Canadian National Railway Co (CNI) 2007 Q3 法說會逐字稿

Welcome to the CN third quarter 2007 financial results conference call. I would now like to turn meeting over to Mr. Robert Noorigian, VP, investor relations. Ladies and gentlemen, Mr. Noorigian.

Good afternoon. Thank you for joining us today. With me is Hunter Harrison, the President and Chief Executive Officer, Claude Mongeau, Executive Vice President and Chief Financial Officer, and Jim Foote, Executive Vice President of 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 or may not materialize and is subject to the risks described in CN's MD&A and other disclosure documents that are available on our website. As such, our actual results could differ materially. Reconciliation of any non-GAAP measures that we discuss today will be posted on our website at www.cn.ca. After the presentation, we'll take questions from the people listening on the phone. Could you please identify yourself with asking -- when you're asking questions and please limit yourself to the number of questions that you ask.

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

Thank you, Bob, and good afternoon, everyone. Thanks so much for joining us. I trust that you have seen our press release with the results. I'm going to ask Claude and Jim in a few moments if they would go through them in some detail. We had -- I think it goes without saying we had some real challenges the third quarter. I was very pleased with our operating results, given some of those challenges, with the Canadian dollar and with the weakness in our foreign products segment, fuel prices less the hedge, but I think all things in this group performed very admirably. Our EPS came in at $0.96. That was with a 3% favorable tax benefit. So if you take the tax benefit out it was a relatively flat or down about, I guess, 1%, but overall pretty good performance. Operating ratio came in at 62%. That's about 3.5 points higher than last year, but I would be -- point out to you that last year was a world record for CN with the best quarter that we've ever had that we're lapping, so operating ratio of 62% is still far, far ahead of the -- of our peers.

A couple things that -- of a longer-term nature that happened in the quarter that we were very encouraged and exciting about. All of you have by now seen the announcement of EJ&E acquisition, the shortline bell railroad that goes around the perimeter of Chicago. We are very excited about that. The operating group has been working very diligently to put the operating plan together. We are hopefully optimistic that this will be a -- hopefully a minor transaction and can do a lot to clear up congestion that we've experienced in the Chicago area. Prince Rupert, the first ship is still due October 31st and we're looking forward to that pickup and in business. We've talked to you before about the -- about our new yard in Memphis, Johnson yard. It's coming along ahead of schedule. Our siding initiatives in western Canada, which -- where we're really experiencing a lot of the growth in the Company. With the exception of the lumber in western Canada, particularly our bulk business is going very, very well and these sidings are giving us an opportunity to again increase train size and productivity, and so I'm very pleased. We still have a couple of issues to deal with between Prince George and Prince Rupert, but we're right along the way there. So I'll have a few comments at the end.

So with that let me ask Claude to run through the financials for you.

Thank you. Hunter, as you said, on balance it's a pretty good quarter given some of the economic headwinds that we faced during the quarter. Our reported EPS came in at $0.96, which is 2% higher than the last year. This included a $14 million gain from tax benefits from adjustments that we made during the quarter. If you exclude this $14 million or $0.03 our EPS on an adjusted basis was $0.93. which is down only 1% and that's pretty good performance, given that the revenue picture during the quarter was a tough one from an economic standpoint.

Revenues overall for us were flat, but 3% adjusted for exchange. Really, as Jim will give you more detail, the strength in our petroleum and chemical franchise, our automotive business, our bulk sector, has been masked by the weakness in the forest product sector and to a lesser extent minerals and metals and intermodal. Forest products really during the quarter was a tough environment for CN to operate in. The housing starts in September on an annualized basis were at just above 1.1 million, which is a low for many years, and we move a lot of lumber we move a lot of newsprint, and it's tough from the standpoint of our business not to be down on a year-over-year basis. As Jim will report, we are holding our own and we're even gaining a little bit of market share, but overall that's what explains our volume down offset by good pricing for a total revenue outlook of 3% for the quarter.

Turning to expense now, our third quarter expenses came in 6% higher than last year, 9% if you adjust for the benefit of exchange. If I go down the expense category, our labor and fringe costs were up 9% during the quarter; really a few things, higher wages and compensation. We also had higher head count during the quarter. Our head count increased roughly 2.7%. Also stock-based compensation is up on a year-over-year basis. Purchased services and material is [well behaved], up 3% on a FX-adjusted basis. Depreciation and amortization also, up really driven by our investment in the plant and in our franchise. Fuel, despite volume declines, is up a full 14%. Really WTI is up but also crack, the refinery margin is up until 20% on a year-over-year basis and the third quarter of 2006 was the last quarter when we had hedging gain to the tune of $10 million last year. So obviously we don't have that benefit anymore and that explains part of the increase on a year-over-year basis.

Equipment ramps are up. That's the net of expense and income. Our expense are well behaved, our velocity to our car fleet is improving, but this was more than offset by a significant reduction in car hire income. The cars that we use to move forest products, for instance, attract significant car hire income when they move offline to other railroads. So as we have less volume and also with our peers improving in terms of their velocity, we're collecting less car hire income and that is why the expense category overall is up on a year-over-year basis. All of this with a revenue up basically 3% effect adjusted, expenses up 9% effect adjusted, you see our operating ratio increasing to 62% for a quarter. Still a very good performance and testament of the strength of our precision railroading.

