Canadian National Railway Co (CNI) 2007 Q1 法說會逐字稿

Welcome to the CN first-quarter 2007 financial results conference call. I would now like to turn the meeting over to Mr. Robert Noorigian, VP of Investor Relations. Ladies and gentlemen, Mr. Noorigian.

Thank you and thank you for joining us for CN's first-quarter 2007 financial results. With me today is Hunter Harrison, our President and Chief Executive Officer; Claude Mongeau, Executive Vice President and Chief Financial Officer, Mr. Jim Foote, Executive Vice President Sales and Marketing.

Today's remarks may contain forward-looking statements within the meaning of applicable securities laws. Such statements are based on assumptions that may not materialize and are subject to the risks described in CN's MD&A and other disclosure documents that are on our website. As such, such results could differ materially.

At the beginning of this quarter, CN reclassified certain non-rail revenues and operating expenses which had previously been netted to their related revenue. Going forward, CN will report on a gross revenue basis. This change had no impact on operating income, net income nor earnings per share. Claude Mongeau may go over this in a little more detail.

In order to be helpful for you as you do your models, we have put the 2005 and 2006 quarterly reclassified revenues and expenses on our website, www.CN.ca. In addition, any non-GAAP reconciliations are also on our website.

The question format today, after our presentation we will take questions for those who are listening on the call. Would you please identify yourself when asking the question, and in order to be fair, could you just limit the number of questions to two or three?

With that, it is my pleasure to introduce CN's President and Chief Executive Officer, Mr. Hunter Harrison.

Thank you, Bob, and thanks for everyone for joining us. I am delighted to be speaking to you today from Moncton, New Brunswick. I have got a big smile on my face. The sun is shining. There's no avalanches. There's no mudslides. There's no rain. There's no high winds. There's no labor strikes. There's no lockouts. Life is good.

We have had by far the most challenging first quarter that I have experienced in my 40 plus year career. And Jim and Claude are going to go over the results with you. But let me just make a couple of comments that the operating team here, this whole group pulled together with some tremendously difficult hurdles and challenges this quarter and did as good a performance as I have ever seen considering what we had to deal with.

I can remember vividly the one day we had in one day 14 avalanches. Things that we have not experienced before. And with the snow we had in particularly British Columbia and Alberta and then we had the spring rains and the thawing and then we had the overburden and snow coming down on the track, and it was extremely extremely challenging.

But the one good thing is we learned a lot from it, and I going to talk a little bit about, after Claude and Jim have finished their remarks, a little bit about the labor situation, a little bit about the changes in the operating plan, a little bit of the learning that we gained and got a little better as a result of this quarter. I'm not going to spend a lot of time on the performance, but you can see the panel there -- the topline was relatively flat. We had a little deterioration in the operating ratio, predominantly as a result of the weather and the strike. Earnings were at C$0.63, down about 5%. Claude and Jim will spend some time on you about our figuring, about how much the weather and the labor issues penalized us a little bit there. That is not an exact science, but we will give you some guidance in that regard.

So overall I was extremely pleased, and things are looking awful good now. We're gaining some momentum back, some momentum that we had built up, and this all really started with us as I talked to you last quarter about Thanksgiving of last year. And now we're back for the first time since Thanksgiving to where we had started to sustain a pretty powerful operation. Our metrics are now setting daily records.

And so overall I am very, very pleased, and with that, let me ask Claude if he will dissect some of the numbers for us.

Thank you, Hunter. It was quite an eventful and challenging first quarter, but we came through with good results in the circumstances. Our earnings per share was at C$0.63. This is down only 5% on the flat revenues, which were impacted by the UTU strike and very severe weather throughout the quarter basically. Strike and the weather overall cost us about a C$0.10 of EPS or C$80 million of operating income. This is not an exact science as Hunter said, but without these issues, we could have delivered around C$0.73 for an increase of 10 to 11%, in line with the guidance.

Our operating ratio was up 3.5 percentage points to 70.6. This is about 1 percentage point higher than the previously reported both last year and this year due to the change in our revenue recognition for non-rail activity, which we now are all reporting on a gross basis. Again, this has no impact on operating income and net income, but it does have an impact on our operating ratio of roughly 1 percentage point.

Half of the year-over-year increase of 3.5 percentage points can be traced to the C$32 million loss of fuel hedging gains. Last year we had 35% of our fuel edge at less than C$35 per barrel. And so that today is no longer a benefit, and that increases our expenses by C$32 million.

As I said, overall good results in the circumstances. Let's take a moment to review the expenses. Our total expense increased by C$73 million or 6% on a reported basis. That is roughly a 5% increase adjusting for foreign exchange. Labor and fringe benefits came down 2% on the strength of continued workforce reduction and lower pension expenses.

Purchase services increased by 6%, partly as a result of the tough weather and some strike-related costs like security. Despite a 5% workload reduction and a lower WTI of C$58 per barrel, our fuel expense is up by 6%, mainly as a result of the C$32 million less hedging gain that I just talked about. Equipment rents are up significantly. Because of slower velocity on our lines, and also it leaves C$15 million because we had less car hire income because of fewer loads off-line, box cars, forest products, center-beams, etc. which were not collecting car hire income during the first quarter.

