Canadian National Railway Co (CNI) 2008 Q3 法說會逐字稿

I would like to remind you that today's remarks contain forward-looking statements within the meaning of applicable security laws.. Such statements are based on assumptions that may not materialize and are subject to risks described in CN's 3rd quarter 2008 financial results press release and analysts presentation documents that can be found on CN's website. As such, actual results could differ materially. Reconciliations for any non-gap measures are also posted on CN's website at www.cn.ca.

(OPERATOR INSTRUCTIONS)

Welcome to CN's third quarter 2008 financial results conference call. I'd like to turn the call over to Robert Noorigian., Vice President, Investor Relations . Ladies and gentlemen,

Thank you, Chris, and welcome to CN's third quarter financial results. I would like to remind you about the comments that have been already made about regarding forward-looking statements. With us today is Mr. Hunter Harrison, the President and Chief Executive Officer of CN, along with Claude Mongeau, the Executive Vice President and Chief Financial Officer, and James Foote, Executive Vice President of Sales and Marketing. After our presentation, we'll take questions for those of you listening on the call. And if you could please identify yourself when asking questions. In order to be fair, limit the number of questions to two or at most three.

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

Thank you. I appreciate it. Thanks to everyone for joining us this afternoon. I'm proud to be able to report what I think is a pretty remarkable quarter in the environments that we're operating in today. Let me just highlight a few issues, and then I'll turn it over to Claude and Jim to get into more levels of detail with you. Our revenues were up 12%. Pretty solid overall growth. Our operating ratio returned to levels that we're used to effectively flat year-over-year at 62.6%.

Our diluted EPS of C$1.16 as reported was up 21%, but that includes a 9%(Sic-see slide presentation) deferred income tax recovery if you look at it on the same store basis year-over-year. EPS was up 15% or a C$1.07 compared to C$0.93 last year. So overall, pretty solid results in the environment as I said earlier we're operating in.

But the thing I'm so pleased about is the impact this will have going forward. We broke records just about across the board in all our operating metrics which I thought was pretty outstanding performance. Our cars switching productivity was up 6%. The run rate as we speak on our train speed is up about 12%. Our active car inventory is down about 11%. Our gross ton miles per available horse power was up 8%. Our car miles per car day was up quarter over quarter about 6%.

And I would expect in the fourth quarter that to move up significantly. So these are operating metrics that [Key's] team have achieved that we can look forward to and will serve us well going forward if we go through some tough times it will solidify our position as a low cost carrier and put us in a good position to deal with adversity as it might come in the future. So, overall I was extremely pleased and let me turn it over to Claude to go through and analyze some of the numbers with you before Jim talks about revenues.

Thank you Hunter. Those were indeed very solid results and they were achieved in a challenging environment. We delivered C$1.16 on a reported basis. That's an increase of 21% over 2007. If I exclude the C$41 million of deferred income tax recovery which we looked in the quarter, EPS is C$1.07 up 15% over last year. And basically, we've executed well on all key fronts to achieve this kind of performance.

Our revenues were up a full 12%, and that was despite a double digit volume decline in three business units that are affected by the economy, forest products, autos -- not by the economy, but grain was also down during the quarter, and we achieved the solid volume growth to offset that in three of our business units as Jim will explain to you in coal, metals. minerals and intermodal. We obviously had the benefit of a higher fuel surcharge but also solid pricing environment continuing. But its not enough to deliver the topline, you have to bring it to the bottom line and thats what we did during the quarter, very solid railroading as Hunter had discussed It helped us drive good productivity but very strong network velocity. I will give you a few statistics in a minute

So, operating income on a year-over-year basis up 10% and our operating ratio came in at 62.6%. That is only 60 basis points increase over last year. All in all, this basically underscores the kind of performance that we can achieve when the fuel surcharge lag which were impacting our results in the first half of 2008 start to subside. Let me return briefly to our expense performance. Overall, a very solid performance, our expenses increased only 2% if I exclude fuel. Fuel was obviously a headline increase with C$140 million year-over-year increase. That's a 55% increase. We were able to offset price with very solid fuel consumption improvement, almost 2% fuel consumption improvement. and volume helped us make the difference between the 60% price increase and the 55% reported increase in fuel expenses.

Labor expenses were very well behaved with a 5% reduction. We had stock based compensation decline due to the stock price, but that was offset by a higher bonus accrual for our normal incentive plan for management for the year. Wage inflation was offset by productivity and also slight head count reduction so very strong management on this front and the benefit you see of roughly C$20 million or C$22 million decrease is the benefit largely of our pension expense coming down by C$18 million per quarter.

Both purchase services and material and casualty and other were up 9% on a year-over-year basis. Purchase services was C$20 million higher, largely driven by the third party carrier costs of our CN worldwide activity, and also to a much lesser degree our equipment repairs which were up slightly on a year-over-year basis. Casualty and other was up C$8 million , the increase was roughly half and half between bad debt, and the fact that we have slightly higher environmental costs or environmental accrual for the cost of certain sites.