Turning to cash flow, year to date now -- not for the quarter but year to date we are at the $193 million of free cash flow. This is down from last year quite a bit, but the story, as we discussed in previous quarter, almost $600 million on a year-over-year basis of decline is explained by the fact that we have cash tax payment, which is both for on account of this year's cash taxes but also installments that were really due to be paid on account of last year's income tax, so we get the double whammy effect. On a go-forward basis we'll only have about half of that cash tax payable going forward, but that explains about 600 -- or close to $600 million of the decline. Other than this obviously lower profitability but also higher dividends. Our dividends have increased and year to date we are paying out to our shareholders roughly $60 million more than last year. We're still confident between now and year end, including, as I'm going to talk about in a minute, the gains in the proceeds that we anticipate from the transactions that we have announced for the Central Station and the EWS that come in overall for the full year ahead of $800 million, but we need a strong fourth quarter to get there.

Just to wrap up, in terms of our outlook for the full year, year to date, given the challenges that we face, to be flat in terms of EPS is good performance. We expect the headwinds to continue into the fourth quarter, especially the dollar, which as you see on your screen has surged beyond parity. The -- and also fuel prices, which last Friday were just under $90 per barrel. The exchange alone for us, if the dollar was to stay at around $1.02 for the full quarter -- last year the dollar was trading at $0.88 in the fourth quarter -- just that on a year-over-year basis is a $0.14 increase, which means about $0.07 of EPS headwind from the conversion alone.

So between that and the fact that we don't recover on higher fuel, but with a two month lag, we have a challenge in the fourth quarter to address, but the business is picking up. We expect good volume, good growth -- Jim will talk to you about it -- and that should help us offset the issues we are facing from an exchange and fuel standpoint/ And with the closing of Central Station and EWS, which together should give us around $0.20 of EPS, for the full year we should have 5% EPS growth. But excluding the gain on the Central Station and EWS, our overall full-year EPS outlook is now flat on a year-over-year basis. Good performance in a tough environment, but as we see this going forward, we think these issues will clear up and when they do clear up, we'll have the potential to return to better profitability momentum.

With that, Jim.

Thank you, Claude. I'd like to go through the third quarter revenue page with everyone now and as always, when I'm talking about the revenues, I will do that on an exchange-adjusted basis. For the quarter we achieved top line growth of 3%. Four of our seven business segments grew, three of which grew at double-digit rates. Intermodal was down slightly and the declines in forest products and construction materials segments reveal the pressure on these markets from housing-related issues. Price during the quarter was the biggest contributor to revenue growth. On a per-unit basis our same-store prices increased over 4% versus the same period last year, average revenue per car increased 5% and cents per RGM increased 3%.

On a mixed basis our average length of haul increased by 3% during the quarter due to the stronger system average growth from our Western Canadian franchise. That drove revenues up approximately 2%. Volume was down. Revenues declined approximately 2% due to lower volumes, as carloadings were down 3% and revenue ton miles declined 1% in the quarter. Fuel was also down. The revenues associated with our fuel surcharge were also down in the third quarter, solely as a result of the lower applicable crude prices this year versus last year.

Going through the various segments in a little greater detail, our merchandise segment was down in total 1%. However, petroleum and chemicals was up 10%. Very strong quarter for petroleum products, low sulphur diesel fuel oil, gasoline, jet fuel shipments all increased. Our [diloen] shipments to the oil sand region of western Canada, from both the west coast and from Texas, continue to show very strong increases, although on a very small base. Our LPG shipments were up in the quarter as demand for butane and propane outpaced last year. And on a chemical side -- on the petrochemical side, imported methanol over the west coast Port of Kitimat drove positive results and offset weakness in chloralkali and other industrial chemicals.

The metals and minerals segment was down 4%. Demand for metals products was up in the quarter. Rolled steel products, pipe, steel construction materials like I-beams, increased as did aluminum slightly. That was offset -- that strength, in our business was offset, as weaker housing construction materials, roofing granules, cement, et cetera, were down as were weaker scrap steel shipments. Shipments of iron ore were down in the quarter, as manufacturers took maintenance down time in this period.

Forest products, down 9%. Our forest products franchise continues to be impacted by the weak market conditions for these products. The weakest demand was in lumber and panels, where carloads were down 10% and 25% respectively. I can't add much to what's already been said about the U.S. housing market. The paper segment saw weaker North American demand for all grades of paper and there were production cutbacks at five major CN-served facilities. Carloads were off 7% in paper in the quarter.

Pulp shipments on the other hand were relatively stable in the quarter, as worldwide demand is strong and there are record prices for pulp creating export opportunities for Canadian manufacturers. Our automotive group up 6%, another good quarter for automotive business, driven by two large initiatives we've talked about in the past, one the new Suzuki traffic that we've been handling and the other servicing GM's new Lansing facility. Our Ford business has also been very strong during the quarter, as the models produced at -- Ford's models produced at CN's plants have been selling well and we're handling some increased volumes to western Canada.

The bulk business, as Hunter said, very strong outlook and very strong performance of bulk in the third quarter. Bulk in total up 10%, with coal leading the way up 10%, coal Canada up 16%, a recognition there of the new mines that have come online and the continuing demand for Canadian metallurgical coal. The U.S. coal down, again reflecting this short-haul [Potover Basin] coal move to the Tennessee Valley Authority facility, which has been showing declines throughout the year from a volume standpoint. Again, though, a very short-haul move for us and therefore, not much of a revenue impact.

