Canadian National Railway Co (CNI) 2006 Q1 法說會逐字稿

[Operator Instructions] Welcome to the CN First Quarter 2006 Financial Results Conference Call. I would now like to turn the meeting over to Mr. Robert Noorigian, Vice President Investor Relations. Ladies and gentlemen, Mr. Noorigian.

Thank you for joining us today for CN's First Quarter conference call. I'm not going to read the regulation FD, it's on the front page of the presentation it's also on our website, and it is also on just about every publication we do. To save you time, and us to, if you want to, read it in whatever detail you need to. Joining me today is Hunter Harrison, our chief executive officer, Claude Mongeau, our chief financial officer, and Jim Foote, executive vice president and chief marketing officer. With that brief introduction, I would like to turn it over to Hunter Harrison, our president and chief executive officer.

Thank you, Bob. And welcome to all of you this afternoon. We are broadcasting to you from beautiful downtown Memphis, Tennessee, where we will hold our annual general meeting tomorrow, the first time that we've held it outside the borders of Canada.

I'm delighted with the quarter. Another record. More of the same. I trust that you have received the press release and have gone through some of the numbers. I'm going to ask Jim and Claude in a minute to go through those numbers in some level of detail. Let me highlight a few things that happened during the quarter.

Our earnings were up 27% to 66 cents. If you look at it from a U.S. dollar standpoint it was up 35%. Really outstanding from an operating ratio standpoint. First quarter, we've never had an operating ratio at the level of 66.2. That represents a 3-point improvement from last year, which was a record at that point in time.

Our revenues were up 8%, as reported. Up 11%, if you adjust for exchange. Free cash flow, my favorite number of 318 million. We continued our share buyback program during the quarter, and our first -- our increase of the dividend in the first quarter was up 30%. The discipline and execution of this operating model continues to drive efficiencies even beyond my expectations. Let me just bring a couple of them to your attention here.

Our gross ton mile per employee was up 6%. Our average train speed were up 6%. Our dwell time, which is already the industry low, was down 16%. And one of the numbers I was proudest of was the overall terminal productivity, measured in cars-handled per engine hour, was up 12.5%. We saw some continuing improvement in the areas of safety, which we focused a lot of time and attention on, and during the quarter, we signed two significant co-production agreements, both that involve Vancouver, one with the Burlington Northern, Santa Fe, and the other with CP.

So overall, I was delighted with the performance of the quarter, and I think some of these operating initiatives are really taking hold, and we're going to move to levels beyond where I thought we could be even. So with that, Claude.

Thank you Hunter. I will be brief with our remarks. I have this vicious cold here and it is not pleasant in Memphis. So if I die before the call is over, Hunter will step in.

We had a very strong quarter. I think the story here, once again, is very good quality growth. Our reported revenues are up 8%, but if you adjust for exchange, they are really up 11.5%.

As Jim will explain to you in a minute, good strength across the board, and also good balance between our increases in prices, our fuel surcharge, and the benefit from volume and mix. So, with good top line growth, and discipline cost control, that's how you're able to bring your operating ratio down.

We've had a record operating ratio this quarter of 66.2. That's an improvement of 3 percentage points on a year-over-year basis. And together, they gave us the strength to deliver 66 cents of EPS, which is an increase of 27%. So pretty good quarter to start the year. And if I turn to the expense, pretty much overall, very well behaved, and if you look at it on a reported basis, our expenses were up only 4%. Even adjusting for exchange, which is a benefit to expense, our expenses are up only 7%.

The story here is really fuel price. The exchange adjusted fuel is up 28%, and that's despite having 35% of our fuel ads. And booking a gain on edging of just a little bit over 30 million. So that increase is really the bulk of our expense increase. The other elements that are important to the long-term competitiveness and productivity of this railroad are really, really performing well. I take example with labor infringe, our labor infringe expense are flat on a year-over-year basis. We've had to contend with higher stock-based compensation, but that was more than offset by head count reduction to the tune of around 4% fewer employees. But also strong focus on managing overtime and making sure that overall, we were keeping in check our expenses.

Equipment ramp is another good example. Basically, flat on a reported basis, up only 4% adjusted for exchange. That's where you see the benefit from car velocity and improved dwell-time that Hunter was talking about. Casualty and other, just a little bit above 100 million. Again, here, we had the benefit of an easy or a milder winter, but very good progress on safety, and also progress on the casualty claims and the FILA expenses. So overall, when you look at it, pretty good expense performance, and certainly, you know, particularly so given that we are just coming off the toughest season which is the winter months.

Turning to cash flow, very strong performance, 318 million free cash flow, and as you know, that's after our dividend which has increased by 30% in the first quarter. Driven by increased profits, but also good management in the working capital. Our working capital has basically generated 61 million. That's an improvement over last year, a lot of this is driven by our continuous effort to reduce day sales outstanding and collect the revenues faster. That helped us finance the small acquisition that we made at the beginning of the year for the Alberta short line that we talked to you in the first quarter. That free cash flow of 318 million was used to buy back shares. We bought 7 million shares during the quarter. We actually bought more -- we actually, you know, spent $370 million on buying back shares which is more than our free cash flow generated. That's in line with our overall guidance to buyback shares at a pace that is slightly more than what we generate in cash, and you should expect us to continue to buy back share for the second quarter at around 7 million shares a quarter. And then we will reassess where we stand in July after we've met with our board. All of this gives us a strong balance sheet. Our balance sheet on an adjusted debt basis, including leases, is at around 42%, just under 42% at 41.8% for the end of the quarter.

Let me say a few words before I wrap up and turn it over to Jim. On the outlook for the full year, I think we've had a very solid start to the year. You know, the quarter is coming in on target, as per our expectation. For the full year, we are still targeting EPS growth in a 10 to 15% range. Although at this point, you know, we see more chance of being at the upper end of the range than when we started the year. Having said this, we do have a number of head winds to deal with, to make sure we stay on target for the full year. We just want to remind you that the exchange at the moment is hovering around 88 cents. That's almost 4 cents higher than what we had in our budget and that would be close to 8 cents or a full 3% of EPS growth that's taken away from our results as they are reported in Canadian dollars. We also have to deal with the 60 million of pension expense, and the fact that fuel today is trading at above $70 is also another area of concern that we have to deal with.

So overall, good quarter. Solid outlook for the year, and we are hopeful that we will remain on target for the next few quarters. Jim?

Thank you, Claude.