So overall the performance is very, very strong as Hunter mentioned. We have network velocity records during the quarter, both in terms of car velocity but locomotive utilization. And basically, that kind of performance is what allowed us to maintain our expense performance and bring the top line to the bottom line in the fashion that we were able during the quarter. Turning to free cash flow, after nine months year to date we generated C$483 million of free cash flow.

The increase in the third quarter alone was significant. We generated 258 million during the third quarter versus C$142 million last year. This basically, puts us in a very good position to finish the year around our target of C$650 million of free cash flow for the full year. I have to tell you, as the CFO of CN in these turbulent times in the financial market, it's good to be running a company that throws off solid cash and also has a strong balance sheet.

We have the balance sheet and the cash balances to pursue our strategy, whether it's investing in our business, although we will be looking at our capital expenditure very carefully into the next year. We have the ability to fund our productivity and our growth initiative. We have the ability to fund strategic initiatives, like the funding of the EJ&E transaction, which we are hopeful to close on before year end. And, we also have the ability to continue to reward our shareholders with a share buyback and our dividend policy going forward.

Just to wrap up in terms of the outlook for the business environment, I have to tell you obviously when you look out there, there's a lot of uncertainty. For 2008 specifically, we are in good shape. The business through October is holding up. Our operating metrics are very good, in fact, they're improving over Q3. And we have the benefit of the head winds in the first half of the year subsiding.

Foreign exchange at C$0.85 and world oil prices around C$75 gives us benefits. In fact, if I add those two into the fourth quarter, it could be as much as a C$0.10 in terms of EPS tail wind. We're in good shape to finish 2008.

And longer term for 2009, although the environment is more difficult to call and we're not going to provide you with specific guidance given the uncertainty about the economy. We feel very good about how we're positioned. The financial markets are stabilizing. There were times only a few weeks ago, when things were looking dire, but things seem to be stabilizing. I was looking at (indiscernible) and they are coming down. All of the concerted effort across the world, from governments and the central banks seems to be stabilizing the financial market, and the question in front of us at the moment is really what will happen to the real economy.

It is difficult to call. So far as I said, we're not seeing meaningful impact on our business but there is a likely slowdown into 2009. The question is, will it be a V shaped slow down that will take six to nine months or a longer slowdown, more of a U shape that could take longer. We don't know that for sure either way. What we do know is that we are very well-positioned and we have a very focused management team.

We can focus on the adversity, as Hunter has mentioned, but we are also positioned to rebound when the economy comes back. We have a strong franchise, and as Jim will tell you in a minute, we have a very long pipeline of structural growth opportunity and we feel very good fa when the economy clears, we will be in a position to show very strong results going forward. With that, I'll turn it over

Thank you, Claude. I'd like to go through the revenues in the third quarter now. A little more straight forward presentation as there's no impact from exchange on our top line. Revenues were up 12% this quarter, compared to the third quarter last year. On from a volume perspective, on a car load basis, we were up 1%.

I think these are pretty good results. The highlights of the volume side, were the growth in almost every sub category of metals and minerals group. Higher US coal volume and the new Prince Rupert. intermodal volumes. These three areas offset the slower Canadian wheat which was down, due to the small 2007 crop as well as the small carry forward. And the continuing slow volumes associated with the downturns in the automotive as well as the lumber and panels market.

On the yields side, in the third quarter yield again improved. Revenue per revenue ton mile was up 14% and revenue per carload was up 10%. About 60% of the yield improvement comes from the higher fuel surcharge recovery due to the higher crude oil and fuel prices and the rest from price increases. Same store per unit prices were again up in the 4% to 5% range.

Other revenues increased 13%, reflecting our focus on growing non-rail transportation services. Take the numbers apart in a little greater detail. Petroleum and chemicals, solid results this quarter attributal to growth in several areas ,which were offset slower production from Gulf Coast customers due to the impact of the hurricanes. On the petroleum side, (inaudible) volumes in the western Canadian oil sands area continue to grow impressively and sulfur movements to the US markets were strong.

These gains were offset somewhat by slower plastic pellets and the associated feed stocks due to business changes and plant closures. The chemical side of the business was softer than petroleum segment due to weakness in industrial chemicals tied to the panel production as well as the auto production. Metals and minerals up 29%. As I said, there was growth across the board in this group.

On the metal side there were increased shipments of flat rolled product. The movement of large diameter pipe related to specific projects and increased volumes of scrap. Mineral side commodities related to the development of the oil and gas industry such as the aggregates that we are shipping into the up greater alley in Alberta as well as increased volumes of sand and cement related to some drilling activity. And iron ore very strong in the quarter related to the overall strength of steel in the segment. Forest products down 2%.

Lumber and panels obviously continues to struggle. The only good news is that our year-over-year comparisons continue to improve. Lumber and panels carloads were down 22% this quarter. Paper and pulp is doing somewhat better. This is due to increased log shipments and some new business that we've been able to bring on to offset some of the plant curtailments and closures.

