Canadian Pacific Kansas City Ltd (CP) 2002 Q4 法說會逐字稿

All participants please stand by. [inaudible] We are just ready to begin. Good morning, ladies and gentlemen. Welcome to the Canadian Pacific Railway's fourth quarter results conference call. These remarks may contain forward-looking information. Actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described in the company's annual report and annual information form.

I would now like to turn the meeting over to Mr. Robert Ritchie, President and Chief Executive Officer of Canadian Pacific Railway. Please go ahead Mr. Ritchie.

Thank you operator and good morning ladies and gentlemen and welcome to our 2002 full year and fourth quarter presentation. And I want to thank you all for joining us on this cold morning in New York. As operator stated, I am Robert Ritchie. I am the President, CEO of Canadian Pacific and I have got joining me, from the far side, Michael Waites, our CFO; Edwin Dodge, our Chief Operating Officer; Fred Green, our Senior Vice-President for Marketing and Sales; and right up in the front, Paul Bell, who is our V.P. of our Industrial Relations.

We are here at the JP Morgan Auditorium. Simultaneously, we have a full web cast and teleconference taking place. We are going to give you a presentation and attain questions from the floor. And from then we will go to the telephone lines and we will have you all wrapped up in an hour.

First, it is my duty to remind you that our presentation contains forward-looking documents, that use cautions and don't place undue reliance on them. Read the warnings. We are using Canadian dollar throughout as well unless otherwise specified. We are going to be also discussing some non-GAAP earning measures today. Reasons for providing you with non-GAAP results, which exclude foreign exchange gains and losses and the long-term debt and nonrecurring items are set out on the slide titled "Note to Non-GAAP Earnings Measures," and the main investor information section on our web site. Reconciliation of income can also be found on our January 27th press release.

So, in spite of having to deal with the worst Canadian grain crop in 41 years, which cost us over a $120m in revenue, we had a very strong year. We set all-time records in operating income and a record for operating ratio. We established record productivity in terms of gross train miles, move for employee, and we had the lowest train accident ratio in the industry for the fifth straight year. We also recorded our lowest personal injury ratio ever on Canadian Pacific. 2002 achievers can be characterized as a year where we remained focused on growing our business where possible, a full 6% on non-bulk commodities. We did this by adapting a world-class integrated operating plan quickly to a dramatically changing traffic pattern and reducing the overall cost per train mile.

Turning to operating income. As you can see from the graph on the, right, we had steady improvement in annual operating income over the past 5 years, culminating with our 2002 operating income, up 2% to $257m, as I said, a record. As the graph on the left shows, the standalone fourth quarterly performance over the same period has not been as smooth. As we pointed out back in October, we had tough comps to the Q4 over last year's record performance. In this year for fourth quarter we had dramatic loss of grain over the previous year's fourth quarter, which despite a poor crop, last year in '01, was surprisingly strong relatively. We also struggled with core volumes.

However, on the good news front, we grew the non-bulk commodities by 11%; this change in mix kept our total revenues flat, as well our comp and benefits were higher for good and valid reasons, not related to headcount. Fred and Ed and Michael can give you some color on those areas later in the presentation.

Turning to the earnings per share, you may recall that we gave some advice on the goals last October for the yearend of between 3 and 5%. Given the stronger finish on revenue growth and lower annual operating costs, we were able to improve the EPS to [2.56], a 7% increase. All of these figures exclude non-recurring items and foreign exchange gains and losses on the long-term debt.

Now let me take you through the details on the year-over-year changes on an EPS basis. Watch the data on that on slide 8, where I think it will help you understand our 2002 performance. I will move from the left to the right on this waterfall chart. So starting on the far left, you can see that our '01 EPS was [solid] at 2.39. Lower fuel prices and gains from our hedging program delivered 18 cents. Hard work and our supply services, lowered purchase, services and materials for a 4-cent improvement.