Finally, casualty and other -- this is our most lumpy expense category -- is up C$22 million, partly due to higher bad debt and legal claims, but also the impact of weather and the UTU strike. With back to work legislation in play and the sun shining here in Moncton, we are squarely focused on running a more fluid network for the balance of the year and getting back to our normal levels of productivity.

Turning to cash flow, we utilized C$176 million of cash during the quarter. The big story here is the [C$370] million of cash taxes paid on account of 2006. Without this amount, we would have generated roughly C$200 million of free cash flow, essentially in line with expectations. Despite this temporary lull in free cash flow, we continued to buy back our stock at a solid pace. We purchased 6.5 million shares for C$345 million during the quarter. We have another 6 million shares to buy to complete our current annual program.

Just like Mr. Buffett, we think railroads are a very good buy of the current valuation, so we plan to discuss the allowance of a new program with our Board ahead of our Q2 results in July.

To wrap-up, we had a tough start to the year, but if I may say so, we are still upright and on track to deliver a good year. Clearly our focus is on regaining momentum in topline growth as Jim will discuss in a minute. If the economy holds up, our goal is to overcome Q1 and still come in with 10% EPS growth and at least C$800 million in free cash flow. The key will be to run a fluid network to grow at low incremental costs. The good news is, this team of railroaders knows how to do just that.

And with that, I will turn it over to Jim.

Thank you, Claude. I would like to start by going through the first line, which is a carload depiction for the quarter, and take a look at that. You can see we started the quarter with very difficult operating conditions, especially in Western Canada. Heavy snow and rain were followed by extremely cold conditions, so we were behind in picking up customer orders when the UTU strike started in February.

We did a good job of recovering through March, despite continued bad weather, which impacted us but also impacted CP tracks in BC where we operate over each other on a coproduction basis. Overall the weather on the strike restricted us from handling approximately C$90 million in revenues, C$60 million due to the strike and about C$30 million due to the weather.

On the next page, we will go through the revenues on a line by line basis, but on an exchange adjusted basis, excluding C$15 million of favorable exchange impact, revenues were flat with last year. Price increases raised revenues approximately 4%. Favorable mix, the impact of continued longer hauls of traffic increased revenues another 1%. These were partially offset by a 1% decline in fuel surcharge revenues as our coverage has increased, but the lower curve in our newer fuel surcharge kicked in. And the rest of the decline is associated with the volume decline I mentioned earlier.

Petroleum and chemicals was up 3%. A few very strong areas drove these results. First, growing shipments of condensate moving into the oilsands region. Second, continued shipments of lower sulfur diesel. And third, higher LPT shipments due to severe cold weather. These were offset by lower sulfur moves that we just could not get to in the quarter and generally softer demand across the petrochemical and petroleum products group as customers in both Canada and the US reduced production.

Metals and minerals was down 2%. In the metals segment, Western Canadian pipeline projects continue to provide us with opportunities, as does structural steel products for construction, and especially flatrolled steel and slab which were up. Construction materials related to housing were down as were shipments of small pipes for oil drilling and shipments of iron ore.

Forest products was down 7%. Housing construction difficulties, both markets and weather-related, continue to impact both lumber and panel shipments. Pulp shipments were lower due to mill closures. This being somewhat offset by our handling of South American imports through Gulf Coast ports. Paper was positive due to the return of shipments from producers that were shut down last year, as well as market share gains from truck.

On the bulk side, coal was up 4%. Canadian coal was up, driven by a new British Columbia mine that came online last year, offset to a degree by a closure of a smaller mine. US coal volumes were down as increases in Illinois coal volumes were offset by lower PRB coal volumes and lower net coal moves versus last year.

Grain and fertilizers, up 3%. Canadian wheat was up as quality crops continued to move to export. US corn volumes in Eastern Canadian markets returned this year, as well as US feed markets were also very good. US moves of corn and soybean were lower due to lower Gulf Coast versus West Coast demand. Fertilizer shipments were very good, both potash and fertilizers, reflecting expected increases in plantings this year.

Intermodal was down 1%. International shipments through the ports of Halifax, Montreal and Vancouver increased, but these were offset by lower domestic volumes where as expected customers diverted traffic to trucks during the strike.

In the auto segment, we were up 4%. Both finished vehicle and parts traffic were positive, driven by strong sales of new products from CN-served assembly plants, increased import volumes and new parts business we secured. This was offset by some plants taking downtime for inventory adjustments.

On the next page, you will see kind of a depiction of the various commodity groups and where we expect the markets to be going for the remainder of the year.

In the petroleum and chemicals markets, we are expecting positive results there as both P&C and metals and minerals will benefit from continued development in the oilsands. The outlook for lumber and panels is more optimistic as the market should stabilize in the second half. We will continue to benefit from paper as our customers return from their outages, as well as to take advantage of new opportunities that we have, market share from truck, opportunities for forest products exports like logs and pulp, wood pellets for energy use, as well as new production capacity coming online in the second of the year.