Going through the revenue items on an exchange-adjusted basis as I usually do, our exchange adjusted revenue growth in the quarter was 11%. In simple terms, one-third of that came from price, one-third of that came from the fuel surcharge, and the remaining third from mix and volume. The third in terms of price, you know, kind of 3 to 4% price increases, trending toward the higher end of that range, is clearly consistent with our previous results, and consistent with our pricing strategy.

On the fuel side, 81% of our business is covered with the fuel surcharge, and 50% of our business now has migrated to the new lower fuel surcharge contained in our tariff CN7401.

On the mix and volume, our carloads were flat, but our RPMs were up 2%. Just about across the board increase in average length of haul in all segments, especially forest products where we continue to see strong volume growth out of western Canada, moving into the U.S., as well as very strong intermodal volume growth from Vancouver, and new traffic, which is coming in at higher rates, is also captured in that mix category. That kind of one-third, one-third, one-third, and volume is spread across all three segments of our business, merchandise, bulk, and intermodal, merchandise up 11%, bulk, 12, and intermodal at 13.

In more detail on the merchandise side of the business, chemical was down slightly in the -- chemicals were down slightly in the quarter, mostly due to weaker market conditioning, as well as lower demand for chemicals associated with the paper industry, as that business has been down somewhat, which I will talk about in more detail in the forest products. Petroleum product shipments are up due to increased eastern Canadian shipments of gasoline and jet fuel, which were offset by lower LPG shipments in the first quarter because of the warmer winter which we experienced. Plastic volumes were stronger in the first quarter, due to increased shipments coming on from our Gulf Coast producers. In the metals and minerals area which was up 17% in revenue, the metals business continues to be very good for us, with the strong markets for pipe, fittings, steel bars, slabs. They continue to be very good and very solid growth. Minerals, and there I mean non-ore, very strong with sand, cement, aggregates, due to the strong petroleum drilling activity, very strong housing market in western Canada, as well as good demand for roofing shingles and brick shipments to the U.S. Gulf Coast post Katrina.

On the iron ore side of the business, in the first quarter, we saw that down a little bit, but that was due really due to some of the iron ore mines that we serve having some downtown for maintenance, or iron ore and limestone shipments were down.

Forest products, very good continuing story, in the lumber business. We are unable to meet the demand, and have been. It just continues to grow and grow and grow. Strong production, output in British Columbia, very good long haul business for us. We're working very hard, adding cars where we can, to meet that demand which looks like it is going to continue into the future.

Panel business, again, increased production capacity for OSB and western Canada. That growth is offset somewhat as we've seen some mill closures, OSB mill closures happening in eastern Canada, where their raw materials are slightly more expensive.

The area of forest products that has been a little weak-- pulp and paper. On the paper side of the business, we've seen some mill closures in eastern Canada. We've seen some mills shut-down, as there have been some labor difficulties specifically in the maritimes. And as a result of some of the tough times for the paper producers, we're seeing some re-tooling of facilities where they're going from lower graded papers, stepping up to producing higher graded papers, but in the short term, that has shown volume declines in the paper area. All of that is somewhat being offset as we work very hard to find new opportunities, moving higher graded, higher quality cut-sheet paper, white paper which traditionally has been truck business, and we are having inroads there moving more of that product.

The automotive sector, up 12%. We continue to see strong import volumes, both on the east and West Coast, helping to drive that segment.

The bulk business, cold grain and fertilizers, coal up 14% in terms of revenue, and coal Canada up over 50%. The mine expansions that we've talked about, the outlook for our Canadian metallurgical coal franchise to potentially double this year continues. Albeit from a small base. But those mine projects are coming online and we're seeing the volume and revenue growth associated with that.

In the Coal U.S., down somewhat, as I think we have talked about in the past, we have some short haul coal, powder river basin coal moves that we handle for delivery to utilities in the U.S. midwest. We had talked about the fact that that business would go away, and it is just a question of when the timing would be. We're starting to see some of that volume go away, so our volumes and revenues, volumes now much higher than revenues in that area, as well as there was a closure of an Illinois basin mine on our property again, that's something that we've talked about in the past. Grain Canada, very good first quarter for specialty cranes. Canola moved very strong. Peas and beans moved very strong. We had very high movement of oats into the U.S. that traditionally comes from European sources. Somewhat offset, although our wheat shipments are still very good, somewhat offset by some lower wheat exports to the West Coast. The U.S. revenues were up very strong. About 34%.

Good moves down to the U.S. gulf and the poultry markets in the Gulf Coast. We saw some traffic mix changes there, as short or haul moves that traditionally would have moved to connecting railroads for movement to the Pacific Northwest, moving down our former IC line down into the gulf. As well as continued strong growth in the ethanol markets in the U.S.

Fertilizers was down. The market conditions for fertilizers is not good. As well as we had a potash move from eastern Canada, go away. It is just a difficult market right now for urea, potash, or phosrock.

And then on the intermodal side, overseas, intermodal in total up 13%, and overseas up 15%, driven by very good volumes on both the East and West Coast, but on the West Coast, out of Vancouver, import traffic originating through the Vancouver port, up over 25%. Domestic intermodal, very good too, up 10%, and a lot of that growth coming in the U.S. as we have continued to focus on that market opportunity.

Looking into the future, we have, you know, continuing revenue opportunities in all areas, on the bulk side. Again, outlook for metallurgical coal in Canada is still very positive. Favorable grain prospects, growing conditions in Canada seem to be right. There are no planning estimates out right now, but the moisture content and everything in the territories we serve seems to be good. U.S. crop planning estimates for '06 also look good. Corn and beans, corn being about on a five-year average with soybeans being ahead of that.

On intermodal, we've added capacity. We've turned on the volume engine now that we have improved the profitability. And we have the capability to add more capacity when necessary.

In the merchandise business, good demand for lumber, steal, the construction markets, our merchandise segment, the heart of this franchise continues to show not only steady opportunities but new opportunities like in the oil sands development where we're beginning to move some dilliwent material from the West Coast into the oil sands region, where that product is blended with that thicker crude for shipment through the pipeline, as well as new -- some low-sulfur diesel opportunities, as more strict diesel requirements come online.

The outlook clearly, a disciplined strategy of price increases, sustainable price increases, 3 to 4%, and realistic view of our fuel surcharge, one that is not viewed as a profit is center but one that is there to recover our fuel costs. We have good penetration, excellent penetration of that tariff. Our volume outlook is good in our core business, you know, our core, core business that we talk about all the time, the volume growth is there. Lumber volume in the first quarter was up 9%. Metals and minerals up 5%. As I said the Canadian coal business is very strong. Volume growth in the first quarter of 25%. Canadian grain volume growth of 8%. U.S. grain volume growth of 1%. And as, probably most importantly intermodal, we have clearly taken the turn now to have realistic sustainable volume growth in that business and will be growing it in the future in, I believe, that range, 5 to 8% going forward.