Implementation of our [Delta Car] Management Systems combined with our continuously improving integrated operating plans, improved asset velocity and yielded 7 cents. Effect of tax rates and other changes were both [lower] for another 24 cents. Average number of active employees for the year was down 870 persons, another 20 cents. This more than offset the normal labor inflation at 15 cents. Incentives in our successful employee share purchase program cost us 8 cents; and increased depreciation and interest, another 20 cents.

Lastly, the revenue story. Yield and a strategic initiative were a driven factor in our non-bulk revenue growth of $104m. They along with the basic organic economic growth contributed 41 cents a share to EPS. Add this out; our annual EPS would have been a very respectable $3.10, right on track to meet our 2004 target, which we laid out for you 18 months ago. But it's not to be this year. The grain [drill] [inaudible] cost us 47 cents per share and with the temporary softness in the core market offsetting strength in the fertilizers; we closed the year at 2.56.

So all in all, a 17-cent EPS improvement or 7% over 2001. So in summary, we are hitting on all cylinders under management control. I will now turn the podium over to Fred Green; he is going to take you through the details of our quarter and the full year revenue story. Ed is going to then describe how we reacted quickly to the changes of our world-class operating plans to accommodate that to those traffic changes as well, still driving up our productivity; and Mike will follow with a review of the financial details, and then I am going to return to the podium and wrap up our presentation and take your questions. Over to you Fred.

Thank you Rob and good morning. As Rob as suggested off the top that Q4 was a challenge, but we are satisfied with the revenue accomplishments. If you wish to follow long, I will work all of my slides from top to bottom. Despite the impact on the Canadian grain drought, -- the Canadian drought on grain revenues and soft export coal markets, freight revenues were up on the quarter and the non-bulk sectors were up by 11% compared to Q4 2001. Grain in total was up $34m, but please note that our U.S. green grain had a very strong quarter mitigating the full impact of the Canadian drought.

Coal was temporarily down. Basically due to fall in gross sales, which I reported on last quarter. Sulphur and fertilizer turned in good results on the strength of those increased export potash volumes and improving sulphur demands. Industrial products growth was based on solid recovery across most of the portfolio. Strong improvements in LPGs and chemicals led the recovery. Lumber remained solid, driven by housing starts and low interest rates. In Q4 we also experienced some modest recovery in pulp. Like previous quarters, [inaudible] continued to outperform the previous year in Q4. Our major driver was expanded capacity at [inaudible] Cambridge and some truck conversion.

Domestic Intermodal sustained the recovery that began earlier this year and international saw double-digit growth at both the Port of Montreal and the Port of Vancouver. The U.S. West coast labor situation drove some of the Vancouver volumes. All in all, Q4 demonstrated the strength of our portfolio. We were able to offset the developments on the bulk side by aggressively leveraging our Intermodal terminal capacity, our unique auto-franchise, and our emerging [inaudible] network and organization. [inaudible] is another good new story. While we all know that cents per RTM is not the perfect proxy for price, we delivered positive results with cents per RTM up approximately 2% on the year and on the quarter. Lower year-over-year bulk volumes partially contributed to this. On the fuel front we continued to manage our exposure with escalation causes and fuel surcharges.

More importantly, we also achieved our 1% same store price targets, which as you know allows us to measure revenue improvement due to price exclusive of mix changes. On a year-over-year basis we saw that disciplined internal initiatives on price and yield pay-off and we expect more of the same as we move forward.

Before going to the full year 2002, actual, let me refresh you on our growth model that we previously presented. Our goal was 4% growth coming from 1% strategic initiatives, 1% price yield, and 2% organic growth. The initiatives and yield programs are exceeding targets with excellent 2002 results and more of the same is expected for 2003.

Non-bulk organic growth has been significant but is [inaudible] by the temporary grain and coal heads, which amounted to almost a $150m. Some specific 2002 success that our note include the following, locking in 100% of Canpotex market share for the long term. Greater than 6% growth in our reload business, which we brand [inaudible]. Double-digit growth occurs across all three [inaudible] products.