Grain and fertilizers, they continue to show a positive result, up 11% in the third quarter. Canada, very strong demand and a very good quality wheat crop is driving good volumes to our CN-served ports. And in the U.S. shipments of soybeans, ethanol, DDGs and corn shipments from the U.S. into Canadian markets were very good during the quarter, although that offset gains -- or opportunities that we had for corn movements to poultry and export markets in the U.S. And fertilizer and potash shipments have also been very good.

Intermodal, down slightly, 1%. Overseas clearly a tale of two cities depending upon which coast you look at. Our volumes on our west coast port for import international containers very strong. However, some declines in our east coast port at Halifax where we've seen some traffic shift to carriers that are making Montreal their port of call versus Halifax, as well as some changes in service and marketing strategies by some of the carriers there. The domestic business, basically flat during the period.

Going to the next chart -- as I always refer to this as the chart that it helps put in perspective for Bob Noorigian what I just went through -- shows that in most business segments we saw growth, which would have driven our carloads up 2%. But taking the specific items that I just talked about and putting them in a chart form to describe the carloads impact, forest products, as I said, down due to the U.S. housing market. Our iron ore business, though, was down during the quarter, but this was clearly related specifically to customer maintenance issues at their mines and we expect to show very solid volume growth for iron ore in the fourth quarter.

Similarly, this TVA Potover Basin coal issue phases out as the fourth quarter progresses, so we'll see better carload growth in all of our coal segments. In the intermodal segment, the opening up of Prince Rupert and the growth of international containers there will turn our intermodal franchise business around. We're expecting volume growth in the 5% to 10% range in intermodal in Q4. And U.S. grain, we've already seen the impacts of a very, very strong corn crop in the U.S. We saw weaker corn shipments in the beginning of third quarter, but they have begun to turn around and have so far in the month of October we're seeing very strong orders for grain.

So in conclusion, taking in summary the revenue outlook, obviously our pricing as strength continues, the guidance that we have provided with a slightly stronger pricing environment in the range of 4% to 5% up from a range of 3% to 4%. The pricing on a per unit basis, as I said earlier, 4.5% puts us right in the heart of that range. The outlook for bulk is very, very good in coal, grain, sulphur and potash. We're expecting to see volume growth in the fourth quarter of 7% to 8%. The mixed outlook in merchandise will continue, as again I'm not any more of a predictor than anyone else is on the forest products market, so therefore, we're looking for that weakness to continue, although we are certainly always in the hunt for new opportunities to offset that declines.

Market share gains from truck, like the white paper initiative that we've been opening up with our warehouse strategy, our trucking and our rail network, leveraging our oil sands opportunities, with new opportunities in the steel and pipe and aggregate businesses there. And probably the most exciting news, 6:00 a.m., on October 31 the vessel -- first vessel pulls -- first Costco vessel pulls into Rupert -- Prince Rupert. We are expecting, and have certainly a confirmation at this time because the boat is en route, that we will have very good discharge volumes from that vessel. And those discharge volumes from Costco should be enhanced as we go forward because we have an arrangement with [Hangin]. who'll be doing an arrangement of sharing a space on that boat with Costco, and that will be adding volumes to the discharge there as we go forward.

So thank you very much and with that I'll turn it back to Hunter.

Thanks, Jim and Claude. Well, I think you can see that we have faced in the third quarter, and will face certainly in the future to some degree some very challenging conditions, but in spite of that we continue to invest for long-term growth. As Jim said, I don't think the dollar's going stay this way, but I can't tell you when it's going to turn. I don't think housing starts will stay this way; I can't tell you when it's going to turn. But can I tell you we're prepared and continue to invest in Rupert, EJ&E to be able to deal with this business. And the best parallel I could draw to this quarter is, last year from an operating ratio standpoint if you draw a parallel to golf, we shot 58 under ideal conditions and it was a course record and a world's record. This year with bad greens, a driving rainstorm, bad conditions, we were able to 62 and nobody else is coming close to that. So I'm very pleased that we've got this strong operating model and a bunch of great railroaders or we would not have been able to produce these type of results with these type of challenges that we face now.

So Joe, with that we'll be happy to answer questions the group might have.

Thank you. (OPERATOR INSTRUCTIONS) We have a question from Ed Wolfe from Bear, Stearns. Please go ahead.

Hey, guys, it's Scott (inaudible) in for Ed. Good afternoon.

Hi, Scott.

Couple of quick ones. One, Claude, did you break out the -- with the Central Station and EWS, I know you said $0.20. Did you break out how much for each? I may have missed that.

Actually I haven't because the numbers in the end will vary depending on the exchange rate of the British pound and the finalization of our accounting for the Central Station, which includes the sale lease back. So I think overall it's around $0.20 and we'll give you more detail when we have actually done all of those entries in the fourth quarter.

Okay, great. On the head count side, up about two and half per -- over 2.5% with volumes down 3%, I know last quarter you talked about some -- taking on doing more contract work. How much of the head count is for that and how much is for ramping up for Rupert and how do we think about head count going forward?

Well, there's a couple things I can bring out. The contracting impact from an engineering standpoint so far is about 160 people. We've talked about for some time that we're going to be contracting more in and that's cost to us. We're also going -- we have the demographics in the west. We have a little older employee. I think we're about -- the average age is about 47. So we are doing now hiring to replace retirees and we have an overlap there. So when 300 or 400 people are going to retire for some six months we have 800 people instead of the 400 that are leaving. Now one of the things that we're doing in the belt tightening exercise is really reviewing the training we're doing for the people, and we've, I think, now come to the conclusion that we can give the same amount of hours of training but do it in a three to four-month timeframe rather than six months to help that situation. And then a few of the oth -- some of the other employees are the result of just ramping up CN Worldwide and CN Worldwide North America to the new business. So that gives you some kind of flavor for the head count because that is -- that's bucks a trend that we've been going the opposite way for some time.