All of that kind of gets us back to the guidance that we've given out in the past for top-line revenue growth of 78% this year, on an adjusted basis and there is nothing that I can see right now that would want me to change it in any wap, shape or form from that. Hunter?

Thanks, Jim and Claude, for those presentation.

Impressive start to the year. I look for more of the same, going forward.

As Jim just mentioned, more sustainable profitable control of the growth. I think the IMX efforts of that group has been outstanding. It has been kind of a good proxy for the rest of our businesses. They have now even exceeded the hurdle that Jim and I initially set for the type of returns that we need, and we are now refocusing on growing that business at a faster pace than we have the last two years. I mentioned earlier, our dwell time improvements. The velocity improvements with the speed of our train.

I would just mention to you that that just serves to improve our service even more. We are going to continue to leverage that service to produce better results. We saw our cycle times improve, and all the bulk movement. The only capacity issue that we have at all, is I know Jim wishes we had more center beam cars. The center beam issue, I think, is more of an issue that we cannot get the cars back from the U.S. The center beams on our system run twice as fast as they do on the U.S. systems, and if we could get those cars returned, we could even put in some more impressive numbers from the lumber standpoint.

So all of this equals this, we're going to be focused the rest of the year, as we always have been, on running a safe, profitable railway. With that, Mary, we would be happy to take questions the group might have.

Thank you. We will now take questions from the telephone lines. [Operator Instructions] The first question is from James Valentine from Morgan Stanley. Please go ahead.

Thank you. Great quarter, guys.

Can you, Jim, maybe talk a little bit about the, I guess, lack of volume growth in the sense that it looks like you've got a lot of great opportunities here. You've also talked about those back in November at your annual analyst meeting, but we're at the third quarter in a row now of almost no volume growth, and I know some of it, like you've mentioned, is some of the short haul Illinois coal or whatnot, that maybe you don't want. But I'm trying to understand how much of it is a conscious effort for you to de-market certain customers versus potentially Canada, because the Canadian dollar has strengthened so much is less competitive in the export market, and versus certain end markets may just not be doing very well. And you have given us pretty thorough step-by-step, but I am trying to understand the big picture why we're in the third quarter now of not seeing volume growth.

I think, Jim, as I went through it, and you've kind of touched on the areas, obviously, you know, areas where we're seeing fundamental issues with, you know, a small part of our business, obviously, is the -- is the paper producers in eastern Canada. They've got some challenges there in terms of their productivity. They've got some challenges there with the increase in the Canadian dollar. So that's an area where we definitely had some mills shut down.

We've seen, you know, volumes drop associated with that. Some of that is driven by, I think, public labor issues with UPM Kimny and Storas attempts to take on some of their challenges in terms of their cost structure, which has caused some downtime there. So there is an area where you've got a market situation. Then we turn around and U.S. coal, you know the history of some of the powder river basin pricing, and that's an issue that maybe, you know, we're either not interested in handling it or not willing to do what is necessary to handle it. So maybe you can call it some de-marketing. A lot of high volume business.

But it is all very specific, whether it is U.S. coal, whether it is paper, whether it is the fact that a couple of the MUSABI range iron mines decided to take some downtime because inventory builds up in China for iron ore. Those are specific one-time deals that certainly don't concern me at this point in time.

The underlying strength of the business is growing very well, but these unique issues are somewhat hiding the 1 to 2% kind of volume growth that we had expected. And I see no reason, as I said, I see no reason-- 1 to 2% volume was going to produce 7 to 8%. There is no reason to believe that our volume is not going to be sufficient, and the pricing gains to be more than sufficient to produce the top line we expected.

Okay. Good. And you did real well earnings wise, so I guess if you you can get it to drop to the bottom line, it doesn't matter if you're not seeing as much top line growth, or at least volume growth.

I guess one other question here, on this whole secular pricing story, because you started the earliest of anybody out there of repricing and thinking about charging the right price for your services because you had the service back in 2002, 2003-- can you give us some thought of what portion of your total revenue is still below market rates or what you think is -- should be the proper rate? And once again, this would be all in terms of business still under contract, it has been under multi-year contract. What portion of your overall revenue is still in that category.

Very, very little of business. Only some legacy contracts that we inherited as a result of some acquisitions. You know, kind of maybe 5 to 8% of my business would not have been repriced, and all of those have some sort of an escalation clause in it. So we've only had -- we had pretty specific strategy here, a long-term contract to me is two years. We started that about four years ago.

Right. Okay. Great. Thanks, guys.

Thanks, Jim.

Thank you. The following question is from Tom Wadewitz from J.P. Morgan. Please go ahead.

Good afternoon. I have two different questions. Let's see, on the cost side performance, once again, you guys put up some great cost side performance, and if you look through this year, are there reasons why you would expect that to slow down, because you know, you have the earnings growth number was, I don't know, 27% or so, but yet you're saying well, we're going to slow down to kind of 10 to 15% for full year, and it seems in somewhat difficult volume environment you still put up very good numbers. So you talked about pension, but are there other things that, really, you see slowing down a lot on cost side through the year?

No, Tom. This is Claude. I think generally speaking we have our initiatives in terms of productivity that are carrying us through the year. There are a couple of factors there when you're looking at it from a quarter-to-quarter standpoint, that you have to take into account. We are losing the benefit of our hedge position. We were 35% hedged during the first quarter at roughly $34 WTI. We will be only 23% edge in the second quarter at $36 WTI, and then it goes to 10% in Q3 with, I believe, roughly $38 WTI. And in Q4, we're at zero. So today, the fuel price is at, you know, above $70. So if I just look at it on a year-over-year basis, we're going to see fuel expenses going up by -- on the order of $200 million, if the fuel price stays where it is today.

So we're lapping good quarters. We have to deal with the pension issues that I discussed, and then we have to deal with fuel expense and loss of hedge and gain. But other than that, the underlying productivity of our business is continuing. You're seeing our headcount down, and we're helped by attrition and our focus on new initiatives. We're trying to improve velocity and asset utilization to contain the increase on equipment rents. And other than the fact that, you know, we've been doing this and we're lapping good quarter, that's what you should expect to continue between now and the balance of the year.

Okay. And then a second question, on the co-production agreements, is there any thoughts you can give us in terms of how far through this process you are, how much of the cost savings you've realized from co-production, if you look at when it really started to hit. I don't know if that was in 2005, or a touch before that. And is there a lot more to go in terms of cost savings that you realize from the co-production, the variety that you've put in place over the last year, two years.