In the coal area, we had record stockpiles at mines and continued expansion of production in Canada, and our year-over-year comparisons in the US will go away with the short haul Powder River Basin coal move going away in the -- the difficult comparisons going away in the fourth quarter.

In the grain and fertilizer segment, the growing conditions are good in Canada. In the US they are projecting corn plantings in CN territory to be 12% above both last year with some decline in soybean plantings. And global potash supply issues have truly favored Canadian producers.

Expecting strong and continued growth in the international segment in Intermodal. Our domestic business is already starting to return after the strike, and we are opening up new products and markets in the US with retail intermodal there.

Similarly, automotive has a favorable outlook for us as the new product at CN-served plants are selling well, as the well as the new plant at Lansing, which is keeping our results positive.

Last page here on the revenue outlook, the pricing environment clearly remains very strong. We're targeting 4 to 5% price increases as we go forward. We are looking at targeting volume growth with an intense focus on new opportunities. We have a very bottom-up focus in terms of capturing opportunities as they come online, as well as leveraging our non-rail assets to be able to provide a better product to our customers.

Prince Rupert update. We are on schedule to open the facility in the fourth quarter. It may be slightly earlier. The customer interest continues to be extremely strong, and we are hopeful that we will have an announcement there in the near future. So we are very focused on achieving our 5% revenue growth for the year, despite the issues in the first quarter which we have discussed. Half of that coming from volume and half of that coming from price.

Hunter?

Thanks, Jim and Claude, both, for those informative presentations.

Let me take a little bit -- a moment to talk a little bit about the labor situation and the challenges that it has presented. We started off this process, and one of the difficulties we started out with one negotiating team from the UTU and ended up with another team. The first team was for whatever reasons there was some internal strife at the UTU. They were removed from office, and we started negotiating with a new team this spring with deadlines staring us in the face, and it proved to be a very difficult process.

Then we went through where we signed a short-term agreement, tried to put it into effect for one year in kind of a cooling off period. And that was approved by the leadership initially, but it was not ratified. It was resoundingly beaten down. Now we have gone through the strike, the lockout. In some locations it is the first time I have seen people on strike where they were working, but things happen differently everyday. I just received word just 30 minutes ago that the Minister of Labor appointed the arbitrator, a man, a gentlemen, Andrew Sims from Alberta. So we will be anxiously awaiting the opportunity to sit down with labor with him. I think we can all see that with where we were with this interim agreement gives some indication I think of where we might be in this process. So we will go through 90 days -- no longer than 90 days, and he will be rendering a decision, and we can move on with life and hopefully not have this issue of labor.

There is a couple of things, a couple of you have raised questions with me. One of the things that was addressed in the legislation, there are some issues that some of you read about going on in Canada where the Teamsters have I guess started for lack of a better term a potential raid and filed with the CIRB in Canada to become the bargaining agent for the UTU. Well, in spite of what the ruling might be from the CIRB, and I'm not trying to forecast or anticipate what that might be, whatever the conditions of this contract are and the length of the contract will stay whether whoever is the bargaining agent. So we were concerned about that and that the process might be reopened, but the legislation addressed that, and that so-called loophole was closed up.

As Claude and Jim have indicated, it was a real challenging start, although the outlook from my standpoint, particularly from some of these operating initiatives, is as positive as I have ever been. This clearly is the low-cost model, and I think it is going to get even lower cost. We have since the strike, during part of the strike and the lockout, we have -- and I had indicated to you some time back that this was probably coming. We have closed a hump at Symington Yard in Winnipeg, which is our second largest operation. We have reduced more than 50% of the assignments. The dwell time is down; the velocity is up. Without adding additional spend at other locales, Mac in Toronto still is back starting to break new records now. We will have more information there, and hopefully you will get a chance to see that operation with our analyst meeting in May.

The signing extensions, which just were starting to kick in, in November we were gaining some momentum when we ran into the weather issues around Thanksgiving initially. Those initiatives are kicking in. Our trainload is up to an all-time record high, both in tons and footage. So I'm extremely excited about the opportunities of how high we can raise this bar and still get over it the remainder of the year.

So with that brief update on the quarter, we will be happy to take any questions the audience might have.

(OPERATOR INSTRUCTIONS). Tom Wadewitz, JPMorgan.

Hunter, I wanted to ask you one question on the potential labor outcome. Is what we're looking at a ruling on the one-year agreement where you would have an arbitration ruling and you would end up with some form of one-year agreement? Or is it possible that you would have a ruling where you end up with a three or four-year agreement that gives you some stability?

Well, we think it will be longer than one year. This is FOA, which is effectively based on arbitration. Now I'm not sure the direction of the arbitrator. He might have a little flexibility and latitude here, but effectively both of us make our best offer. And then he selects and picks both on a wages and length of and work rules what he thinks is most appropriate. I would feel sure that it would not be a one-year deal. If I had to forecast, I think it will be three plus.

But they could offer one year and you offer three years and you might end up with the one year?

Well, it is a possibility, but I would go to Vegas on that one.

