobody would have thought that there would ever be the development of a port in Prince Rupert and now it looks like that's very possible and feasible. And there's certainly talk now about the trade changing and more and more ships coming through the Suez to the East Coast and Halifax is extremely well positioned there with available capacity to handle that. So we're very optimistic about the long-term out look there. And we see growth coming through Halifax this year in the 4 to 5% range as well. So it's - it's a great fort and it has great opportunity.

Thank you very much.

I believe we have time for one more question operator.

Thank you. For the last question, from Jennifer Ridder from Lehman Brothers. Please go ahead.

Good morning. Thanks for taking my question. Just wanted to make sure I'm clear on the 10-15% earnings growth, EPS growth that you're projecting. Are you projecting that off of the 434 that you reported for the year or is it sort of pro-forma in the acquisitions that you did in 2004.

We reported for the year and with some trepidation and head winds and issues and the stars that have to be aligned are wrapping up to deliver this year 10-15% half of that base in 2005.

And do you -- your currency doesn't move much between now and then?

We're assuming that the dollar will settle around the $0.82 range that it has been trading at the last month or few months, so that's going to be a headwind that we have to deal with fortunately, our share buy back will offset that and so we have to deliver a 10 to 15 on the strength of the incremental accretion of the BC rail acquisition and all of the initiatives that you heard us talk about on this call.

So if currency were -- didn't move, then you would actually have even stronger earnings growth?

Arguably, yeah.

Okay.

Thanks very much for all of your support. We appreciate you joining us. And we look forward to talking to you next quarter.

The conference has now ended. Please disconnect your lines at this time. We thank you for your participation and have a nice day.