Automotive overcoming the GM terrain (ph) shutdown and still growing greater than 9%. Intermodal growing almost 10% over 2001. Expressway up 46% and we successfully proved our port of Vancouver to Chicago service. I highlight our non-bulk growth of 6% to show you that we have real growth and when Mother Nature cooperates we have substantial upside.

Looking forward grain may be down slightly compared to 2002. Our model assumes a return in the new crop year to 85% of the normal crop in Canada and a slight easing to more typical U.S. volumes. Early signals are that moisture content will support this planning model.

For clarity, I will remind you that the new crop mostly affects Q4. You should expect our Canadian grain to bottom load in Q1. This reflects the impact of the Vancouver grain handlers lock out, which caused the diversion to Prince Rupert. Until the end of February we are temporarily handing off much of our export grains to the CN at Edmonton. I will also note that the real annual upside in grain could be in excess of $180m as full year run rates representing nearly 5% growth. This will be a 2004-2005 story.

Turning to coal, I am sure that most of you are aware of the exciting developments in our core markets. The big players [inaudible] are creating a single entity, which will give them considerable new strengths in the world markets. This appears to be very good news over the long term as CPR exclusively serves these markets, these mines. Our planning model assumes that this new coal consortium will be well positioned to grow sales starting in Q2. As you also likely know there has been some storm damage to west shore (ph) vessel loaders.

Although it may take six months or so for complete repairs our customers are confident they can meet sales projections by redirecting tonnage amongst various port facilities and markets. This is being facilitated as the members of new consortium controversy ore mines and relevant port facilities and early results are favorable based on January [inaudible]. Our coal model suggests that it will track somewhat below last year in Q1 and Q2, and out perform Q2 in the second half. We expect fertilizer and sulphur to surpass 2002, on the strength of improving sulphur demand and a full year of 100% Canpotex market share. We expect our [inaudible] business in force products and industrial products to grow in the 2-4% range.

Connetix will also enable growth with the continued expansion of our transload network including facilities in [inaudible]Quebec cities, New York, Philadelphia, and Mexico. Automotive will prove slightly versus last year's quarters and we expect to be off marginally in 2002. Our model is based on industry sales expectation for 2003 in the low $16m range adjusted to reflect our specific circumstances which includes our strength of our Ontario based Honda and Toyota facilities. Intermodal is expected to slow relative to Q4 2002 performance, but should approach our historical growth rates. As I mentioned earlier, we also recently had a great opportunity to showcase our port of Vancouver to Chicago product. This market is beyond our [inaudible] and in 2003, we intent to fully leverage the divergence experience of several shipping lines last fall.

We anticipate retaining the Vancouver to Calgary growth that we secured in 2002, or beat it with a smoother seasonality. So on summary, we will deliver on our 1% initiatives and our 1% price yields. The organic growth in bulk remains subject to positive growing conditions while our balance of our portfolio appears consistent with our stated goals. That completes my report; I will return the podium over to Ed.

Thanks Fred. First let me talk about safety. And this is an area; I am personally very satisfied with my team's performance. And just let me give you couple of reasons why. First as Rob mentioned, we are still the industry leader when it comes to the lowest frequency for train accidents. And second, in 2002, we received the responsible care verification for the effectiveness of our safety processes and culture by the Canadian Chemical producers association. But what really pleased me about this external audit were the observations about our employees' positive attitude and commitment to safety. Our service response as Fred mentioned to the new market opportunities was excellent.

Over the years as many of you know, I have been a very strong believer in what I call the hard assets. Intermodal facilities which we spend over 180m in the last 4-5 years, additional sidings and yard capacities both in our US mid-west operations and our Northern Ontario operations and the acquisition of modern and reliable AC locomotives, because it is my belief that with these hard assets and with the comprehensive integrated operating plan this would form the foundation for us to grow our business profitably. And I believe that second half of our operations and the adjustments we had to make were proof of that belief. Just to give you an idea of the magnitude of operational changes we experienced in the second half, we increase our active covered hopper fleet by 6000 cars for 25%. We added 4000 container platforms or 20% to our fleet.