Fair enough. Two questions I guess for Jim primarily. On the Intermodal yield slide, I know the strike probably put some noise in there because maybe domestic yields are a little bit higher. But the yields on Intermodal looked a little bit soft, and I am wondering if that is just a mix effect related to the strike and you would see strong Intermodal yield growth going forward? Or if there is some impact from softness in the truck market that might be affecting, and then I have just one last one on Prince Rupert.

No softness in pricing. Our price increases are pretty consistent. Amongst all of the business units, that's clearly just a mix issue associated with more international containers versus domestic.

So you would expect that yield to pick up once you are beyond the strike then?

Correct.

Okay. Then on Prince Rupert you said it is pretty likely you would get in agreement. Is there a certain point where if you don't have an agreement it makes you I guess more willing to consider flexibility on rates there, or is this something that you are really pretty close to having something and the rate outlook on that piece of business is very robust?

It is a unique -- we are sitting on a unique project with a unique doorway into North America for these containers. And, therefore, as I have said in the past, I think that that unique opportunity should be priced appropriately. We continue to believe in that model, and we continue to be confident that that is recognized by the steamship community as well as their customer and that we will be having, as I said, some announcements in the near future on that.

Scott Flower, Bank of America Securities.

Just a couple of questions. I know that in slides we've talked about 4 to 5% pricing. I'm just wondering are you finding that the market is a bit firmer? The reason why I asked that is that it seems like -- and maybe I am just misrecalling here -- is that we sort of talked about 3 to 4. Are you just finding that the markets are that much firmer, that there is a little bit more uplift there?

I think that is right, Scott, that historically I have talked about 3 to 4%. In our guidance we have clearly been delivering over the last at least three, maybe four quarters 4%, and I believe that the demand for our service number one, there is good demand, and two, our service continues to get better. And that it is reasonable for us now to assume that, especially at the pricing going on in the industry, that we should be looking at 4 to 5.

And obviously some of this depends on when different pieces of the business comp, but how much of your business is more tariff-oriented that sort of your change in outlook can manifest itself quicker in terms of changes versus waiting for some of your annual contracts or multi-year contracts to roll over if you could refresh us on that?

We have a very small amount of our business as does everyone else that really moves under tariff, maybe about 15% direct open tariff. I don't have any long-term contracts. I don't have any legacy contracts out there. The average length of my contract is probably two years, which would already have into it an escalation clause in line with what we have already talked about 3 to 4. So I would expect near-term that we should be able to start to achieve again better pricing and/or better divisions with our connecting carriers associated with their price increases.

Okay. And then the last question and I will let someone else have at it. Of the roughly C$90 million that you all talked about relative to the strike and I guess maybe some component of that may or may not have been weather, how much of that is more deferred versus how much of that might have been intermodal where someone just said, look, I have got to go truck and you know that movement is gone? I'm just trying to get a sense as to how do I think about that as a split between what was deferred and maybe being caught up versus what did go over the road? And of that amount deferred, are you still catching up, or is it more or less of that been seen as we are almost to May now?

There is clearly some product that is still there that has not moved yet that is associated with the strike. The one area, the only area that I really commented specifically on was the domestic Intermodal that where it starts on a truck and they just keep it on the road when they are unsure of what the service could be like. And again, as I mentioned, there's record stockpiles of coal. It is very different for us to quantify, but I think there is certainly some opportunity out there as we go forward to try and recapture some of this business. We cannot turn around and move it all in a one or two-week period, and the longer we wait, other sourcing opportunities are made by our customers' customers. So there is some out there we will continue to get at in the next couple of months.

Edward Wolfe, Bear Stearns.

Just trying to clarify the slide where you look at 4 or 5% pricing and 5 for 6 revenue growth, is that for the full year or just for the three remaining quarters that you are targeting that?

The run-rate is more on the -- 4 to 5% is more of a guidance going forward, not necessarily the full year, but the 5 for 6 is our annualized target.

So the implication of the one -- if I look at 4 or 5 for pricing and 5, 6 for revenue of 1% volume, if I combine that with minus 5% volume this year, this quarter I'm looking at 2 to 3 for each of the quarters going forward kind of volume?

No, I think what we're saying is on an annualized basis, our topline target is for 5 to 6% growth, half of which would come from volume, half of which would come from price, which is again kind of consistent with our prior guidance of 3% price. But, on a run-rate going forward or at least as a target for which we are striving to achieve, it would be price increases in the future of 4 to 5%.

Okay. So pricing firms from here are from 4% is your gut?

I think yes, if my gut was 4% with maybe a little bit leaning towards 3 as a downside, I'm now saying that 4% with maybe a little upside and leaning towards 5.

Okay. I am not certain, I thought I heard you say I think it was you, Jim, that Prince Rupert was going to ramp up in the fourth quarter? I thought historically you said in the third quarter, the end of the third quarter. Is there a change there?

I think the official opening that everyone has talked about is October 1. But construction is slightly ahead of schedule. And so -- but I would not put any kind of numbers as for Bob and Claude to give that kind of guidance. But I would not put any kind of numbers in the third quarter until we get closer to them.