Automotive up 3%. There we're seeing some increased -- import traffic through the ports of both Vancouver and Halifax which is offsetting a little bit, this decline in shipments from the North American manufacturers as they continue to rationalize capacity and cut back on production. Coal up 41%. Virtually all of this related to the production from the new mine that we've talked about in the past coming online in the Illinois basin. As well, as some increase in some western coal traffic that we received from interline partners for delivery into the US.

On the grain and fertilizer side, the results have been impacted in both in Canada and in the US from late harvests as well as the low carry forward for the crop in Canada which I talked about. Fertilizers was down somewhat as we had good shipments of fertilizer in the US, which offset some of the decline we saw from potash shipments from in Canada.

On the intermodal side of the business Increased volumes from existing customers calling Prince Rupert there, helped drive results intermodal in total being up quite a bit 24%. And the domestic business also doing well as we continue to gain share from trucks in both the Canadian retail market as well as the transborder market. of both southbound and northbound flows.

So if we look forward a little bit on the next page talk a little bit about structural growth opportunities that we have and continue to focus on, and which are delivering results not only in the third quarter, but I believe as we move forward, intermodal we're going to continue focusing on growing the intermodal franchise both overseas and domestic leveraging the structural efficiencies we have with our parts, and taking and selling the modal advantage in the domestic market.

On the merchandise side of the business, the oil sands is going to continue to provide us with a lot of opportunities as well as other gas and oil related projects that are being developed in that region. And on the bulk side, clearly a good franchise both north and south. Very good crops and good quality crops in Canada and the US. The Illinois coal is taking off and is going to continue to grow. And we have a lot of opportunities to work on on the fertilizer side of the business.

The last page kind of again a little broader perspective in terms of pricing. The pricing environment remains solid. We have a very good business model which is designed to sell service, not sell this transportation as a commodity. And the price ranges we talked about in the past is 4% to 5%, continues to exist. I believe that the specific initiatives that we talked about will continue to provide us with opportunities to have volume growth, even in these difficult times.

And we will continue to focus on our non-rail activities, as an opportunity to both grow the business which we saw in this quarter but also provide us with a greater advantage in terms of selling our service to our customers across the board. So with that I'll turn it back to Hunter.

Thanks, Jim and Claude. Just as these times are give this group a real opportunity to shine. The tough times that we can differentiate between this franchise and others, you're clearly going to see short term and long term focus to continue to focus on market share growth to kind of offset the storm if you will. And I think we're well positioned to move forward and I feel very good about this. This is a excellent franchise with a wonderful operating model and a group of great railroaders that know how to execute day in and day out.

We'll now take questions from the telephone lines. (OPERATOR INSTRUCTIONS) The first question is from Jason Seidl from from Dahlman Rose-- please go ahead.

Good afternoon, gentlemen. A couple of quick things. When we're looking out in 2009 in terms of Prince Rupert, given there's a lot of excess capacity in the west coast ports, should we assume there's no additional ships calling on Prince Rupert, or with the service advantage that we still have an opportunity to grow that base.

Yes, I think as we look out into 2009, our existing customers have come to appreciate the value of the service that we have over Prince Rupert, both into eastern Canada and the US, and continue to talk with us about ways to grow the volume. So I would expect that that will continue to happen as we go forward into 2009. But our challenges there are much greater as I said earlier. Our challenges are much greater today than they were a year ago, when there was very limited capacity on the west coast. Intermodal volumes in Canada, for the two Canadian railroads continue to outpace the US railroads. And we continue to lead the pack in Canada and I would think that will continue.

Jim, I guess for my second question I'll stay on the intermodal topic. You mentioned you're still gaining shares from the truckers. Could you give us a little bit more color. Can you talk about the length of haul that you are gaining the market share on the truckers, and how you're doing and maybe call it 800 to a 1000 mile lane, given where fuel is currently at.

On the domestic intermodal, clearly in the 800 to a 1000 mile range, we have an advantage.. As our cost structure comes down, we are trying to push that down to below the 500-mile range in order to be more competitive there. And are having success, not just clearly from the cost perspective, but also as we continue to offer a more retail focused product which allows us to differentiate ourselves in the marketplace, in that we have rolled out that retail model further in Canada and now into the US, and that's helping us grow this business and will continue to help us going forward.

Let me get this straight, you're taking market share under 500-miles?

In the 500-mile range is clearly a much more likely scenario today, than in the 800 to a 1000 mile range.

Impressive. Thank you for the time, gentlemen.

Thank you. The next question is from Chris Crossow from Credit Suisse

Thanks and good afternoon. Just a couple quick questions. Do you see any risk to the work or the projects going on in the oil sands? What crude oil price do you start to worry about?

That's difficult for us to answer. That's really for the oil companies to be drawing their determination. Our assessment -- and that's what this is -- our assessment of their activities, is that they will continue to go forward at oil prices that are kind of jumping around even though they might get down to the mid-70 range here. They will do that possibly on a slower time frame than the past, not because there's not a need for the oil, but because by waiting a little bit, they might be able to buy some of their steel, necessary for the development of these projects at lower prices and or get lower -- be able to pay lower wages as they go forward. None of us here believe the long term viability of the development of the oil sands is in jeopardy. It's just a question of timing and we're working with these customers very closely in bringing in the construction materials today to build these facilities.