We increased our train starts in certain corridors by more than 25% over the previous year. These changes allowed us to handle record movements of US grain to the Pacific North-West, record container movements over the port of Vancouver and record auto traffic. However, one thing I want to say about our integrated operating plan is that the rigor of this planning and the effective implementation of it has resulted in CPR being nominated as the finalist for the 2003 [inaudible] competition along with other well-known finalist as UPS, Henry, and Hewlett Packard. I am personally very proud of this achievement, because it represents to me an external verification of the effectiveness of our service delivery processes.

In short we proved our ability to quickly adjust our operations in order to provide new services and to do it profitably. Labor productivity has always been a key metric for me, and during the last year and a half we have had many efforts on many fronts to reduce the number of employees and to do it effectively. As a result of these efforts and not withstanding the significant traffic mix change; we have improved our labor productivity by 4%, which was a new record for us.

Our train leads for the year and the for the quarter we are below the 2001 level, however, this was not implied, we had a reduction in the productivity of out train operations. The reason for this drop can be explained by two factors. First, traffic mix caused by the significant decreases in Canadian grain and Canadian coal shipments and second the growth in non-bulk revenues. We increased our training starts to handle this growth and to provide a service level to our customer, which has earned us the title Canada’s best railroad, in the survey done by Canadian transportation and logistic magazines.

These changes to the ILP will give us the capacity for our growth plans in 2003. Even with the decrease in the train ways, we are able to lower our operating expense per train mile. One of the ways we managed to control our cost was that 15% of our train started using only one AC locomotive. I don't know personally of another railroad with our train that can match this performance.

These efforts allowed us to actually reduce our operating cost by 3% for the quarter and 2% for the year measured on the train expense per mile. And out looking the 2003 operations here, I feel my expectations. We will stay the course on safety because, as I told you many time before, I believe safety is good business and it continues reduce our cost. Our service quality improvements will continue on the intermodal and bulk business front. Our carload(ph) product -- in the carload (ph)product we will implement our latest version of the ILP to capitalize on our expanded network of Connetix facilities and improve our service delivery which in turn will complement our growth plans for this market place.

Third, there will be more productivity improvements as we take delivery of 46 new AC locomotives and get a four years benefits from the Northern Ontario Siding extensions and other recent capacities investments. In conclusion, I believe our operation has momentum from its record performance in the last quarter. And we already are looking forward to the return of the Canadian grain and coal business. Now I will turn the podium over to Mike who would like to take you through the financials.

Thank you Ed. Before I get into the numbers, I will remind you of Rob's comment for the outset of this session which talk about the non-GAAP as well as the GAAP measures. For clarity, I will use the term "adjusted net income" to mean "income excluding foreign exchange gains and losses on the long term debt", and also excluding non-recurring items. The "reported net income" means the GAAP number. I will also direct your attention to the non-GAAP earnings note and disclosure in the press release. Now turning to the income statement, I am going to take a few minutes to round out that discussion. I will move into the expenses and conclude with some comments looking forward.

This chart deals with fourth quarter net income on the left; we have the full year income summary on the right. Looking at the fourth quarter of 2002, total revenues were $950m that was flat compared to 2001. Freight revenues were $887m, that's up $5m or 1% from 2001, although the mixes as referred is quite different with the notable growth in intermodal and automotive traffic. Other revenues totaled $63m; that's down $5m but on a full year basis consistent with the guidance we gave earlier for a number approaching the $200m mark. Total expenses came at a $712m; that's up $23m. I will step through the expenses by line item in just a few minutes.