Well, Tom -- we've really just scratched the surface because we're just beginning the co-production efforts. We signed both agreements in first quarter. And for an example, part of the issue is trackage rights over us, with being Santa Fe from central Illinois to Memphis. They've not started doing any of that yet, which would be some in the revenue stream. We take over effectively the dispatching of a critical 12-miles in Vancouver where we have the most amount of business. So -- and there has to be some track construction that is under way now. So that is, you know, you saw very little impact the first quarter on that agreement. The CP agreement is basically just things that make really good common railroading sense. Vancouver, effectively, most of them, and that is going on, and that is -- we saw some savings, but as the year goes by, both of those will pick up at a much faster rate than they have the first quarter.

I think perhaps I didn't phrase the question quite right. I was thinking not just the first quarter agreements, but when you've had agreements over the past year or so, where you have avoided the longer mileage, and you give something up and another railroad gives something up, you have had a number of those with the U.S. carriers come in, and I'm just wondering if you can give us a sense of what magnitude cost savings you think you've realized from them and if there is a lot more to go with that?

You mean the routing protocol?

Yes, I'm sorry, the routing protocol.

The routing protocol has done wonderful things for us. We could not have achieved the type of additional train speed, and velocity, and cost savings of 3% over last year-- I mean, look, these are record-breaking numbers. I mean I think we're 15 or 16% better than the industry average. So we're trying to beat world records. You know, it is very difficult to take that one initiative and put a number on it. I originally said, and I remember it well, because everybody in the room blinked when I said it, that the original number for the routing protocols, I thought, was a point in the operating ratio. I think it probably is. Is there more to do there? Yes, as volumes picked up, there will. So it has been a very significant addition, and I think as we go on further, we kind of have a Phase II internally of writing protocol, and maybe even a Phase III. So it has been a very, very positive addition to the list of cost savings initiatives.

Is there potentially a point from the co-production agreements, or are they more smaller impact?

No, they're not near on the order of magnitude of the routing protocol, but I mean they're not insignificant. They're probably -- if you put the best case for all of them together, you know, you might be talking about $12 - 15 million a year savings.

Okay. Thank you for the time.

Yes, sir.

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

Good afternoon, gentlemen.

Good afternoon.

Just on the fuel surcharge, the May 11 hearing, any idea what the outcome might be there? And I would assume that your recent change to your grid to the 7401 would appease that. And would you guys look to do any more hedging on the back of that?

Certainly. This is Jim Foote. I certainly wouldn't speculate on the outcome of the public hearings to be held by the SCB. We're certainly going to go and tell our story. I think we've done a good job of trying to tailor this fuel surcharge to cover our expenses, and be fair to all of our customers. We will just have to wait and see how it comes out.

And we're not going to add to our hedging position. We stopped it today with the revenue surcharge. We are covered, and if we were to hedge, we would just be adding to volatility and taking a position on fuel price going forward.

Okay. And just on the chargeable services. I know you guys have tightened it down over the last couple of years in terms of getting the proper behavior from your customers, are you there yet, and I also noticed that you raised your incentives for multi-car grain handling. What has been the net impact of that?

Well, we're always trying to refine our chargeable services to, you know, make sure that we get the proper recovery for our assets. And I think that's a work in progress. We're going to change the merge policy, we've told our customers that, to go to a more simple straight-forward plan, and in the process, we actually have reduced our -- the charge for demmurage, so, again, trying to do this in a fair. But it is always something that is in the works. As a result, as it relates to your question about the multi-car blocks, that's really just a question of, from an operational perspective, now that we have the higher volumes and the good grain crops, getting more and more focused on running the effectiveness of running unit trains to destination, as opposed to running the smaller block cars that we were doing in the past when our volumes were down. So we have the flexibility and the wherewithal to price the product to try and take advantage of the operational efficiencies that we can generate.

Excellent. Thanks, gentlemen. Great quarter.

Thank you.

Thank you. The following question is from Ed Wolfe from Bear Stearns. Please go ahead.

Hi, good afternoon, guys.

Hi, Ed.

You talked about 1 or 2% volume growth. I'm guessing longer term that the goal is to do better than that. I know it is nitpicky when you're being as efficient as you guys are, but you did talk about it at your analyst meeting quite a bit, the idea of starting to spur more volume growth. How do you look at that going forward? You talked about a lot of one-off issues. What would you expect, longer term, that volume growth should look, assuming the economy holds up?

Well, I think, what we've said is-- what I said is what I meant. I think the merchandise business, which is a good part of our franchise, should grow in the 1 or 2% range, and if you exclude these kind of one-off events that we have seen, that's where I think that major segment of our business is growing. Bulk. The bulk segment is going to grow higher than that, or lower than that, dependent upon grain crops, and the development to these new mines. And intermodal is the area where we think we can pump some volume here into the, you know, kind of 5 to 6% volume range, depending -- dependent upon the import/export economy, which, again, long-term, looks very positive for us.

If you add all of those things together, you're not going to take this business model, and we wouldn't want that to happen. We try to, you know -- I could turn around tomorrow and tell that you we're going to have 10% volume growth, but what we're going to do to the bottom line in the process is not something we're going to be happy with. We want to have long-term, sustainable, profitable growth, and that's what we're doing, and that kind of results in the overall 2 to 3% volume range.

We see grain and fertilizers start to pick up through the year?

Right now, we've got a good crop, we've got a good carry, we have a lot of grain to move, and the conditions are such for another good crop this year which will mean more will want to move. As I said, Canadian grain is moving in the first quarter, 8% volume growth. That's pretty good.

Okay. And you talked about an 81% fuel surcharge. Does that include ARCAF as well?

No, that is straight tariff. The remaining 19% of our customers would be paying some other form of fuel surcharge, probably Arquette.

Okay. Is there any way to quantify the benefit from weather in the quarter, when we get to this quarter next year and we're thinking about some of the benefits of a warm winter and more cars being loaded, and you know, insurance and those kinds of things? Have you put a quantified number on what the benefit might look like?

This thing is all over the board, depending on where you were. There's parts of Canada, I can tell you, that in February, people didn't consider it a mild winter. We don't really kind of keep track of the benefits we're getting from good weather. You know, certainly, I would make a case that it was overall. In all of our territories it was a little milder than previous year, but I don't know that I can give you -- yes, it was better. Did it help expenses? Yes. But I don't know that I can give you an accurate number. It damn sure wasn't a point in the operating ratio, I can tell you. Was it $5 or 10 million, maybe? Certainly.