You mentioned an aggregate 4% to 5% price. Can you give us any color by commodity which ones were particularly stronger or weaker than that level?

I don't think there's one that is particularly stronger or weaker. There's all clustered around this area. And it's not fair to say, that necessarily the business segments that are the most distressed in the area where they had the lower price increases. There are certainly areas where we are able to work with our customers, because of our low cost nature to find new market opportunities for them. And we continue to do that.

Quick housekeeping item. Can you give us the year to date performance and the (inaudible) pension fund.

It varies by day. This morning was a good mark internationally. I think minus 10% is not a bad number give or take over the current environment. They're clearly ahead of their peers in terms of performance. And the good news is while we do have a large pension fund. We are one of the few pension funds comfortably above in a surplus position from a solvency standpoint. We're riding the market. We have a strong investment division. They're outperforming their peers. And we're all hopeful the markets will clear and they're going to come out strong.

Thank you very much

The next question is from Jacob Bout CIBC World Markets. Please go ahead.

Good afternoon,. Can you comment on how the credit crisis impacted your relationship with your customers. I know we're hearing some very [wonky] things out there. Grain inventory levels and the inability of the shippers to get letters of credit. Can you talk how that relationship has changed and what you've done to offset some of this risk.

I guess some of the stories that we have heard anecdotally about some of the customers not shipping. I guess the best way to put it, is, some of our customers not shipping products to some of their customers because there were issues with credit. We have been unable to find any circumstance where a product has not moved because of that. Clearly, just as we are watching all of our customers and our receivables on a much closer basis, as we go through this to make sure there are no issues that come up in terms of the payment for our services, but I see no change in the relationship with our customers as a result of this.

Okay. Second question then on your share buyback. I think everyone has been under pressure. Your stock has been under some pressure as well. Any thoughts on increasing your share buyback?

Well I think the first call on cash in the short term here is to finance our J transaction. We're hopeful we're going to get a good decision from the court and we will be able to close on this C$300 million transaction before year end. Having said this, we will be coming out of these results here in our blackout period. We will be opportunistic in the market. We do believe we have strength in our balance sheet and the cash available that we can pace ourselves, and continue to be in the market even if we have the J transaction coming in front of us.

Thank you.

Thank you. The next question is from Edward Wolf from Wolf Research. Please go ahead.

Good afternoon, guys.

Hey.

A couple different things. First Jim, could you talk a little bit about the timing of grain. When does the grain start to come back and when do those volumes start to come back? When do you expect them to be positive year-over-year?

I think we're going to start to see as we go into November on the Canadian side of the ledger more grain begin to move, and we're seeing that some of the largest shippers out there, are putting in orders now that will be above what we have had over the last couple of weeks. This is a situation right now where a lot of the buyers of wheat are kind of waiting to see whether or not those prices will go down, and so there is some softness in the ordering. On the US side of the ledger, the corn harvest is well behind the schedule as a result of the flooding problems that began the crop year. But that is now beginning to come in. And will help to increase our US grain volumes there. I would hope that mid, in the next few weeks, is the best way to say it, our grain volumes will begin to get back to normal levels and we'll see again kind of flat results on a year-over-year basis because this is the time of the year when we run at maximum capacity. We're not going to really ever outperform ourselves from the prior year. We just want to be able to perform at that maximum level during the maximum shipping period.

Do you think flat to modest volumes for grain is possible for fourth quarter?

Again, on a year-over- year basis, the fourth quarter is -- we run pretty aggressively during that period of time. And most of the variation in the year-over-year performance has got to do with weather issues, or something like that, not demand. As the crop comes in both in the US and Canada in the fourth quarter, everybody wanted to move it. That's an historical shipping pattern and we will try to get back close to that. It changes from year to year as I said. More to do with weather issues and the timing of holidays, etc. than it does to do with demand.

Claude, can you talk about head count, head count was fairly flat. Volumes are up.

That's basically in line with what we had indicated before, Ed. We are kind of running over the period where we did the more aggressive insourcing of some of the activities, although we're continuing to do some of that in certain trades. We are lapping over some of the increases in the running trades, that we needed to do to make sure that we have the resources to run our trains and deliver the business. From this level we're now able to run a tight ship and manage our work force productively. I would think what you saw in the 3rd quarter is a good indication of what you can expect going forward.

In terms of pricing visibility as we go into '09, when you think about pricing, can you give some guidance toward where you see a range for that or what percentage of your business you have visibility to at this point?

I think the guidance that we've given in the past,as I said earlier, this year our range was four to five and we looked for up side there. And my position right now is depending upon what unfold over the next six months, that's still a reasonable assumption on our part. And we do not have a lot of long term contracts. And so a big portion of our business or legacy contracts will be a portion of our business in 2009 at those run rates.

Thanks for time, guys. Appreciate it.

Thank you the next question is from Randy Cousins from BMO Capital Markets.