Operating income at $238m was down $23m or 9% from a tough comp in 2001 that Rob referred to this earlier. It is, however, inline with the average of about $240m over the previous four years. We also posted strong performance below the operating income line while other income and charges were virtually unchanged at $8m. Interest expense totaled $57m; that’s a $9m improvement primarily due to debt management efforts and the effective cash rate was 31% consistent with Rob, who has been saying throughout 2002; that's down 34% from 2001. These below the line items largely offset the lower operating income resulting in an adjusted net income number of $120m; that's off $4m compared to $124m in 2001. Foreign exchange gains on the long-term debt totaled $6m in the fourth quarter 2002 as the Canadian dollar strengthened slightly. Reported net-income was $126m; up $28m from 2001 that was mostly due to the unrealized foreign exchange gains, a long-term debt in 2002 versus a loss in 2001.

The full year story on the right has been covered by Rob, obviously the key points record operating income performance, record operating ratio performance, cost management played a key role in that achievement with expenses down 2%. I should point out that in 2002 our interest expense was up $33m to $242m that was due to the full year's effective of the post spin-off capital structure. However, our effective cash rate for 2002 declined to 31%; it’s down from 37% in 2001. And the benefit from lower income tax is more than offset the higher interest expense. So, adjusted net income for 2002, $407m; up $27m from 2001. All in on a reported basis, reported net income for 2002 $496m, up a $124m from 2001. As I’ve mentioned, fourth quarter expenses were $712m, that's up $23m from 2001. Compensation and benefits expense accounted for half of that increase. I will come back to that in just a few minutes.

But looking at some of the other highlights, fuel expense at $98m was down $1m or 1%, not withstanding an increase in the posted crude prices that we saw about $5.60 per barrel US. And that was due to the favorable performance from our fuel-hedging program. Materials expense of $36m was down $6m or 14%, mostly due to some one-time favorable items. We continue to work materials consumption efforts but this was mostly due to one-time items this quarter, and as you know, we normally see a run rate there of $40-45m.

Purchase services another at a $148m was up $15m with $5m of the increase due to the higher insurance premium’s expense that we are seeing this year. The balance due to a number of smaller items, higher energy and utility expenses, building and facility cost, and so on you will see ask focus on this number going into 2003. On the full year basis, and I am not planning and getting into details, but you have the story by now.

Clearly, a solid performance with expenses down $49m or 2%. Turning to comp and benefits expense -- fourth quarter comp expense, $280m; is up $12m with about $10m of that swing in incentive based compensation. The reason for the $10m swing is that we came up short on our targets in 2001 and we reversed some of the bonus compensations that have been accrued for us throughout that 2001-year in the fourth quarter. When we trued up the bonus accrual with 2002 strong performance, the difference was $10m. However, there are other factors that work looking at overall comp and benefits expense.

Inflationary wage increases and benefits slowed about $10m; that was partly offset by the headcount reduction efforts not withstanding the increase in train miles, as Ed spoke about. In addition, other work force management related expenses were down including variable compensation expense and training expense. So, we continued our cost containment efforts in the fourth quarter. The employee stock purchase plan expense increased by $3m, but as Rob and I keep saying we are happy to pay this, was roughly 55-60% of our employees participating in this program. Turning to the quarterly EPS summary and departing from the third quarter 2002 cumulative improvement of 20 cents, and again, I should be clear that’s before the -- or excluding the foreign exchange impact on debt and the recurred -- non-recurring items; positive factors included a reduced net effect of tax rate between quarters, as well as, the after tax effect of lower interest expense. These items were worth 4 cents per share each.

We have talked about the strong results on the non-bulk part of our business and as Fred mentioned, we can report, we exceeded our goal for 1% improvement in same store prices. Clearly, though the bulk business was down, which had the impact of reducing the EPS number by 19 cents. The non-bulk revenues added 21 cents for the net revenue swing of 2 cents favorable. The increase in comp and benefits reduced EPS by another 5 cents while the remaining expenses increases accounted for another 8 cents per share for a net full year EPS improvements -- 17 cents to $2.56 cents per share. Summary -- 2002 was a very strong year considering the Canadian rain situation and the impact that had on us. Turning to the balance sheet, cash flow, and another metrics. Net debt stood at $3.038b; that’s down about $150m and that resulted in a net debt to net debt plus equity ratio of 47.3% certainly within our targeted range. We show here cash flow on both the pre and after dividends basis because we didn’t have a typical capital structure or dividend payout as a [sublet] of the former Canadian Pacific. Key point to note -- cash flow came in on target bolstered by $72m of cash from a prior period tax settlement.