All right, that's helpful color. And is that 2.5% a good run rate to use going forward?

No, I think we're going to come down more closer to flat going forward because some of these items are one time in nature. The engineering employees is a good example. We may continue to see increases there but not to the tune of 160, and similarly for the running trades. Once you get your complement of people in training, we may have 400 or 500 at the moment in training, you don't need -- you just replenish them and they go into the work force and we don't go higher than what we have at the moment. So flat to slightly up depending on volume would be a better number to use.

Okay, that's helpful. And just one last one for Jim. On the revenue per carload up 1% can you just -- I know you gave -- can you just give again the split on fuel price and mix and what exchange rate -- how that comes into play and if we should be thinking about that going back up as we get to fourth quarter and beyond?

Well, excluding exchange here again, the numbers that I provided was that price would have been up 4% -- revenues up 4% from price, up 2% from mix, down 2% from volume and down 1% from fuel.

Okay. That's helpful. Now I mean -- and that 4% for price, that was the same as last quarter, is that -- or (inaudible)?

Right. That's -- again -- again on a per unit basis -- on a per unit basis we've gone up slightly into the range of 4% to 5%. 4%, I believe, is what we -- exactly what we said last quarter and I believe the quarter before. So that's the range and I'd like to see that over time move closer to the 5% in the range, but I can't tell you exactly when that will happen.

Okay. But we should just stay at these depressed levels until the exchange rate normalizes?

A 4% price?

No, the total reported yield -- carload -- revenue per carload.

Actually when you look at exchange alone in this water, it's a headwind that is quite significal -- significant to the tune of 4%. In the fourth quarter it's going to be even more than that, like -- just as I said earlier and I was talking EPS, but in the fourth quarter the dollar last year was $0.88 and it's trading at $1.02 now. That's a whopping increase and that's having a direct impact on our reported revenues.

Right. On a reported basis we will have a larger impact from exchange in the fourth quarter than we did in the third quarter this year and -- I mean, if you want to try and put it in perspective to try and understand it, we actually had a slight positive in the first quarter of this year and we will have almost double the impact in the fourth quarter from exchange if you assume that it stays in this $1.03, $1.04 range. So that's good. That's why I try to strip it out when I do my explanation, have apples to oranges, otherwise it's so variable.

Got you. All right. Thanks for the time, guys.

Thank you. the next question will be from Randy Cousins of BMO Capital Markets. Please go ahead.

Afternoon. Jim, I wonder if you could -- you got the first boat coming into Rupert. I wondered if you could answer two questions for us. Can you give us indication -- I guess it's calling into three ports, Rupert, Vancouver and Seattle. How many of the boxes are going to be dropped -- or what percentage of the boxes are going to be dropped in Rupert and how many of the boxes will be making their way into the United States versus staying in Canada?

Well, I think that what we're looking at right now in terms of just dealing with TEUs, at least for this first call we're looking at a discharge of about half the boat. And in terms of the final destination for those boxes, my original plan here was to have about somewhere between 70% and 80% of that going into the U.S. I have not, to be honest with you, seen the final manifest, but I would assume that they are still in that range.

And has Costco or Hangin given you a sense as to how they're seeing the service develop out or what they're looking at in terms of order flow over the balance of this quarter and into 2008?

Well, this is kind of the -- this is kind of the run rate -- well, to be honest with you I'm very excited about the first call that the volumes are this high to be honest with you, because this is kind of the run rate that we were looking at to kind of -- to kick off the service, so to speak, and to have it there on the first and appeared to look like on the next vessel,that's a good sign. There's clearly in the shipping community -- either the manufacturers or the receivers of freight -- a desire to want to use Prince Rupert because of all the benefits that we've talked about, congestion free, et cetera. So it's not only the steamship companies that have been there to look at it, but the big box stores and everyone else has been up there as well. So it looks good so far and we're on track here and very excited

So you're not seeing any -- the run in the Canadian dollar, have you priced this in U.S. dol -- you're not seeing an FX impact in terms of the viability of Rupert?

No. No. I mean it's -- we've certainly had anticipated -- we had anticipated the volatility in the dollar, not to this extreme, and marketed and priced the product accordingly.

Great, that's good news. Second question and my last one, I wonder if you guys could comment on the CTA proposal with reference to the hopper maintenance, how it's going to impact the results, both this year and I guess next.

Well, this year the decision of the CTA has been safe, so I think it's not going to have any impact into this year. But the government is on the record that they think that the estimate for the maintenance adjustment is about $2 a ton, and so there's going to have to be consultation and technical analysis with the CTA to arrive at that number and it could be up or down around $2 a ton.

What would that mean to CN?

I forget the exact number, but if I recall it's on the order of $20 million a year or so.

Okay. Thank you.

Thank you. The next question will be from Scott Flower of Banc of America Securities. Please go ahead.