And then Hunter, you talked about at the analyst meeting hoping that the U.S. guys, and betting on the U.S. guys, to improve their network velocity and getting the boxes back to you. It felt like we were starting to see some of that, again, you have positive weather working for you, but is it your sense that you're starting to get boxes back a little quicker.

No, it is getting worse.

Is it getting worse particularly from certain side, east or west, or not?

I would prefer not to get into specifics, but I mean I can tell you that we are -- I'm not trying to be critical, I'm just stating facts-- We're trying to work -- Something has to change. And something is going to change. And we're trying to partner, work, with all of our partners to try to improve the situation. But on a gross average, it's gotten up to the point where we are, I think the last numbers I saw, we are carrying the stuff 63% of the haul in 37% of the time.

Yes, I remember those slides from the analyst meeting.

If do you a simple calculation, now, and don't take into account how somebody figures it. Just take the miles per day a car. Just take how far did it go off our line, and how many days was it gone, and don't worry about the customers door or where it was, our speed doubles the speed of any U.S. carrier. And that's a lot of opportunity there. Now, are there some reasons for that? I'm sure there are. But I have not seen that improvement yet. I still hold out faith, and hope that it will improve, but we have not seen it yet.

Does it make you want to maybe partner or buy one of these companies and do it yourself?

No, I'm just not that crazy yet.

Thanks for the time.

Yes.

Thank you. The following question is from Jordan Alliger from Deutsche Bank. Please go ahead.

Hi. Just a quick question. I think back at your analyst day, you mentioned a significant amount of sort of operational cost takeouts somewhere in the 4 to 500 million range, across a variety of buckets, and I'm just wondering as look back at those in November, and some of the things you were sort of targeting on velocity and productivity, how much of that was sort of impactful or transparent in these first-quarter expense controls, which obviously were quite good?

I was going to say, I think, you know, you're seeing it pretty much across the board, Jordan. As I said earlier, our head count, despite -- our head count is down close to 4% on a year-over-year basis and that is a key driver of keeping our labor expense flat. Our velocity is up double digits in terms of the speed at which we move the cars or where you look at it from a car cycle standpoint. Terminal productivity is up 12%, and partly because of all the efforts we have on getting to the new level in terms of how we manage our yards. The labor productivity, overall, if you look at the raw metric of employees, GTM's for employees, is up 6%. So all of these initiatives are showing through in the solid productivity, and we're certainly in line with our target of getting that first $100 million of cost takeout this year.

Okay. And then just a quick follow-up, I think, to a previous question. You had mentioned 5 to 6% intermodal growth, I think. I didn't catch if that was sort of longer term, or what you expect to build on from this first quarter through the the balance of '06?

I think that 5% that you see in the first quarter is at least reasonable throughout the rest of the year.

Okay. Thank you very much.

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

Hi, good afternoon.

Hi, Ken.

Can you just talk a little bit -- Claude, you just mentioned the head count down about 4%. And Jim was starting to talk a little bit about inflection in volumes. As you start to see that turn a bit more positive, should we see head count shift at all? Do we need to increase head count to keep up? Or can you offset it by continued productivity improvements?

Well, there are some areas, obviously, where we have to look at the volume and look at where we are, and we need to hire to make sure we protect the business. There are other areas where we -- it is more driven by initiatives, where we are able to come and do more with less. So overall, you know, we have given you guidance that we see, attrition working for us, and that we see our head count down, you know, in the 2% range per year. It was the guidance we gave. The first quarter, you saw us coming in with closer to 4% down, so that gives you an indication, we just had a good first quarter, more of the initiatives were kicking in. At the end of the day, we're going to higher the employee we need to hire, in the places where we need to hire them to protect the business, but overall we have a full pipeline of productivity initiatives to help us get better in terms of labor productivity.

Great, thanks, Claude. And Jim, just a quick question, a follow-up on the fuel. On the percent of the contracts, you said that 19% have either ARCAF or some sort of forwarding or some other fuel collection and you also noticed you had about, I guess, up to 8% of contracts that haven't been repriced yet. Are you likely to see, as you move through this year, more and more move onto this circular that you've got for your fuel hedges? Fuel surcharges, I'm sorry.

Yes, our goal is to get 100%. Now, there is a segment of the business which is the Canadian regulated grain which won't be subject to this, but we're going to get -- we're going to get 100% of our customers on what we think is the lowest and the most effective fuel surcharge in the industry. And by getting 100% of the customers on that, we can have the lowest -- we can have the lowest surcharge. That's the name of the game.

So I guess then if you've got such a solid coverage right now with your contracts, you're double covering because of the hedges.

That's why we're out of the hedges.

Okay. So -- so are are your contracts more -- if you ignore the hedges, then, for a second, if you just look at the contracts, are you -- because you've lowered the rate twice in the past year, are you at now 100% coverage, so as you get on any more of these 19% of contracts that aren't on this surcharge, you could be lowering it again or is this kind of the --

We will constantly look at that. If we were to get, you know, those customers that are on RCAF for whatever reason, on to this, then we would then take a look at it, if necessary, adjust the surcharge and if adjusting it down was the right way to do it, we would adjust it down. As we said before, this is not a profit center. This is to cover our costs.

Thanks, Jim.

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

Thank you. Good afternoon. Just quickly, Jim, we're in sort of I guess one of the strongest Canadian grain export environments we've seen in a few years, but I understand in your comments that specialty crops were dominating. Did you make some reference to wheat exports, the port of Vancouver being soft, and was there a specific reason for that?

One of the things, and I think we talked about this in the past, where we had a slightly lower quality grain crop, we had a very good volume crop last year, but a slightly lower quality grain crop last year, in wheat. And when that happens in our draw territory, which is to the north versus CP, much more of that grain is likely to move to the feed markets, which are traditionally truck. So our West Coast export of wheat business was down slightly, but as I said, the canola, peas, lentils, et cetera, offset that because they have been very strong. Just a question of, in any growing year, you've got a couple of things to look at. One, you can have, you know, how much is planted, what is the yield, and what is the quality. We had a great plant. We had a ton of volume, but the quality of that grain crop last year was slightly down. The reason they held it last year was they were doing some blending the year before, so in any given year, in this grain, there is always variables, and this year, the variable is lower quality, less West Coast exports.

Okay. Thanks. And just quickly, Hunter, do you have any update on how things are progressing at Prince Rupert?

Yes, I think that things are right on schedule. The cranes are ordered. The initial work has begun. And we are looking to a startup of October of 2007.

How important is Prince Rupert to your -- sort of your intermodal projections for '07 - '08.