Okay. Hunter, you sound very optimistic compared to where you have been in the last couple of weeks or months, and you talked about potential for margin improvement. Can you talk a little bit about how long it is going to take to start to really see the railroad operationally ramp back up to where we could start to see margin improvement again?

I think you're very close to seeing it now. If you could look internally at all our numbers right now, they have -- on a daily basis, they are back up to the record levels and starting to track there, and we still have some carryover that we are working through. So I think that within two to three weeks we will be on a consistent solid basis producing numbers 5 to 6 to 7% better than what we're doing at the peak in November.

David Newman, National Bank Financial.

Just on the non-rail asset initiative CN Worldwide, how do you plan to grow this? Is it going to be organically, or would you look at some acquisitions? It is obviously a very fragmented market. Any color on that?

Initially just like we have done with our CN Worldwide International, the freight forwarding operation, clearly our plan here is to start this business organically, leveraging our business model by taking key people from within the railroad who have the knowledge of the way we operate and allow them to expand into these opportunities because clearly the initiative here is focused on developing new lines of business that are consistent with and support the railroad. So organic to start.

Okay. And how do you manage any freight forwarder conflicts that might arise?

We don't hardly have any freight forwarder business.

But it is -- do your competitors -- are they not also your customers in this space to a certain degree?

Well, one of the challenges is we evolve is to look for channel conflicts and to make sure that in all circumstances we do the right thing. Our CN Worldwide International, which is our freight forwarding business which we are now going to expand in the US, it is a stand-alone company that buys its services in the marketplace just like everybody else does. But they do it just like we run the railroad. They do it better.

And so, therefore, their competitive advantage in the product that they can offer to the customers is based upon having something better and different to sell as opposed to something that would create a conflict. We certainly work with the [Shanker's] and the Panalpina's of the world and respect and try to do the best job we possibly can for them, just like we try to do a good job for CN Worldwide.

Yes. And would you guys ever consider circling back with Ontario Northland? Obviously it had some mishaps. It looks like the rail bed and the railroad is getting a little further deteriorated. Is that something you might consider again?

Sure. If the government of Ontario decided to take a look, we would be happy to sit down.

Okay. Last question on that guys, if you strip away the weather and the strike, were there any surprises that you see in the fundamentals to the downside or upside by sector at all? I mean is that surprising you at all?

No, I think the market, the business markets are soft in the areas where we had expected them to be soft. The only area of surprise I guess would be on the upside where clearly demand in the bulk segment right now is very, very strong.

Jordan Alliger, Deutsche Bank.

Just a question. I think most US rail has been talking about 5 to 6% price increase going into this year. You guys have not been below that I think in that 3 to 4% range, now sort of normalized back to what some of the US counterparts have been saying. I'm just sort of wondering, is this somewhat of a strange in strategy, more of a price push on your part or a realization maybe the market was toned on prices better than originally thought?

No, I think that our guidance and our strategy is, first of all, starting price increases will before the rest of the industry did, based upon really changing our service model in 1998 and switching from selling transportation as a commodity, but selling it as a service was good. And we have had those 3 to 4% price increases consistently over the last five or six years. We don't have the legacy contracts, which a lot of the other rails that do, and therefore, they get these one huge onetime pops in readjustment or rebasing their prices. But, at the same time, we try to understand where the marketplace is, and we try to understand what is a fair price for us to charge. When I look at the data out there, a lot of which is accumulated by you folk in terms of your surveys with the customers, and I see what the customer base is expecting in the future in terms of price increases, when I see during the strike situation how high of a demand there is for the services, we just try to take all that into consideration and put the peg in in the right place all the time. So it is all those factors that have come together for me to believe, as well as I said earlier, some from straight price increases but also some from improvement in our divisional arrangements with our partner railroads because they are extracting higher price increases at this point in time than we are.

Okay. Thank you. And then just a quick follow-up. I know this is not an exact science and there is probably lots of moving parts, but if you adjust the revenue and EBIT that you had given in terms of the effect of both the strike and the weather, you still get some [OR] deterioration in the first quarter normalized by my calculation. So I am just sort of wondering -- and I think you alluded to it -- just to be clear, are you anticipating sort of the OR to start moving favorable again, or is this earnings expectations for the year more a function of revenue gains than sort of any OR improvement as we go through the balance of the year?

Well, on the first quarter, our operating ratio, just the fuel hedging is about just under 2 percentage points of increase in OR. Last year we had 35% of our fuel bill adds at less than C$35 WTI. So that C$32 million of hedging gain that is no longer here is, as I said, about half of our increase in operating ratio. That hedging headwind, if you wish, diminishes in the last three quarters, and you will see our balance of the year with a good combination of topline growth at low incremental costs and the ability to bring it to the bottom line.

Walter Spracklin, RBC Capital Markets.

Just two questions for me. The first one is on labor but not specifically on the UTU, but rather I see at the end the year, you have two big negotiations coming up. You have got USWA I guess and then IBEW. I'm just wondering if this has created any -- and, Hunter, perhaps you can touch on this -- but is there any cascade effect that you think that the recent strike has caused and particularly if we see a settlement that is not exactly what you wanted, what that might -- how that might impact your negotiations for the end of the year?