Yes. good afternoon all. Just wanted to see -- obviously this has changed a lot more than anyone thought on exchange rate, but obviously exchange rates tend to, on a lag basis, effect a lot of the product loads and that tends to take place over six or nine months. I'm just wondering, there seems to be a little bit of an east-west skew in your business right now where the west obviously has continued strong with bulk and east, for all sorts of reasons, is a little weaker. Does the currency shift accentuate that? Where does currency actually -- (inaudible) the report of financials but affect the product flows -- obviously paper and perhaps pulp -- but are there other products, like industrial, that get impacted and how can you actually manage some of the operational challenges as you get a skew of business stronger in the west, a little bit weaker in the east?

Well, Scott, that has been the challenge for us in the quarter where we've had very, very strong business segments in western Canada and the bulk businesses that have been coming at us very quickly. In some segments like our coal business, et cetera, we are 20% ahead of what we had budgeted for the year. So we have been working very hard and diligently there to meet our customer demands for the significant growth we're seeing in the west. Now the east obviously does not have similar characteristics in terms of its markets and therefore, it has been softer to begin with. And before the dollar appreciated take a look at the issues associated with the soft wood lumber agreement where a lot of the lumber had already been -- manufacturing had been transitioning from eastern Canada to western Canada, and now paper manufacturing is clearly impacted by the exchange rate because there is clearly a -- manufacturing done in the Canadian dollars and the market for the product in U.S. dollars.

And there have been cutbacks and there have been curtailments by our customers, five of which were new in the third quarter, and unless something happens with the exchange rate, those shutdowns could be of a very long duration. Our challenge is to hustle around and find new opportunities to take their place in eastern Canada, and that's what I challenge my sales team to do every day and I'm optimistic we'll find new business opportunities in the east to grow just as fast as we have in the west

I mean, Hunter, obviously is it just an infrastructure issue? Is there anything that tactically you could do operationally to try to -- in addition to Jim getting his sales teams to try to -- to get back filled to try to manage that skew, which looks like it may get worse before it gets better?

I mean it's not -- it's a clear division Jim described between east and west. We've adjusted train sizes in the east. We've taken pairs of trains off in certain markets. We rerouted traffic between Toronto and western Canada, different route schemes. So the whole operating plan effectively in Canada is being redesigned and has been redesigned as we've moved into this over time. So, as we go into -- right now we're heavy into grain, we're heavy into potash, we're heavy into all the bulk commodities in the west, but that's the way the model adjust accordingly. So from that standpoint it's -- it's relatively manageable. Now you have the fixed assets, you got people in place for the business, you got locomotives there, you've got cars there, but from a variable cost standpoint it's certainly manageable.

And the last question and I'll let someone else have at it is, I know that Claude mentioned in his discussion of car hire obviously that both in terms of lumber cars going less so into the U.S. as well as some improvements in the U.S., when shall we expect some of the car hire income to last? Will that be fourth quarter, because if I look at last year your comps seemed to get easier in fourth quarter, or is that going to be something we'll continue to see into the first half of next year? I'm just trying to get a sense of when I can think about the car hire income issue becoming more normalized?

It's two things. One, if you just look at it from a -- just the lap basis or number two is when the forest products comes back stronger and so you might have a double effect. I mean I start to read, it's the same thing that you all read about the lumber picking up fourth quarter of '08, first quarter of '09 when the predominant one largest area there is clearly center beam cars, lumber cars, which are quite expensive from a car hire standpoint. I think we have like 1,800 parked as we speak, so if you can look at a car that's getting $25 or $30 a day and you've got 1,800 of them parked, well if you start lapping one of these quarters at the same time when business picks up, you'll see a big swing in the car hire counts.

All right. Thanks very much.

Yes, sir.

Thank you. The next question will be from William Greene of Morgan Stanley. Please go ahead.

Yes, hi, good afternoon. I'm wondering if you would know the answer to this and that is, can you tell how many carloadings were affected by the change in currency? In other words, not thinking about the revenue per car impact from currency but how many carloadings maybe didn't go this quarter as a result? Is that something you can tell just looking at what shut down on the line this quarter?

That's -- Bill, that's very, very, very difficult. I don't think that -- I think it's just really vague kind of numbers that we look at that we think the dollar is in the overall impact and how much is the dollar, how much is the economy, how much is shifts, that's very, very hard to determine.

Yes, that's what I thought, I just thought I'd ask anyways. So then as a follow up to some of the questions asked on productivity, if we look at things on a cost per GTM basis, it actually went up by almost 6% this quarter excluding fuel, and so I'm wondering if it's sort of a sign that maybe that's just -- is that all mix or is that a sign that maybe some of the productivity efforts that CN has been renowned for for so long, you've kind of gotten as far as you can on that. Without volume growth there's not much more you can do.

Well,I don't know if it's volume growth. I think it's -- number one it's return of volumes. But the issue become when's you gear up for certain volumes when times are good and hard times happen, you can't just get rid of the assets that you've bought. You've got locomotives parked. you've got cars parked. Those things you can't impact. Now, if you can peel back and look more, when you start take the volume out of the numbers, the productivity numbers all continue to improve. So it's more of a volume-driven issue than it is anything than productivity. Now having said that, I think we said to you last year that we were at 58 or 62. We're probably not going to 50. So and as we've said before, we'd like to grow this business and when we get in better economic conditions and a little favorable dollar in forest products, housing starts, and those things we can, but I don't think it's any sign of any slippage from a productivity standpoint.

Okay. And then Hunter one last question for you. Just you've now done a number of acquisitions over the years. Is there a lot left in terms of small acquisitions that you can tuck in here, and how do you think about acquisitions that are noncontiguous?