Our additions to property totaled $559m, that’s substantially below 2001, but note that we did not acquire any locomotives in 2002. Looking forward to 2003, crude oil and fuel prices continue to be a challenge for us as they are for others. However, we do have significant hedging programs in place and in the first quarter we have 41% of our requirements hedged on the forward contract, $21.95 U.S. per barrel.

As well we have, what I call, a first tier of callers, is a cost less callers combinations that puts in call options that covers another 6% of our requirements for the floor of $20 per barrel and the ceiling of $25 per barrel. Finally, we have a second tier of callers in place for the first quarter for another 11% of our requirement for the floor of $26 and a ceiling of $30. For the remaining three quarters of 2003, we have 25% of our requirements covered under forward contracts at $22.35 a barrel.

And that first tier of callers that I spoke about the 6%, remain in place as well. Again, the floor there is $20, ceiling $25. We shared with you our 2003 pension assumptions at a discount rate of 6.75% and that is unchanged and our fund return assumption is 8%. We did see stronger equity market returns in the fourth quarter of 2002 which will result in a year-on-year increase in pension expense of about $20m, that’s a little better than what we discussed with you back last third quarter when we indicated the $25m type number.

In summary, some challenges but also some opportunities in 2003. And I would expect some tough comp from the first half, given the timing and size of the Canadian grain crop and to some degrees the coal situation, but we expect another solid performance in 2003. This concludes my comments. Rob, back to you.

Thanks Mike. [That’s] our story. It is one that I believe finished exceptionally strong in all those areas where we are in control. Our revenue growth exceeded our expectations with dramatic inner [motor] growth, especially over the port of Vancouver and that’s [inaudible] Chicago in the mid-west. We saw industrial products returning into a more normal growth pattern and good [color] of strength from Connetix in the [line] of strategies. Automotive was refreshingly strong given that we had the St. [Torais] closure related to the Fire [Burden Camarel], and most heartily our fourth quarter was strong. We exceeded the year driven by the nine [non-box up] to 11%. On the operating front, we continue to drive productivity gains, expenses portraying mild and continued to drop driven by employee productivity which is on the rise. Fuel consumptions rates continue to decline, asset velocity continues to improve.

Ed spoke about the new capacity which we put in place last year. This combined with the arrival of 46 new AC locomotives on our property, as we speak, mean that we are truly positioned to handle the retrain of bulk commodities later this year. We have got the schedule of Railway that's flexible. We have the people that are engaged and driven for results. Our leadership team is committed, motivated, and ready to do what is necessary to hit our long-term objectives.

So looking forward to the balance of '03 and beyond, I see a reasonable growth in the 3-4% range in revenue, in spite of the worst Canadian grain crop in over 40 years, which will constrain our grain revenue to even lower revenues in this year that we had in '02. We have shown that we can grow the top-line and we will continue to do so.

There is two main drivers here -- first the growth in our car [inaudible] motor business to strategic initiatives; and secondly another year of yield contribution of plus 1%. We are breaking new ground on safety, service, and productivity; and we will continue to improve. Productivity improvements will be the basic fundamental driver to our cost management. For the year, we expect modest earnings per share in the growth of 1-3% range. This is modest, but remember we are well positioned for return, a more normal growth, which will -- more normal grain crop which will come not until October almost [until] fourth quarter of this year.

And coal shipments will be more normal in the last three quarters of this year, which will strongly drive our exit from ’03. So, I look to the grain and coal adding another, say, $20m in ’04. This strong return of the bulks is going to contribute to our march for those 2004 objectives that I talked about.