I don't think so. I think with this section, this -- a lot better term is aberration with the UTU, I mean this was a powerful attempt own their part to move back five or six or seven years. They came to us and their original request was a two-year deal of 9 and 9 with a C$10,000 signing bonus. That does not sound like to me somebody that wants to make a deal. They wanted a confrontation, they wanted a strike and they got it. We went through this once with the CAW, and I'm proud to report that our relationship with the CAW in my view has never been better.

We're going to fight the good fight here. We're going to try to be as fair as we can possibly be. We're offered this group the same things that we had offered basically the CAW and basically the Teamsters, the engineers. We offered 3/3/3/3. If you want to do a fourth year, you get a fourth. If you want to a fifth year, you get a fourth. And that has kind of been a standard package, and we have tweaked the fringes a little bit, tweaked a couple of the rules. And I think we developed with these two organizations coming up a mutual respect. And they are going to want a little more and they are going to fight the good fight, but I don't think anything is going to get out of line from a labor standpoint from a cash gating standpoint. What it is, if it gets out of line, it's going to be after we are whipped, I can tell you that.

Okay. That is great. The second question is just -- this is for Claude -- a lot of the feedback or questions I have been getting certainly around some of the private equity activity is on underlevered companies, and clearly debt is one thing here where you have been ramping up toward your 45% target, but sort of not quite more in the 41, 42% range. Has some of the things that have been going on particularly in Canada with some of the large takeouts here with BCE, has that altered your view on where you're comfortable with that? Will we see you come up a little bit closer to the 45% a little sooner? Or on the dividend policy, I mean you talked a lot about 25% but never -- we have been hovering more around the 20% level. Is there more of an impetus to get to those levels?

I think it is fair to say we have been kind of to the extent of our success. We overperformed in the last couple of years. So, given that our dividend increase is our perspective, if you overperform, you don't actually quite make up in terms of progress for your payout ratio for instance. This year you should expect our dividend to go up again about twice as fast as our earnings, and that should be true for the next couple of years to all but get to that 25% payout ratio. And a similar story on the debt side.

This is the year in 2007 where because of a tax payment issue, our free cash flow will come down, but we are still planning to buy 1.5 to C$1.6 billion of stock back. So that is a full C$800 million or so of debt increase during the year. So we think we have a solid pace of rewarding shareholders. We do think that the pace at which we are achieving those targets is going to quicken here in the next year or 18 months, and we're not going to sit on the sidelines. We have a strong cash flow generation, and we think we have a good business model, and we will continue on that fact.

You had mentioned a capitalization program you are going to bring toward the board. Is that related to these things we just talked about, or is that something different?

Well, no, our buyback program expires in July. So when we complete it, we will go back to the board and ask for their consideration on a new program as of July when we announced our results.

Cameron Jeffreys, Credit Suisse.

Great. Claude, is it safe to assume that the rotating strikes in the past few days are negligible on the financial impact side given -- you know, versus the strike in February?

Yes, that would be correct. I think this was -- we do have costs to deploy our employees and make sure that we protected those terminals, but the impact is very minimal versus what we faced in the first quarter.

And just secondly, on the fuel hedging headwind, almost half of what you faced in '06, I guess you can about 60 or C$65 million in '06 from a hedging gain, about half of that went away in the first quarter. Is it fair to say that the majority of the remainder is going to go away in Q2, and Q3 and Q4 are going to be fairly light in that regard?

That's actually correct. There is nothing in Q4, so all of the remaining 32 or C$33 million is split between Q2 and Q3.

Fairly evenly or should it be more weighted in Q2?

I think it is actually more weighted in Q2, and then we just have the tailend in --

Tail end in Q3. Okay. Great. Perfect. Thanks. That is it for me.

Let me clarify one thing. There really was not -- in spite of some of the announcements, there was not a rotating strike. When we saw -- when we saw there was going to be rotation, we immediately, because we could not deal with that and not know where to put our resources, the first people that went out on the so-called what was going to the rotating got locked out and stayed out the whole time and nobody else rotated. So that worked well for us.

James David, Scotia Capital.

My question regarding the balance sheet was asked already, so obviously it is an opportunity for leverage. I guess the question is on, Jim, when you talk about the second half -- sorry, when you talk about the full year, there is sort of an underlying assumption, and presumably you have to make this in the planning sessions that the housing market will stabilize. But can you perhaps speak to what kind of contingency plans you would have in place in the event that the housing market does not cooperate with your lumber franchise and with construction materials?

Well, as I said earlier, certainly there are areas of opportunity for us that are greater than what we had expected clearly on the bulk side. And so one of the opportunities for us would be to try to move more of that product as the demand for that product grows, and that is what we are looking at right now for the next three quarters. I'm not projecting any kind of a massive turnaround in the housing market. I think most people are saying, hoping that at least their customers are saying that they believe that it has stabilized at this level. And so that is the kind of run-rate going forward that we are looking at in forest products.

If you've got to continue culling lumber out West lumber producer, does that stuff get hauled, or does it just end up getting stockpiled if it is not moving into the housing market?