Well, I'm not sure that -- well, number one, ones that would potentially be that are noncontiguous are very limited, number one. Number two, I don't think that's necessarily an ingredient. We've said we do a pretty good job of railroading. If we can buy a railroad at the right price and make a buck off it,we'd certainly take a look at that, but obviously the small niche acquisitions, given what we've done the la -- we've done now about $7.5 billion since '95, they're running down. So with the exception of a larger transaction, those things are not going to be available like they have been.

Thanks for your help.

Thank you. The next question will be from David Newman of National Bank. Please go ahead.

Good afternoon, gentlemen.

Hi, David.

What do you anticipate the fuel headwind could be on the top line in percentage terms in Q4 and as you look in 2008? And would you anticipate that there'd be any pushback from your customers given the tougher economy, especially given you guys have taken 4% price increases?

Well, before the answer the one about the -- look, customer could pushback in whatever area it is, okay? They don't like 1%, they don't like 2%, they don't like 3%, or they don't like 4%. So, it's a marketplace at work out there and the customers that are using us are using us because we got all things in, the best service for the best value. If we don't do that, we're not going to be able to take the price increases.

Does the bottom get tougher, though, Hunter?

Well, it's tough today, it was tough last year. When chippers -- and I love them, they're why we're here so, let me qualify it with that. When they've gone for 20 years without price increases and then if we walk in the door and say you're going to have to start taking increases, it doesn't set real well with some of them, whether you're in the Canada or you're in the U.S., but that's kind of the market at work.

In turn, the revenue generated from fuel surcharge in the fourth quarter, it should reverse itself from the third quarter as the price that's tied -- that calculates fuel surcharge will be higher in the fourth quarter of 2007 than it was in 2006. I think the crude was, what up 8% or something like that in the fourth quarter and I just mirror exactly what Hunter said. Customers would always like to see lower rates.

You should see a little bit of a negative spread, though, at $85, though, correct, WTI? Until you catch up, I guess, in the new year.

Yes, there's a two month lag.

Right, right.

So the 8% that Jim was quoting is on the basis of the prices during Q3, which will by and large for the first two months dictate our fuel surcharge in the fourth quarter.

Right. The last one, if I may, guys. Just in terms of -- obviously the long term impact of the exchange rate on Canadian manufacturing and the housing downturn, does this change your strategy at all, especially related to acquisitions? In a perfect world, what would you like to do, I guess?

I very seldom think of a perfect world. I don't think that -- I think what we have to do is adjust our strategy to markets, I don't think we're able to set that strategy. And I think to some degree we go through these times and we learn our lessons going forward about things change and I think we've got a pretty solid portfolio, pretty diversified and, if we talk about -- in January if we look at the annual result, then look at the headwind we're going have to compete with overall for 2007 and have a flat year, if that's the case, just hypothetical, that's going to be all American. And when we get a little pickup in Rupert, we get the initiatives kick in from the J, we get a little bit -- I don't think the dollar is going to stay here. I don't think housing starts are going to start at one-one in the U.S., them things kick in and we -- but we're not in the -- in this kind of business you're not able to all of a sudden just shift your strategy overnight --

Right.

-- to adjust to markets.

Okay, very good. This last one is on guidance. The guidance for the full year, is that based on the $0.93 or the $0.96?

No. We're guiding looking out to the current environment and we see the exchange at a parity and that's what we're guiding on.

Oh, no, I mean for the quarterly result this quarter, Claude, is that based on $0.93 or the $0.96?

Oh, yes, $0.93.

$0.93, very good. Thanks, gentlemen.

Thank you. The next question will be from Todd Wadenetz of JMMorgan. Please go ahead.

Yes, good afternoon, it's Tom Wadewitz.

We know you, Tom.

You know the name. Let's see. On the -- I think you started to comment a little bit on '08, but when you look at some of the pressures in fourth quarter that look like they drive earnings down a little bit year over year in fourth quarter, how much of that continues into '08 and is it -- is it reasonable to think that you get some good growth in '08 or if conditions don't change a lot our earnings maybe flat or down in '08?

Well, I mean -- Claude's going to comment on this more, get more specific, but I can say this. This kind of environment is extremely, extremely difficult to forecast what's going to take place. We had -- I don't think any of us internally, I don't think anybody in the world thought we were going to see a Canadian dollar the other day at $1.03, almost $1.04 trading. I certainly didn't see it. I didn't see the housing starts like this. So, there's a lot of big questions going into 2008, which we're going to have to qualify whatever we say about it. We just frankly don't know and somebody can help with that, then we can give some guidance. We might have to give it in ranges, but I think the fundamentals are there. Claude's going to talk to you about some of the challenges we're going to have. We're going to get better in some areas from a productivity standpoint and it's nothing that I think we -- I think we can deal with it. But once again it's a very, very volatile type of environment.

In fact, I would just basically echo Hunter's comment. At this juncture calling the economy is a tough call. We think that on balance the housing issues will not have too much contagious effect and that we will be able to rebound in a soft landing in 2008, but you could see it going the other side. And leaving to the side for a moment the high Canadian dollar and fuel price, it's just very difficult to have a clear direction into next year. For sure if the dollar stays at parity or above, just that on a Canadian dollar reported EPS basis is a headwind of 5% that we have to face. So we're cautious about next year. We think we can come in with EPS growth if the economy holds up. Is it going to be double digits? Probably not. Is it going to be high single digits? At this juncture we're not providing high -- or formal guidance. We just like to wait and see what the economy does and provide you more color at the first quarter earnings call.