So, that concludes our remarks. And operator, you can open you the floor to questions. And please identify yourself and the firm. And limit yourself to two questions please. It will take approximately 50 minutes from the floor here in New York. And then we will go to the phone lines. And for you on the phone, we can begin to queue up your questions at any time. And, operator, please review the instructions. Thank you.

If you have a question on the phone line, please press “1” at this time.

Very good. Okay. We’ll open it up here. Please Tom.

Yeah. Hi. It's Tom Lodwig (ph.) from Bear Stearns. Couple of different questions for you. To start with -- for you Rob. The techno reduction -- you had a program, I guess, in place in fourth quarter ’01. And so as we look at fourth quarter over ’02 on a year over year basis that head count reduction slowed down a bit.

I think it was about 1% decline in average head count. You talked about the productivity you measured since and so forth. Can you see that reduction accelerate in 2003, or is there anything that will prompt you to take a look and say, okay, we need to do something to really increase that reduction in head count. And maybe give one-time program maybe take some other action. Or should we just look at continuing 1% reduction for ’03?

We really -- Tom thanks for the question. We really got ahead of the wall in starting at the beginning of ’01, for a variety of reasons that I have touched upon in the past. And we have had some significant reductions as that slide has shown you -- 10% since 2000. We are now facing record train miles and we are continuing to see growth in other commodities. And that doesn’t mean that we will not continue to look at every area of the company where we are in right size, but as I said in the past we see it in the 100's, 200-300 type of people coming out driven mainly through retirement, attrition and select us for you know layoffs.

But overall, we do not see any major program as we have had in the past. Okay, and at this time, as I always tell our employees, it depends on the way the economy goes, but we are trying to improve our service and improve our revenues.

Okay. Thanks. And a question for Fred. Actually, maybe, two questions. Can you give us a sense, if you look at the full-port portfolio of revenue of your business, on how much of that can you apply a fuel surcharge? You know, a rough percent. And what type of fuel surcharge are you looking for? Is it 2%, 4% right now? And, then, another question for you on the Intermodal side, where your competitor has talked a bit recently about the programs to try to increase their profitability in Intermodal. And they are doing some things I think to change customer behavior. I am wondering if you are anticipate trying to, maybe, gain some share for them if that impacts their service or what your view of that is and how you are responding for that?

Tom, on the fuel surcharge side, I think, in the past what we have tried to do is illustrate the there are two mechanisms for recovering or mitigating the fuel impact. Fuel surcharge that we apply tends to apply to shippers who are used to working in a world that is say, tough competitive or international road where bunker surcharges are quite common. So in the International world and the Intermodal world, fuel surcharges are quite a common vehicle and we do apply them.

In the balance of the business, the fuel surcharge will tend to be applied on, what I would call the open [tariff], and it was more the spot business or the occasional business that arises. That would tend to have a fuel surcharge applied to it as well. Then beyond that, we have a second tier of activity which is to embed an indexation into every single contract as they have come due which is a program in place for about the last 16 or 18 months. So, while we don't have a 100% yet, because some of the contracts haven't come due, it is a policy now within our company that we must have some form of [fuel] litigation built into our an escalation cause.

So that's the second tier of activity that we have in place and probably by the end of this year, I would guess 90% of our business will have either of fuel surcharge on it or a clause that is applicable. And within the next quarter or two all of that will be there. With regard to the order of magnitude, it is available; it's public. I think it's on our website. I am sorry I can't quote it exactly at this point in time, but orders of magnitude, I believe [we'd] probably in the $18-20m last year on -- just on fuel surcharges, prices are looking to be higher obviously in the first quarter. So we think our run rate will be higher than that in Q1.

And then on the Intermodal side?