We're working on numerous opportunities for the product out West with our customers. We have a significant amount of export opportunity that we are looking at both for us to rail it to the West Coast for transshipment. But we are already doing and shipping logs in containers where we are handling the load door-to-door with our international freight forwarding operation. There is opportunity there.

The wood pellet business is something we have not been involved in. That is quickly growing as an opportunity for us. So we are not -- our customers are not just sitting there either with their mills and their opportunities waiting for somebody to start building more houses. They are looking for opportunities to manufacture new products and sell new products, and we're working with them actively to make sure that we ship it. So everybody is hustling here to find something to do with this wood during this downturn.

John Barnes, BB&T Capital Markets.

Most of my questions have been answered, but Hunter, can you remind us -- I had to jump off for a couple of minutes -- but just after you get done with this contract negotiation with the UTU and get either the regional agreements in place or what have you, what is next? Is there any major labor agreement left out there?

Well, there is two that are this fall -- the IBET, which is basically the signal communications people, and then there is the steelworkers, which is basically the track maintenance people, and that will be coming up, and really I don't want to be too optimistic, but we don't anticipate a lot of issues there.

And what would be the difference in those negotiations and why you would be more optimistic versus what is going on currently?

Well, I think we have developed a certain respect and trust between those organizations. I think we have -- I think both of us could sit down today and we could put a bracket around a point and a half of where the wages might fall. Those folks are certainly willing, if there is something in it for them, to give us some work rule helper relief. We will turn around and give them quality of life issues if they need those. There is a lot more flexibility at the table with that type dialogue.

I mean I can go to an organization and say, if you cannot give me anything work rule wise, I will pay you three. If you give me a lot in work rule relief and I can convert it to productivity, I can pay you five. Our highest-paid workers on the system by far right now are the US operating (inaudible) with the hourly agreements. But they produce much more than others. So there is that quid pro quo and that respect and that what is in it for me type arrangement that gives us hope going forward.

Okay. And is there any other agreements in '08 that are looming?

Let's see the engineers come up at '09, which is going to once again -- I don't anticipate a lot of issues there. There are patterns set to some degree, and I think what people have learned to a degree and I think maybe the UTU will learn it this time, and maybe the arbitrators and maybe all of us that deal with labor in Canada, if we don't sit down and file these ourselves and they know where they are going to end up with an arbitrator, then it's going to be like the US systems where agreements stay out there five or six or seven years or get warehoused in the mediation board. So it sends a real signal that if there is not any consequences, that we can just sit here and not have to make our best efforts to get agreements, then the government is going to be in the business of giving us labor agreements, and I don't think that is what the government is there for. I don't think that is what we or labor wants.

Okay, very good. Thanks for your time. Nice job this quarter.

Randy Cousins, BMO Capital Markets.

Claude, I wonder if you can help us a little bit with this new other revenue line? In terms of modeling it, should we think of it as kind of something that is going to grow with it exactly in line with the revenues of the railroad itself? Or can you give us some suggestions as to how to think about this line item? And I guess as a related point, is this where the ships are now located?

Yes, we group all of the expenses that are non-rail in that other revenue line. So you would have passenger revenues in there. You would have inter-switching revenues, and you would have all of the new activities that Jim referred to under CN Worldwide North America and CN Worldwide International. So that includes the ships, the docks, the warehousing, the transloading, etc. In terms of growth, as Jim said, we think we have potential there, and so you should expect a little faster growth on this line than our overall rail business.

So when you guys gave the guidance, I guess the guidance is reverencing this new restated base as well, or is this just a reallocation issue?

No, when we provide you with all of the information, we have reclassified both this year and previous years. So it does not impact in any way, shape or form the growth rate.

Okay. So if I'm looking at the slide that has got market outlook remains strong and we've got the little triangles indicating growth, that is growth for the year or that is growth for the balance of this year?

Balance of the year.

Okay. And then the last thing, Jim, if I caught that right, did you say that the fuel was -- the fuel surcharge was actually a negative in terms of revenue for Q1? Can you give us some sense as to if oil prices stay where they are today, how that is going to work in terms of the new formula when we comp Q2, Q3 and Q4?

Well, the first question, yes, we were down. We were down in the first quarter as a result of the lower fuel surcharge. Now there's one thing, the thing that is going on here, as a custom, we have two fuel surcharges out there, a higher one and a lower one. The higher one being our original fuel surcharge, which we modified twice lowering the curve on that to more accurately align that fuel surcharge with fuel consumption.

Now there has been some conversion from the higher fuel surcharge to the lower fuel surcharge during this quarter, which had a much greater impact on it being a negative than the price of WTI. Had everyone been on the same fuel surcharge throughout the quarter, there would have only been a slight percentage change in March, January and February and our 7401 would have been relatively consistent year-to-year. So we are not assuming in that 5 to 6% top-line growth rate that we talked about that we have any impact from fuel. Claude, I think it is C$60 --

C$65.

C$65 that we have modeled into that number. So there will be slight variations up or down in the event that crude were to trade either up or down from that C$65 figure.

Okay. So bottom-line here is that the guidance here does not implicitly include any kind of fuel surcharge adjustment component in the revenue growth guidance?