Good afternoon. I guess maybe Hunter you could answer this. Everybody is concerned about the state of the economy. You can't control demand. But I wonder if you could give us some indication of what you think the sensitivity of your organization to shifts in demand. Lets say we had a 3% drop in volume, Would that translate into a 3% reduction in EBITDA? Or how should we think about the linkage between volume and profitability?

I think Randy, obviously, there's a point where you can't do that. I wouldn't try to tell you differently. In those modest numbers of 3% to 5% we can make adjustments accordingly. We have been keeping a tight rein for example, on hiring given that we had some indication that we might move into a softer period. We've got a hiring freeze on right now. If it wasn't for the productivity numbers we wouldn't be able to have the hiring freeze on that has increased. I feel pretty comfortably certainly from an operating expense standpoint, that we can maintain the kind of EBITDA that we produced.

Going forward in this environment would be pretty outstanding. Now, we've got some contingency plans here. We have taken a look at the capital budget, and once again we are waiting while the smoke clears. We have identified potential C$200 million reduction in the capital budget without getting into basic capital of rail ties and what things that would affect the physical plan. We have a plan A. We have a plan B. And we have a plan C. If we need to have a D, we'll have a D. And we're able to make these adjustments I think better than most.

It would be fair to say that the railroad's ability to deal with a downdraft has probably never been better in its history.

Absolutely.

My second question has to do with the coal business. So I wonder Jim if you could give us some additional clarity on exactly what is happening there. Your market increase in coal was like 24% It was close to -- it was one of the better increases. Is it -- What's happening with the Illinois volume? And is it long haul business? And can you speak to the growth potential that sits there? How do you see the coal franchise playing out over the next year or so because obviously? thermal is less sensitive to GDP than say metallurgical coal.

This is the Illinois basin coal development we've talked about for the next couple of years. Some new miners have come into the region and are aggressively developing new mines. In the first of which came online early this year, and has ramped up and will ramp up to a production run rate of around 7 million tons of new business a year.

It is business that is moving into the utility markets in the US southeast and to a degree into the US kind of north central region. As well as we have been bringing this down to the Gulf Coast as they have pursued some export opportunities. That is going to continue to grow.

It is on an average revenue per car basis higher than what we have realized in the past with the -- some of the Powder River basin moves that we deliver and has to do with the length of haul there. We have a lot of volume that we received for delivery in and around Chicago, Gary or Detroit, where we're kind of just a delivering carrier, and therefore while we have a good profitability and good volume, its just really short haul moves. So that's why you see the spike on a per unit basis.

So looking at 2009, in terms of your coal business and again this maybe- the thermal coal is probably less sensitive to what the economy is going do, is this a business that can have 20% volume growth?

You know, probably not in 2009. The next step up in this will be when another mine or potentially two come online in 2010. So there are a lot of activity there. There's a lot of development plans in the works. But we'll be in the step basis as those come online.

Okay. Thank you.

Thank you. The next question is from Tom Wadewitz with JPMorgan.

This is Michael Weinstein in for Tom this afternoon. I was wondering, if looking into fourth quarter looks like on a per worker comps and benefits basis, were basis down 30% last year. How should we look at that going forward for '08?

Well, it's always difficult to predict quarter over quarter. Costs per employee depends on stock based compensation and a number of other items not related to normal wage inflation. Our normal wage inflation In the 3% to 3.5%.. In 2008, every quarter we get the benefit of lower pension expense, to around an C$18 million per quarter that will continue into the fourth quarter.

Certainly at that point in time if the stock price stays at the current level, there should be a benefit. But I am very hopeful with good results like the third quarter, maybe that solves the issue, and you see actually see an increase in our cost per employee which would not be a bad thing to happen.

What's the sensitivity to the stock price? Whats the way to frame that?

Its about C$5 million -- it depends on whether it's US or Canadian dollar but rule of thumb C$5 million per C$1.00 of stock priced movements.

Okay,and could you possibly quantify the benefit from fuel surcharges this quarter?

I think it's quantified in the MD&A as 2/3rds of the price being associated with the fuel surcharge.

Okay. Thanks a lot, guys.

Thank you. The next question is from David Newman from National Bank Financial.

Good afternoon, gentlemen. If you look in the current environment, obviously, it's a tough environment. But you're in terrific shape obviously free cash flow and balance sheet.. Would you, even though you've got EJ&E on tap here, would you look at other acquisitions to, and specifically on CN Worldwide, to take advantage of the current environment and perhaps bolster that platform?

I think that's getting a little ahead of us. I think in the environment we're in now, we'd like to get the J behind us and see what the economy does, let things stabilize a little bit. And then we would take under advisement what opportunities present themselves.

Strategically, you have your operations and house in order that the other areas of the supply chain are areas where you would look to perhaps improve the efficiency or free porting or what have you. Is it something longer term that you'll look more aggressively at?

I think we'll take this in incremental steps. The first step was seeing worldwide, both international and North America. We're in the freight business. We're in the owner operated retail business as Jim described in the US where we hadn't been before. We're in the business we have never been in. So we're controlling many more links in the logistics chain. And I think as we gain confidence, that this is the right strategy to pursue, that we will continue to look at other opportunities to loop that chain fully. What that presents in the future probably one it will be post Harrison. So maybe it's not for me to say. But I think there's opportunities.