I think Jim can speak to it further. Basically, not much in the 2007 numbers, because it's just very recently that we got this solidified about when the startup was going to be. And hopefully, you know, you make forecasts, and I hope October is right, but could that slip a month, it might slip. So I think very little is in 2007. Certainly, there is some in, as we look forward to '08, I mean we're very, very bullish about the opportunities at Prince Rupert, so certainly it is in our -- at least our thoughts internally about what 2008 will be for intermodal.

Sir, just a quick follow on. Have you had a fair amount of customer sort of interest being expressed to you at this point for the '08 period?

For Prince Rupert?

Yes.

I would say more than a fair amount. I would say every customer in the world has talked to us. I am of the view, I could be wrong here, that Prince Rupert, after it's open three or four months will be sold out, till we get to Phase II. And I think Phase II will bring other things on. If you look at the-- if you look at the power of the story and the model, coupled with our franchise, Prince Rupert is the place people are going to want to be.

Great. That's all for me.

Thanks.

Thank you. The following question is from John Barnes from BB&T Capital Markets. Please go ahead.

Good afternoon, guys.

Hi, John.

Hunter, real quick, just a couple of questions. On the labor side, I mean a 4% head count reduction, but you're forecasting a lot of growth coming on, I mean you have been talking about this carload growth that is kind of imminent and I'm just wondering how can you do both? I mean, I trust you guys when it comes to this, but we've seen other rails cut too aggressively and then when the volume did show up it impacted them for a while. Do you fear that you're cutting too deep, or is this still some stuff that you think is low-hanging fruit.

John, let me -- I want to be sure we're clear here, we're not talking about cutting. Most of this has -- has gone through attrition, but let me just bring one thing to your attention. When we can have the kind of productivity that we have, gains that we've had in the terminals, which just looks at one quarter, and those gains aren't over, that says we don't have to hire people in the terminals, except when our attrition is running to 8 or 10%.

And I would also remind you, for one example, that we are making a significant investment this year in the extension of Sidings from all the way from Winnipeg to the West Coast, to both Prince George, but predominantly to Vancouver. That is going to -- I'm trying to talk from memory here, but that train starts in the area of 25 to 30%. About 25 to 30% less train starts, by lengthening your train, your average size trains, you know, there is a lot of people involved there.

So look, there is still more power to this model. I know you all think we're going to run out. But it hasn't run out yet. And I still think we will be able to -- and I would hasten to add, we right now, as we go through normally, are going through a -- trying to forecast our employment needs. Are there places that we are going to have to bring people on? Absolutely. Where we see some growth, and where we have the demographics, the attrition will be at a much higher rate. But on in, I am still comfortable going forward that we are going to see the same type of head count numbers going forward that Claude described, even with the growth we have predicted.

Okay. And can you just give us -- you know, out of the 4% that you took out, was it a 50/50 split kind of rail workers and non rail workers, or, you know, was it a little bit more weighted to kind of nonrail employees?

It is pretty much across the board. The vast majority of our employees are operating craft, and people who do the maintenance of the railroads. But we have initiatives, the Siding Extension that Hunter talked about, our Smart Yard initiative, and the terminal productivity, we have, you know, tremendous progress on our engineering forces, with focus not just on head count but also on overtime. And so overall, you're seeing every sector of the business, including the accounting function with the employee, and also the management function with nonunion employees, being under the radar to make sure that we are doing everything as efficiently as we can.

And you know, John, the other thing I would add, that you would not expect probably with head count coming down and overtime to be coming down at the same time. And it seems like you are getting rid of people and maybe you have to work a little more overtime. We have some significant initiatives in reducing overtime, where it was out of hand. Where we were not doing the appropriate thing. And that was the final thing I would add is we're making a significant investment right here in Memphis, over the next two years, we will be invested in over $100 million in the total renovation of this yard, almost a greenfield to raise the productivity. They will probably raise the productivity of this yard, in my view, 28 to 30%. So there is a lot of initiatives there that are going on.

Okay, all right. And then just hypothetically, and I know this is a tough number to get at, but look at all of the things you kind of got going on with your network and with the Sidings, and you know, a lot of the Smart Yard stuff, theoretically, how much more could you handle. Is it another 20% volume you could handle in your system, is it another 50%? I'm looking for magnitude on how much you think you could do before you really had change your thinking on either head count or something else.

Well, number one, let's just talk about the physical plant, from Winnipeg west, which is the area right now that we've seen right now with the largest growth, with bulk, with grains, with coal. With the Siding initiative, we can grow 20%, without doing little or any additional hiring. Now, if Prince Rupert hits big, and a couple of other things happened, and we grow 25 or 30%, do we have to add a few people? Yes, absolutely. In certain quarters. We will have to do something maybe a little bit of over the lakes. And over the lakes, I mean from Winnipeg to Toronto. The U.S., we're in pretty good shape. But we can incrementally, you know, extend the Siding or add the Siding here to accommodate the growth. I don't -- you know, I think that probably if you take everything in, we can probably, with our initiatives and all, we can probably go 18 to 20%, and on a net-net basis handle it with the existing physical plant and people and locomotives.

And that's -- okay, that's exactly what I was looking for. Hunter, nice quarter and congratulations. Thanks for your time.

Thanks, John.

Thank you. The following question is from Scott Flower from [Sacre] Research. Please go ahead.

Good afternoon, all.

Hi, Scott.

Just a couple of quick questions. I wonder if you could -- I know you talked a lot about productivity, but give us perhaps a little bit of an update on CX and basically are we on IMX or are we to the point now where it is growth focused versus driving out further inefficiencies, no inefficiencies, ar all the focus. But is really that IMX has done its growing, versus there's a Phase III or Phase IV of IMX, but if you could give me some sense of where we are on those two initiatives.

I think, and I want Jim to comment on this, also, we are comfortable that we have achieved the type of returns that make us very confident in reinvesting in the business, number one. And now, I think our shift and our focus is not to turn our back on efficiencies, and opportunities, there, but to focus more on the growth side with the type of returns we have. So now, I think we're in a position, in a mature business segment there, to be able to look at, and see that business grow at a little faster pace than we have seen it in the past but once again, not get carried away. And I think that looking forward, with what we can see, if you see fuel and the other things that might happen, I mean I can't believe fuel is where it is.

I hear people that are reasonably supposed to know, predicting it might go to $100 a barrel, and if those things start to happen, that is going to offer big opportunities for us from an IMX standpoint. From a CX side, I will ask Jim to comment also, they've done a wonderful job. That is across several business units,basically all the merchandise units, a lot done on chargeable services, a lot done on asset utilization. But they have a lot done with the routing protocols, and the next phase of writing protocols, so there is more to come from CX.