That is correct.

Ken Hoexter, Merrill Lynch.

Can you talk about -- I think I'm just a little confused on what Jim was saying before about 5 to 6% revenue growth, half comes from pricing, half comes from volume. But then you mentioned you are moving to 4 to 5% pricing. I just want to understand are you then changing your volume outlook, or are you increasing your then revenue target?

As I said, the 4 to 5% is more of a long-term guidance in terms of what I think the market will bear in terms of pricing. It is not conceivable that I would be able to change that from 3% to 4% to 4% to 5% in one quarter. It is something that takes some time, so that's only guidance in that that is the kind of price range that I think is achievable on a go-forward basis. The 5% to 6% is where we expect the year to come in now in terms of revenue growth made up half from volume, half from price.

But if you are already doing that level of pricing, are you then suggesting the back half might not be as strong if you are saying it's going to take time to get to those levels?

Well, half of 6% would be 3 and the other half of 6% would be 3, so 3% price, 3% volume would be where I think the year is going to come in now. Going forward, I would hope that the market is such that we will be able to achieve a higher price take in the 4 to 5% range.

Okay. So you are suggesting that the second half will not be stronger than where it is right now as you are already posting the 4% to 5% pricing?

I'm not suggesting the price will be 5% in the second half of this year, correct.

Okay. Thank you. Then I want to come back to Claude. At the beginning of the call, you commented that there was some sort of pension cost decrease in the first quarter. Labor and expenses, labor and fringe came in a bit below where we were expecting. Is that something that was one-time in nature? Was there some adjustment made that should be then reflected in the back half of the year, or is this kind of a run-rate level? Can you describe kind of what that pension adjustment was?

No, that pension adjustment is as expected in that we have basically an accrual on an annual estimate of what our pension expense is. So our 2% reduction is the only one-time factor in there that I could point out to as we did have the lower-cost due to a strike employees, which were not getting paid while on strike.

So other than that, it is good focus on over time, good focus on productivity. Our headcount year-over-year on an average basis is down a little bit more than 2%, and we are continuing to bring efficiency levels so that this very important expense category is well behaved.

So, Claude, then just to understand then, I think you said there was a C$30 million strike cost impact. Does that mean costs would have been C$30 million higher on that labor line if the employees had come to work?

No, no, I did not say that. The amount for the employee is less than C$10 million, I think something like 7 or C$8 million at most.

So there was not anything special or significant on the costs then on the labor and fringe side?

No.

[Sal Vital], Calyon Securities.

Just a quick question on forest products. I'm looking at the yield growth here, and that was 9%. Pretty impressive. Can you give a little bit of a breakdown on how much of that was mix and what the pure price there was and what your expectation for pure price and forest products would be for the next few quarters? Any color you can provide there would be helpful.

The price increases that we are achieving and those which we expect to achieve in the future are pretty consistent in all of the commodity groups. No one group is significantly different from the other. The yield change in forest products this quarter is clearly driven by the length of haul where much more of our business is moving in Western Canada versus Eastern Canada. In fact, our length of haul in forest products was up 8% versus an average increase for the whole company of 3%.

Okay. Thank you. Just one more clarification if I could on the share buyback. Can you just repeat that? Was that 1.5 to C$1.6 billion for this year for 2007?

Yes, that is correct. That is the range. At the pace we are buying, we bought C$345 million in the quarter, and that is the slowdown from the previous quarter. So for the full year, if you look at where we are, you should expect on the range of 1.5 to C$1.6 billion.

Okay. And looking forward into '08, can we make any type of estimate as to whether that would taper off, or can you provide any color on that?

Well, our first call on cash is to invest back in our business, and on an annual basis, we review where we stand and put the cash flow to best use for our shareholders. So, at this point in time, it is a bit early to give you what we will do in 2008.

Understood. Thank you.

Bill MacKenzie, TD Newcrest.

Just a question on headcount. As we go through the rest of the year, it sounds like volumes are going to ramp up and with Rupert ramping up in Q4, can you just give us a sense as to for the full year what we should expect on headcount in terms of what type of delta year-over-year?

We're continuing to manage our opportunities in terms of attrition and the proper planning of our workforce such that we expect our headcount to come down at about the rate it has been coming down for the last several quarters now. So in the range of 2% is not an unreasonable assumption, and that is not going to move much with volume up or down in that timeframe.

Okay. Great. Thanks. Second, just a house-keeping I guess on tax rate. I guess it was around 32% this quarter, and I think in '06 for the full year, if you adjust for some of the tax adjustments, we were running at about 33.7. So that 32, 34 range that you talked about before seems to be where we are at now. But is 32% kind of the low-end of the range more normalized number, or will the tax rate creep back up as we go through the year?

We have given guidance that our tax rate would be 33 to 34, and so now this quarter we are at 32%. We have the few elements which happened to bring in a percentage down, but our full-year guidance of 33% or so has not been changed.

There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Harrison.

Thanks very much, Julie, and thanks very much for joining us. We will hope to see most of you at the analyst meeting in May 23 and 24. Have a nice day.

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