Excellent, and Claude, you mentioned about C$0.10 looking into Q4 in terms of FX and fuel. I'm looking at a math in terms of Q4 last year and C$0.85 right now.. It looks like you're almost there just on the FX alone. If you held the WTI as it stand today, what sort of fuel tail wind could we see in Q4.

I think you have to look at every aspect. David. We have realized foreign exchange gain and losses that go through other income. And your right, If it stays at C$0.82, it would be more than C$0.05 or C$0.06,but I think overall the fuel surcharge lag which is now a benefit for us and exchange, if the dollar stabilizes around C$0.85 and WTI stays at C$75, all in a C$0.10 just round number, is not a bad number to use.

Very good. And lastly, obviously, the CN franchise is built for volume. And as I look out into maybe getting ahead of myself, past the current market malaise and getting into the 2010 period. Could you see core pricing first of all increase beyond the current levels of 4% to 5% and operating ratios drop down to the 50s level again such that you can plow it back to the franchise? What's your thoughts as volumes come back?

Well, if we keep seeing the operating metrics the way they are and keep delivering the type of service that the operating group has provided, and it's not a commodity and it's the real value out there Volume helps certainly in this business the efficiencies. And so is there potential to move into the 50s again? Sure, there's potential to move there. It's how much growth you have. And if we maintain that -- we are blessed, we don't have capacity issues except one place, thats Chicago, Illinois and we're doing everything we can to address that.

How do you balance that off against pricing? I think you've said you didn't want to drive it too low. Would you take prices up beyond the current core level that is you're looking at today?

Well look, I'm a believer that the market gives you the price. You don't determine the price. The market gives you the price. This is not cost based. This is the market and you decide whether or not you want to play in that market.

I've said many times, and will say it again, we're not obsessed with operating ratio. And with the high fixed cost capital intensive business, I'd much rather be a 65 OR than be a C$20 billion company than a C$10 billion company at 60, 59, you pick the number all you have to do is do the math. So there's a balance between the growth and discipline and what the marketplace will allow you to do.

Excellent. Great results, gentlemen.

Thank you. The next question is from William Green from Morgan Stanley.

Hunter, I think in the past you've mentioned a couple of times that you had thought that US rails were a bit expensive when we think about acquisitions. They're a lot cheaper now. As so, you look at the US, given your balance sheet and operating model, I would think the economics of considering a larger merger would be so compelling now. What's wrong with that thought process?

Well Bill, I have addressed this question, I cannot go back to Chicago, Illinois. I have enough problems there now. Really, we need to get this issue resolved as far as the EJ&E. We have some structural issues with the law in Canada that talks about ownership percentages, the 15% and some other issues that don't make it just as easy. And probably the most important issue is this. I don't know of anybody else that wants to dance right now. And so given that, we're going to focus on getting through this storm, getting the EJ&E transaction done, and then I'll leave a message here for this team as to what they ought to do going forward as far as acquisitions.

if I come back to the pricing comments that Jim made about 4% to 5% next year, if the economy is as bad as some think it could be, how do you avoid having conversations about price next year with your customers? I just don't understand how you might be able to sustain that. Is it that they don't have that many options and you're the low cost. A pricing umbrella or how does that work?

We'll let Jim comment also but it's the value of your product. You have a certain service offering at a certain price. And they look at the competition. And say what is that service offering? And what the that price? And they pick the best one. And it's value related, depending on how people value carry costs.

If people are going to get the environment they are in, if I were them I'd be looking at cutting safety stock and inventories and getting my carrying costs down and speed and velocity is very, very important then. And that's a value proposition. So I think if we continue to produce the kind of reliable service that our customers have become used to, that we can -- not across the board. There will still be some ups and downs, but generally speaking, I agree with Jim that we can sustain those levels.

You can't say look, the economy is bad, I don't want to pay the price for fuel. If you're going to do business, you got to do business. And you make that choice. Our suppliers don't allow us to say, times are tough, so cut the rates. They're not very sympathetic.

One last question, so when you look at your total volume, how much do you think is related to all automotive business, in and out everything that you would think is automotive related.

Bob thinks it's about 7% or 5% for the business unit and the parts etc. that are moving in containers etc. plastics, that's pretty much our estimate.

All right, thanks for your help.

Thank you. The next question is from Walter Spracklin from RBC Capital Markets.

Thanks very much. Just wanted to focus on operating efficiency improvements Pretty remarkable here and only a 60 basis point decline despite fuel going where it is -- is much better than we had expected. Can you touch on if it's you or Claude that want to touch on this. You mentioned you broke all the records, Can you talk to us a little bit about what happened during the quarter and why we should think that these improvements should carry forward in the quarter that you were suggesting in October.