Okay. And then maybe just a big picture question, is obviously, you all did start earlier on pricing, and you also took attack on fuel surcharge and trying to be a little more transparent there. I'm just wondering what you're hearing from your customers. Obviously customers never really like to pay more for anything, even if they're getting services. Has some of the U.S. industry gotten perhaps a little ahead of itself. They don't have necessarily your service metrics, and they're pricing several 100 basis points higher, and certainly fuel recovery has become a profit center. Is there any risk from what you're hearing from your customers beyond the normal moaning about higher prices, that there is, you know, certainly when you've got hearings at the SCB, and not that these are major hearings, that things are getting a little out of hand on the yield front, versus the service tradeoff for the industry.

Scott, it almost sounds like you answered you your own question.

You know the customers more than I do.

Let me say it this way. I am nervous about the activity. We've got a job, to run our railroad.

I think our customer's perception is that Jim and company have done a wonderful job of creating a fair fuel surcharge, one that is not a profit center, that is a pass-through. We have not -- we don't have rate increases in the 10 to 12 to 15 to 20% ranges. We have never predicted that. And in fact, we have had customers that have said to us we're going through tough times here, help us, and we try to help them, absolutely. We were way ahead of this curve that when people start saying that the capacity is gone and they are going to sell on, you know, on demand, and we were way ahead of that. I think our customers think that we're trying to be very fair there. And do I hear rumblings in the U.S.? Yes, I read the papers, and the periodicals, and I don't -- and it is hard to give a general answer, you know, I mean you have to look at kind of each individual. I hate to lump carriers together.

That's fine.

But I think there is some -- maybe, you can make a case, that there are some inappropriate things going on.

But, I mean, are you hearing more angst from the customers about specific behavior, without getting into individual carrier names that, more than the normal, again, sort of the push back the customer perspective.

Well, we don't hear -- we don't deal with near as many of the U.S. customers that are big customers for the other roads, and I think it would be unfair for me to try to characterize what they're saying.

Okay. That's fair. And last quick question, for Jim, is you mentioned a little about getting some grain through the Gulf Coast that was PMW bound. Is that just a function of where ocean spreads are? Is that a function of just crop pricing? Help me a little bit understand where you're seeing some of the additional pull down on the Gulf Coast for BNW.

I think it was more to do, Scott, with some operational difficulties in and out of some of the Pacific Northwest ports that is not, you know -- kind of a one-time event that helped us out in the first quarter.

Okay. Fair enough. Thanks very much.

Thanks, Scott.

Thank you. The following question is from Bill MacKenzie from TD Newcrest. Please go ahead.

Thank you. Jim, you had mentioned that on the fuel surcharge, that about 50% of your customer coverage was under the 7401. I guess versus the 7400. Can you break that down in more detail between the 7401 and the revised 7401? And second question related to that, if oil does stay in the sort of $70 range for the balance of the year, net of moving more customers over to the revised 7401 versus the high oil prices, what sort of top line revenue growth would you expect from the year from the surcharge program overall?

When I say 7401, I mean 7401, I mean the revised. They were were on 7401, they went on to the revised so that just means what I said.

Okay. Fair.

I mean you can -- number one, I don't think we give out the specific dollar amount of what it is we generate off the fuel surcharge, you know, you can do the -- what the percentages are out -- are on the way, Internet, you know, 13 1/4 at $72, 7401, so you can kind of get a sense yourself what the revenue number would be. But we don't talk about the specific dollar amounts in fuel surcharges.

Okay. And second question, for Claude, on the buyback, and the balance sheet, I mean great to see how aggressive you guys have been on the buyback, and your balance sheet has clearly been able to absorb the additional debt as a result, I'm just wondering, if the board does approve a renewal of the buyback, and you guys continue to be aggressive, at what point do you see the balance sheet maxing out in terms of taking on additional leverage to fund that?

Well, we've given guidance in our previous meetings that we see ourselves evolving over the next couple of years to a 45% adjusted debt ratio. So, you know, we're at 42 today, and we're not going to do this here in a couple of quarters. We're going to gradually buyback a little bit ahead of our free cash flow in the short term, and then the overall guidance that we had given is that we see that there is about a billion dollar of additional debt capacity that is allowed under the 45% adjusted debt ratio target. So that gives you as much of the framework to work with, as I can give you at this point.

Okay. And now, on the free cash flow for the year, still comfortable with your previous guidance despite the strong Q1 cash flows that we've seen?

Yes, actually we're on target for the -- we were expecting, you know, a strong Q1, and you know, as I said, we've delivered a tremendous amount of that cash flow through improvement in our collection cycle. That's a great story. But once you've done it, you know, the cash is there, it is -- you got to pedal hard to keep it, and we see the full year at around a billion dollars free cash flow.

Great. Thank you.

Thank you. The next question is from Ted Larkin from Orion Securities. Please go ahead.

Thanks, operator. Hunter, a question for you. Where you gentlemen are standing today, you touched on this earlier, that you're putting a significant amount of money in the Johnson yards in Memphis, and that begs the question strategically, how much growth you're looking for on the IC itself, and specifically the port of New Orleans. Can you just comment on the types of traffic you expect to see on that growth going forward?

Ted, good question. A little context, if you go back, trying to go back in history a little bit, 25 or 30 years ago, the largest gateway in the U.S. rail gateway was St. Louis. St. Louis now is like third or fourth, maybe fifth, because of -- they didn't react to the -- and put the proper infrastructure in, their service deteriorated. At that time, Chicago was a low third, Kansas City was second. Those things change.

Now, if you look at what has happened, St. Louis is not a player east/west interchange quite as much. I don't think, at least at this point in time in my view, that New Orleans will ever be the east/west gateway that it was. Chicago cannot continue to sustain the business that it has. So that leaves one place. And that's Memphis, Tennessee. So we see all the carriers operate through an interchange here in Memphis. It is of strategic value. We perform work here for all carriers here but two, and we're in negotiations with one of those two, so I think that we will be performing a lot of work here for other people. And I just think that we're very bullish on the growth that could take place in Memphis and the gateway that it opens up beyond Memphis.

I would just add that there is another dimension here, as we bought the few railroads that we have in the U.S., we basically inherited a number of small yards, and we don't have in the U.S. one major classification yard of the quality of say a Simonton or a McMillan. So what we will be able to do as well over time is to bring more of the traffic away from those satellite yards into Memphis, and be more efficient from a service and cost standpoint.

Hunter, one other question for Hunter, just -- and this is for Jim as well. I wonder if either of you gentlemen or other senior marketing people have been over to China recently. That seems to be the big throbbing heart right now, and you've got three offices over there. Can you just comment on the tone that you're seeing going forward, with the customers you're chatting to, either here or over there?