Okay, that's fair enough. I know it's pretty tough to tell from here, especially given the uncertainty in the economy. What about the cost side? You've got a couple questions on that. Are there places where if volumes don't pick up you can push harder on head count, or are there other areas you can -- with a little bit of a time lag you can go after it even harder on the cost side?

Well, there's clearly -- I'm not a big head count, more in cost, we might -- if it's smart, if it lowers their cost by raising the head count, I'm not adverse to doing that. But clearly with the J acquisition and with the capital investment we're making at Memphis over the next -- we have made now for two years and completing in 2008, clearly will give us a lot of savings in the U.S. internal operations. It'll give us car velocity improvements and a lot of things there. There's a continuing initiative with siding initiatives in -- further in western Canada. Keith Creel is looking on some issues and reroute the traffic between east and west. We've got distributive power coming on with locomotives where's we can sustain longer trains, quote, in colder weather. We've got some air repeater cars. So there are a lot of initiatives and this operating group shines the greatest when times are the toughest, and so we will overcome.

Okay. Great. Then the last one and I'll pass along to someone else. On the Prince Rupert forecast, I think back in May there was some good enthusiasm. You achieved 500,000 TEU in 2008. You mentioned Hangin doing some volume on the Costco ships. Do you think that's still a possibility in '08 or is that -- how would you characterize the 500,000 TEU goal for Rupert in '08 in terms of your outlook now?

I think that the -- I think that the guidance that Mr. Noorigian has provided, which I have endorsed, is that we will have $100 million of revenue in the first 12 months so that is what we are anticipating beginning in October. In addition to that I'm still -- what I have said was that what I had hoped for was to have the remainder of the capacity sold out at Prince Rupert and what I've also is said is that we need one more customer in there in order to -- one more big customer in there to have that capacity sold out and I would hope that we would get that sooner than later. We're still working very hard, we still have a tremendous amount of interest. And if we get that customer signed up sooner than later, it will be additive to that $100 million in the first 12 months that Bob has talked about.

So you're still comfortable with $100 million for the first 12 months?

It's in the bag with this customer, yes.

Okay, great. Thanks for all the time.

Thanks.

Thank you. The next question will be from Walter Spracklin of RBC Capital Markets. Please go ahead.

Thanks very much. I just wanted to make sure, because it was around this time last year that you started guiding us for '08. Did you say first quarter of next year is when you'd expect to come out with your '08 guidance?

Yes, that's the fair approach. Things -- Walter, the reality is it's tough to call the economy. Every day I look on the screen the dollar is up $0.02 and fuel prices are skyrocketing. At this juncture we'd just like to see a little bit -- an environment that's a little bit less volatile for us to be able to provide you with some guidance. And so at this juncture we'll just reserve and do that in the early part of next year.

Okay. Move over to Jim. Jim, you'd mentioned there was a shift from Montreal -- from Halifax to Montreal. I know, Hunter, you talked a lot about Halifax as an important gateway. Are we seeing this shift as a permanent thing, part of a longer term trend, or are you still optimistic with respect to Halifax as a port?

Oh, Halifax has a great potential for us and we continue to market that very aggressively with the new port players out there, the owners of the terminals and the port authority, et cetera. So we think it's got great potential. This shift from Halifax to Montreal is a result of industry consolidation, one steamship company buying another steamship company and taking advantage of certain different routings, that's all, so no long-term complications.

Okay, but I guess Halifax has always been pretty good potential, but in terms of the growth and in terms of capacity utilization it hasn't always come up to expectations. Anything that would indicate that Halifax is -- any problems there or is it just continued to be optimistic?

No, there's no problems. In fact, it's a very well run port and there's certainly been new investment by new players into that. Everybody is extremely optimistic about the Port of Halifax. As more and more trade with North America comes through the Suez, as manufacturing picks up in India and in that area, everybody is extremely optimistic that Halifax will be a huge player in that business, so much so that other people are looking at -- currently looking at developing new port facilities on the east coast because they don't believe that Halifax is going to have the capacity to accommodate the growth.

Okay, last question just on Prince Rupert. You mentioned the -- getting up to full capacity through the year. Are you considering any options in terms of the strategy you use? I know you do want to get that 70%, 80% U.S. destination. Is there any ideas toward -- or thinking toward being lenient on the first little bit in terms of getting some utilization up at the expense of perhaps -- not necessarily at that high ratio of U.S., or are you going to stick to that target?

No. I just -- we don't see any reason to change our marketing strategy and we believe that we have a premium product, a gateway on the west coast of North America that doesn't exist anywhere else, and we are going to continue to market our product just as we have.

Okay, that's it for me. Thanks very much, guys.

Thank you. The next question will be from Ted Hoexter of Merrill Lynch. Please go ahead.

Hi, good afternoon. It's Ken Hoexter.

Hi, Ken.

Claude, can you just talk a bit about what happens if the dollar actually gets a bit worse on volumes? Obviously nobody would have guessed $1.40 down to $1.20, now down to $0.97, so what happens if we end up and we're talking about a $0.90 or $0.88 the reverse way versus a year ago? How does that impact the business.