This is not real glamorous. This is just blocking and tackling every day and getting a little bit better every day at it. We've had a real focus on a quality efforts that affect train speed. We've been working diligently on train speed. All these things fit together. Your train speed goes up. You need less assets. Your quality improvement. You have less recrews. Less deadheads. And you build on that momentum.

We are at a run rate today of somewhere around as we speak today, not quarter over quarter comparisons -- but somewhere around 200 miles a car day. People never thought we would achieve that here and it's not over. We can still go beyond that level. I know people want us to -- that there's some secret story here. This is just getting a little bit better every day in execution, being sensitive to the needs and the impact they have, and you will continue to see these operating metrics improve.

Whether we use it for growth in the market or cost or a combination, that speed and velocity allowed that reduction in the rolling stock inventory that's down to like102,000. cars online as I speak. I can remember when it was 130,000 cars. And the thing people didn't realize if you have less cars in terminals, just fewer cars to deal with, lowers the operating cost in the terminals. Which makes the velocity faster. It's really exciting for me to see all of this start to come together. We hit a little wall in 2006 we broke records, 2007 we had some head winds and weather and strikes that set us back, our momentum. Now we have regained that momentum and we're back beyond the 2006 levels and looking for next wall we hit.

Thank you. The next question is from Bill Mackenzie from TD Securities. Please go ahead.

Jim, I was wondering if you could maybe talk a little bit more about the metals and mineral segments. Its one area you guy have had pretty exceptional growth. And I was wondering, a lot of those markets through that segment are fairly economically sensitive, but you have had great success with some of your customers ramping up. I was just wondering if you could give us looking out over the next 6 to 12 months, how much of the growth of that segment will be from dependent on customers ramping up production or new customers versus the sensitivity their to the economic outlook.

Well, we have experienced growth area in two areas. Obviously, the ore business, the aggregate business, and the success in there has been driven by kind of economic growth and specific business activity like the oil sands project where we've been moving thing moving the aggregate out there. The steel business and the slab and the sheet has been associated with economic activity, and to some degree increased activity from production in the US per export as the dollar has moved around.

And thirdly, one of the areas where -- that's been helping with the growth has the industry, the steel industry has consolidated and they have sought efficiencies in their manufacturing activities. They have changed their production and shipping patterns. That has greatly favored rail where everything used to move truck and so we've seen market share gains there. So I still continue to believe that the oil sands activity will continue. And I still believe that we will continue to have market share gains from truck. And so we'll have to wait to see going forward about the other third of the growth driver here, kind of the economic activity. When do we start to see the impact? And if we are marketed with a slowdown which I think we'll see in the very near term, when does that come back as we move into '09? And I think right now everyone is believing that that will be sooner in '09 than later.

Great, thanks. And then just a housekeeping question for Claude on the tax rate, which if I'm doing my math rate -- the deferred tax recovery in the quarter, the tax rate would have been around 32.5% which is a little bit higher than where you've been tracking the last few quarters. I was just wondering if that was shoring up some reserves, or if that's more normalized rate going forward or if we should see it come back to the lower 30 range that we've seen in the last little while.

31% is the number I've been guiding to, and obviously it varies like water as you have seen it in the third quarter. I think 31% excluding the DIC recovery is not a bad number to use.

Okay, thank you.

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

Good afternoon, and It's Chris Weatherby in for Ken. If we could jump back to Prince Rupert for a second, and get an understanding of how the port is ramping and if we've seen an increase as you've gone through the quarter. Obviously, there's general economic weakness that seems to accelerated as we moved through the quarter. Just get a sense of where volumes were, as we moved our way through the third quarter.

On a weekly basis, on a quarterly basis, off the top of my head I can't tell you exactly what they were. In October of last year, is when the first vessel came in, the first Costco vessel came in. That was the first level of activity. In July of this year, we saw the Costco and the Alliance there. Bring another vessel in. Basically, we doubled the volume in July and so that's been kind of the rampup level of activity. We went from one train -- I mean one vessel to two. And our goal here is to, in 2009 get another vessel in there as well.

Following up on that, is that the capacity, another vessel in there. How much general capacity is left at the port as we look forward to next year?

I think that's the order of magnitude, thats about right. We get one more vessel call and phase one of that facility is sold out.

Okay, great. And then switching gears, Claude, I think your mentioned a bad debt number. I missed it. I just wanted to understand. Was there an increase in bad debt and if so, is there a specific area that you are seeing weakness in your customer base?

No, we're obviously monitoring that carefully. The increase is only a 4 million increase in bad debt year-over-year. It's a small amount. Certainly we're mindful of the current environment. I don't see any trends with collecting our receivables.

Great. Thanks very much.

Thank you, the next question is from Cherilyn Radbourne from Scotia Capital. Please go ahead.

Thanks very much and good afternoon. I wonder if you could speak a little bit about the different business dynamics across the various regions, west, east and south. And just tell us if there is anything you did during the quarter to respond to changing demand patterns across those regions.

Let me make a couple comments. Generally speaking, our eastern Canada operations have seen the softest business levels. And they've made the most adjustments relative to business levels. Obviously, that paper franchise in eastern Canada has been in trouble and we've seen depressed business levels. In the U.S. business has been a little better and it's been a little more up and down throughout the year.