On the outlook -- our outlook for China continues to be overwhelming for all of us, and we're adding more staff there and putting more people there. I was there last fall, and hopefully get an opportunity to go there again this year, and the senior marketing people are there, so not only that, but our CN worldwide freight forwarding presence is, that we started in Europe now is catching hold there, as well. It's given us a lot of great opportunities. So we're not only Prince Rupert, you know, but, you know, Halifax, is the recipient of the Asian trade. New Orleans is, I believe, going to be the recipient of the Asian trade. As well as this -- our freight forwarding operation. So unbelievably optimistic.

Okay. Well, this reflects on your network. That's a great quarter, guys. Thank you.

Thanks.

Thank you. The following question is from Walter Spracklin from RBC Capital Markets. Please go ahead.

Thanks very much. Hunter, just looking back, when you had your focus pretty much over the last little while on bringing that operating ratio down, obviously good job there. If we're going to look at the next leg now, and you've talked a lot about service improvements, and I was wondering if you could touch on what -- like for example, the routing protocol one, that was key in your operating ratio, what is one of the key programs that you have in terms of improving the efficiencies at Smart Yard or where is it that you see it and what kind of magnitude of impact would it be by whatever metric you wanted to use on that one?

Well, I mean, the Siding Extension program is big for us. Smart Yard, we've gained a lot of knowledge and developed and trained a lot of people. So it is going to work well for us. And when you do better in the terminals, you know, if you look at the average train speeds, and then if you look at how long cars sit in terminals, the big impact that you can make and asset utilization improvement of service to the customers, is cutting the dwell time at terminals.

So we think that the initiatives to improve the terminals go a long way in the service areas, they go a long way in asset utilization, they go a long way in reducing costs, which then just allows us to be a little more aggressive in the marketplace, to gain market share. I mean I think we had to do this just kind of one step at a time. We were a very -- we lack the discipline in our pricing, and in fact, our trends followed the U.S. trends from the Staggers Act, down to about 99 to 2000. Our prices went down. We turned that -- our service up. We've done better with our pricing. We've learned through IMX and CX, so look, is there more efficiencies to ring out of this? Absolutely.

But, at the same time, I would hasten to add, and I've said this many times before, at the point where we are now with our returns, relative to the cost of capital and so forth, it is time to take this and leverage into growth. Now, that depends a little bit on the economy. It depends a little bit on what happens with the Canadian dollar. But we are positioned to be able to have, out in the future, I'm not talking about this year, and revising numbers, but out in years to come, some big gains in market share that we've seen recently that are, as Jim said, masked by other issues, just as a good strong model. And I'm very bullish on the future.

Okay. And just one question for Claude. The Johnson freight yard, US$100 million, is that incremental, is that on top of your 1.5 billion Canadian cap ex expansion or cap ex that you're looking at this year? And overall, are we expected to see that number, you know, is there anything in the works right now that would indicate that, you know, some more projects down the road that would see the 1.5 go up from here?

No when we mentioned New York, we guided you to slightly higher than 1.5 billion this year. I think our guidance was more like 1.55. And we see that, you know, continuing to grow over the next couple of years with inflation an other factors. But the big picture, that is the right envelope for the foreseeable future and it does include what we will be investing for Johnson yard.

Perfect. Thank you very much, guys.

Thanks. I believe we have time for one more question, Mary.

Thank you. The last question is from Randy Cousins from BMO Nesbitt Burns. Please go ahead.

Good afternoon.

Hi, Randy.

You guys are in the fortunate position of generating huge free cash flow. I wondered if you could spend a little bit more time just talking about the opportunity to deploy that free cash flow. Or, really should would kind of be modeling on a go forward basis a company that sort of continues to buyback its own stock?

Well, I think you're asking a very good question. We've always said that the first call on cash is to invest back in our business, and we have a number of initiatives that we are pleased to be driving forward, you know, the best example is the one hunter just talked about right here in Memphis. You know, it is a quality, it is a lot of -- it is a luxury from a railroad standpoint to be able to take such a strategic investment and commit to $100 million to upgrade a new yard so that's what we're looking for. Investing back in our business. That's the first call on cash.

Second call on cash is if they are available at the right price, accretive acquisitions, of course we will be looking at them. We have a track record in the past of deploying our business model, and successfully driving value for our customers and shareholders that way. Having said this, when they're not there, or if the price is not right, then we see ourselves bringing the cash back to the shareholders in the blend of dividend increase, and share buyback that we've talked to you about, Randy.

But in terms -- Claude, I guess what I'm trying to get at, when you look forward, look at your asset pool, look at your growth opportunity, you spend 1.5 billion as kind of a sustainable number, do you see other things out there, other investment opportunities, or really, have you guys just become fortunately a precision railroad has become the precision cash, free cash flow generating machine?

That's a pretty good story for me.

I think, you know, I think Randy, if I understand your question, you know, I think that really, in my rail career, until just recently, I've never been -- had these kind of opportunities to have free cash flow like we've had and the type of projects and the type of compelling returns that they bring to be able to do these things. I mean Memphis yard here, for an example, has not had a significant amount of work done on it, affectively, for about 50 years. It's 50-year-old technology. And we can go out here and take capital and spend it in a facility like that and get the type of return, that are compelling returns, that can drive low-operating ratios, and earnings, and free cash flows, you know one thrives off the other. You know, it's a powerful, powerful story.

If I get the short answer here, at another level I guess what I'm trying to get at, is that there's Memphis, there's selective little opportunities, but there's no other sort of really big nuts out there that you would see as opportunities to put that free cash flow to use in the business.

No. Well, I hesitate to say this, but one of the reasons, one of the challenges that we have, that is presented to me by a lot of you that say, you know, this such a compelling story, why can't you grow market share faster than you're doing, and the issue becomes that last mile, or the last 5 miles, or the last 50 miles. When rails lost a significant market share in the late 70s and early 80s, the infrastructure changed. People bought, built warehouses and manufacturing plants. They didn't put in rails first. Now, are there opportunities down the line to address some of things Jim has done about putting in reload centers, by expanding outside of the business to get maybe into some logistics. Will those be things that we will focus on in the future? Yes. But will we do it very carefully? Yes. Because our strength is railroading, and we will do that very cautiously, but there's opportunity to take care of that last few miles.

Okay, thank you.

Thanks. Okay, thanks very much for joining us. A powerful quarter. We look forward to more of the same. And thanks for all of your support.

Thank you, gentlemen. The conference has now ended.[Operator Instructions].