Well, don't mix it up on me because I'm paying you a dollar and I live in Canada, so (LAUGHTER). But no, it's -- who knows? We think that the dollar has run up ahead of its fundamentals a little bit and that it should pull back. The reverse is also a possibility. One could argue that it wouldn't move to $1.05, say, exchange rate. I think the issue that we face then is straight forward from a conversion standpoint. For every $0.01 that the Canadian dollar appreciates we lose about $0.02 of EPS. The tougher call is what happens to the number of manufacturers, our customers, the people who are selling into the U.S. markets, it's tough. It's tough at $1.00. It's a lot tougher at $1.05 or $1.10, so I think you would see more casualties and we would have to be even more nimble to work with our customers in that kind of an environment. I just don't personally see it. I think that what you're going to see is the Canadian dollar gradually coming back to a more reasonable level, but it's very tough to call.

All right. But just in case this does head in this direction are you then talking about mostly cross-border traffic and then what fields are mostly exposed? Is it just the forest product business? Can you kind of direct to us which businesses we could see impacted more than others?

Well, by the time it gets to $1.05 we'll be looking at business that is south/north and shipping Budweiser into Canada.

If you see the dollar go much higher like that, to Claude's point it's going to be produced somewhere in North America and if it's not produced in Canada, chances are it might be produced in the U.S. and you're going to have to stop (inaudible) the U.S. from moving to Canada instead of vice versa. So, there's a point where manufacturers can only survive so long in that kind of environment. So if that's the case -- I don't happen to think that's going to take place, but if it takes place, there could be some fundamental shifts.

Okay. All right. Hunter -- so I guess back over to Jim, on the congestion at Ports of L.A. Long Beach, obviously it was actually volumes but I think on the imports were down 1% last month. If we continue to see some loose capacity at the Ports of L.A. Long Beach does it make it less likely for you to be able to get that up side to your $100 million target and getting a second committed customer? Are they in discussions about thinking about what happens when volumes actually do pop back up and they do get ahead of the congestion, or are they seeing, hey, nothing's wrong right now, why even think about it?

I think the lack of congestion in L.A. Long Beach caused us to -- caused some customers to be not as eager to make a complete shift to Prince Rupert. and therefore my comments earlier in the year that I was pretty confident that I would have the facility sold out this year haven't come to reality yet. I think everybody expects that as we move into 2008, which is why more and more vessels continue to go all -- the all-water route to east coast ports to avoid the west is that this congestion issue will return and that will make Prince Rupert again not only more attractive, but a necessity, which is why I said earlier it's not only the steamship companies that are interested in going there, it's the manufacturers and the receivers of the product that want to make sure it can get into their markets and why they are eager to use Prince Rupert. And so in 2008, if we don't get it done this year, I still think that we'll get it -- one more large customer in there and we'll have the facility sold out and we'll continue to progress and be -- aggressively pursue expansion of the Port of Prince Rupert.

I think, Ken, to further that point is this. I think we will find and customers will see -- and we're going to see right soon -- that even without congestion in Long Beach, Prince Rupert beats Long Beach from Asia to Chicago, for an example, all things in. It's a premium service and once it's sold out it's sold out. There's not an option then when there's congestion in California to say now we're going to Prince Rupert because Prince Rupert, we think, will be sold out by then and I think to the degree it deals more from a pricing standpoint then.

And if I could just do one quick clarification just so I understand. Jim, it was on the east side Halifax you're seeing it switch to different ports. It's not an issue that trucks are getting more competitive and it's going off of rail onto truck? Is that correct or is that -- are trucks getting more competitive?

No, it's that the vessel as opposed to discharging their cargo at a port --at a terminal in Halifax is taking that vessel all the way into the Pont of Montreal.

Okay. Thanks for the time.

Thank you.

Thank you. The next question will be from Bill MacKenzie of TD Newcrest. Please go ahead.

Thank you. Jim, can you just talk about the other revenue line a little bit. It was the biggest driver to the revenues in terms of the year-over-year growth. Just wondering if you could give us a little bit more color in terms of what's going on there, whether that's CN Worldwide or any other factors that are driving the improvement there?

Yes, off the top of my head I think it was the growth of [$20-some million] year over year. About half of that comes from the nonrail logistic businesses growth, warehousing, trucking, et cetera, where as you know we're aggressively pursuing growing that business. And the other half of that comes from a slight change in the methodology of accounting for -- or the revenues associated with our coal dock and iron ore dock, where the revenues from that used to be up in the business unit item and they're now down in the other revenue, although we did not restate the prior period because it was one little -- small little change.

Okay. And I think from a business perspective that's driving that significant growth that you saw this year -- this quarter?

Well, besides the accounting change and the growth in the nonrail business segments like warehousing and trucking, no, that's what it is.

Okay. Okay. So just a question in terms of the asset sales, is there any longer term impact on earnings from entering into the sale lease transaction or any lost other revenues from the sale of these assets?

No, our other income will be lower -- a little bit if we conclude the sale of EWS, but the Central Station, the lease expense that we have going forward will be offset by the profits that we would defer over time on the transaction itself. So the sale lease-back component of the transaction as a deferred amortized gain, which is about the same as the increased lease expense.

Okay, so no bottom line materially EPS impact?

No. Actually it's really -- those are two good deals, the way I like them; lots of cash, no impact on the P&L.

Okay, great. Thank you.

Thank you. We have reached the end of the question period. At this time I would like to turn the meeting back to Mr. Harrison.

Thanks, Joe, and thanks so much for joining us. We appreciate it.

Thank you. The conference has concluded. At this time you may disconnect your telephone lines. We thank you very much for your participation, and have a great day.