But right now running pretty good with the addition of the train from Prince Rupert. And we'll pick up more when the grain picks up as Jim said earlier. They were a little bit late in getting in the fields to cut the beans and corn based on weather. It's just a timing issue there.

But the US is up a little bit. Western Canada has for the last several years, been the strongest growth story related both to Prince Rupert, and opportunities associated with Prince Rupert. Obviously, the projects in Edmonton, Albert and the (inaudible)and all those issues., So we have had real strong growth and activity in western Canada and thats how we adjusted accordingly. And we've reallocated resources. We reallocated people. And adjusted to those kind of levels. If you want to think of that over two or three years, eastern Canada has been down a percent or two a year or so. The US has been up a percent or two. And western Canada has been boom town. And we kind of expect those trends to probably continue. Jim --

I think that covers it.

Very good summary.

Since no one has asked a specific question about the EJ&E, I'll ask what updates you want to give there or just curious whether we have to wait until after the US election to see something there?

We're working very, very hard, this staff, Jim and I and Karen Phillips from our Washington office were in to see Mayor Daley last week. We were in to talk about the transaction. Claude has been working very hard on the transaction. We're in the courts in Washington asking the court to require the decision so we can close the transaction prior to the end of the year. So we won't have trouble with our friends at US steel.

We're hopeful that the STB without court action will step up and approve the transaction. I think it's fair to say they have to approve the transaction based on the merits and the competitiveness. Nobody is racing an issue about the competitiveness. The only issue has become is the "mitigation" of the environmental issues.

And we are perfectly willing and we have said to the court and the STB that we would allow us to close based on that its not competitive, and we will hold and freeze and have a status quo -- not changing the operation until they feel they like it -- and are comfortable that the environmental issue has been dealt with. We've had some worthy opponents in Chicago, but the fight is a long way from over. I think and I'm hopeful that we will get the transaction done and completed by year end. And if there's any more, we'll let you know.

I do think that, given the election and when the elections are passed, there could be a little shift in certain areas. I think if you've been following it closely and you looked at the various editorials and papers and interact with some of the towns, I think the momentum has swung back towards a little bit in our favor from where it was at one point in time. So that's one of the things I do every night, when I get on my hands and knees, is talk about the EJ&E so we hope it will be done by year end.

That's all for me.

Thank you. The last question is from David Feinberg from Goldman Sachs.

Good afternoon. Gentlemen. Most of my questions have been answered. Just two broader open ended questions. The last two years the winter has been severe, particularly in Canada. Wanted to know if you're making special preparations or adjustments to your operations ahead of the winter this year in.

Well, we prepare every year. We have a special process we go through in preparation for the winters. There's certain things you can't prepare very well for. I would add this, we have done one thing. We have added 160 DP units to our fleet. Which is distributive power, if you are not familiar with the technology is where We can put one engine on the head end of the train or 2/3 back, or in some case 2/3 on the rear end We get an air supply from more than one place allows us to run much longer trains than you would in 30 or 40 below weather.

So where we've had to cut train size 30% to 40% in the past. We feel going in this year, we'll be much better prepared than we have been in the past. We did make some physical changes at Winnipeg that -- and we're doing one project as we speak to get ready. We have a little different operating plan, that if we get into some of the severe weather that we got into last time, we can react. We have a contingency plan that says, for example, if it gets 40 below above the lakes, we'll run below the lakes. and There's a lot of things we have done and learned we'll continue to get better at in dealing with the weather.

All right. And then one follow-up question because there haven't been enough on pricing. You made mention in the Q&A about, we'll see what happens over the next six months in terms of your outlook for '09 and base pricing at the 4% to 5% level. Just trying to get a sense if you're pricing strategy is based on the value proposition of your product. What could change over the next six months that would pressure pricing more hypothetically?

Jim's got a comment also. I would say this. We're relatively bright people here. If this thing is a horrible storm and we get into real depressed levels of business, we're not going to let a franchise sit out there with people with assets and with the lines that we own and not have some business on it. Somebody's got to pay for the light, gas, and water. I understand that. I don't think we're going to reach that point.

But there's a point in certain markets, that we would have to make adjustments. If our customers don't make it, it's not good for us. Are we going to try to work with them and help them where we can, and help them enhance their product? Sure. But I don't think that any of us think that it's going to reach any proportions close to that.

I was going to say that over the last two years, we've clearly had not difficult economic times tied to the housing industry in our forest products but clearly depression type levels of activity in that group. And now for most of this year, very difficult problems in the auto industry and during that period of time, my pricing activity has been in the 4% to 5% range. I think you misinterpreted what I said I would assess mid 2009. Maybe there was up side on pricing.

Got yo. Thank you for the clarification.

Thank you.

That's all the time we have. I'd like to turn the meeting back to Mr. Harrison. We look forward to visiting with you in January and reporting results as nice as these.

Thank you very much for joining us and we look forward to visiting with you in January and reporting the 4th quarter results that were as nice as these.

The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.