On the Intermodal side, you know, we've got a great business franchise. We -- as a -- it is at point [inaudible], and the executive team have supported and endorsed and invested in a great set of -- a great network of facilities across the country. We have a model that works exceptionally well. We are very balanced; we are very different than the U.S. intermodal business. I think everybody is familiar with that, retail versus wholesale. We are quite pleased to see some of the activities of our business associate in Canada as well, because we think they are our going down a path that we've been on for a long time.

We have fuel surcharges, I said, we have detention charges; we have storage charges. We generated in excess of $30m last year on supplemental charges in the terminals, encouraging people to move their cans faster that type of things. So directionally, I think they are following a path that we have been on and we encourage and we think it's a sensible one for [referral] parties involved.

Hi good morning. Ken Hoexter from Merrill Lynch. Fred, can you talk about the average revenue per carload on the grain side? We saw a huge decline for the quarter. Is that something we should continue to see until early '03? And then can you also talk about the impact of the strike as kind of breaking down what the percentage is of that? And then just my second question would be for Ed or Mike. Just on the comp and benefits line, was there any upfront labor cost included in this quarterly performance or should we see something going forward? Thanks.

I think Ken the grain one is pretty straightforward. As I referred to with the grain hammers [lockup] in Vancouver, for all of the fourth quarter and for the first two months of this year, we have been handing off the Vancouver [inaudible] business at Edmonton. So obviously we don't get a full halt to the coast.

And we eliminate, obviously, the expenses as well, but the average revenue per car were dropped, because we basically are getting half or two thirds depending on the origin whether it is coming from the Alberta [inaudible]. So that is dropping the average revenue per car in the grain side. That will recover, obviously, as of March 1st when the Port of Vancouver facilities reopen, and we then start to direct all of our export grain at the Port of Vancouver until such time as the Port of [Clandibail] comes up in the spring . On the second question, you asked about the percentage impact of the strike, which commodity were you referring to Ken?

With the grains, I think you just answered that with the [lockup] [inaudible].

I'll take the second quarter Ken. I am interpreting your question as upfront, meaning did we take any accrual in the labor expense and the answer is no. And I'll get back to Rob's comment earlier, which is while we can't roll out special programs, we are trying to deal with those numbers and as he indicated, perhaps the number down in the 100s. But we are going to try and deal with as much of that as we can with the [treasure] little time.

So can you just talk generally, you know, what kind of increase we should seek to the comp and benefit fundamental?

Well the issue there is that you have to be careful of, of course, is the volume growth and you know that is good problem to have. Having said that, if we take a look at the unit rates what we've said in the past is leaving pension aside for a moment, we would see unit rate increases of about 4%. And that when we add the pensions in with the increase in the pension expense of approximately 20%, I think the number around 5% is not a bad number on a unit rate.

Although I [didn't], come back here, Gary Yablon First Boston. First a question for Ed. Ed, could you talk a little about what's some of the potential you see on with some of the efficiency measures -- you talked about GTMs per employee and could you talk a little bit about volume growth for the company vis-à-vis what you see for freight car growth, for a growth in locomotives, how much can you grow the business without having to add as many assets going forward?

Okay Gary, let me just give you an example I think that the, you know, in locomotives we came into the fourth quarter and facing some increasing demands that we hadn't expected. US grain coming up in Dalbarta (ph) for figuring, a very strong Pacific North West movement of being out of the Midwest to the Pacific North West. And one of the ways that we start to leverage our operations was to move into single unit train starts, where we took our existing fleet and 15% of the train starts were put into single units.

And that's my way of looking at in operations; using existing assets and generating almost another 15% increase in train starts without additional locomotives. On the car-side, you know we haven't, sort of, giving you the numbers on our productivity improvements on the cars. But we met out targets and then and exceeded it overall in the year notwithstanding in the fourth quarter, we had some mix-significant change in the traffic floor, because of the different movements of covered hoppers and containers. So we are [sweating] the assets.

Last year we took out of permanent service 7,500 cars. And still move the volumes that we did. We expect to keep that 5-10% improvement per year in our car velocity. This year while we had a full run of delta, which is our [anti-tire] repositioning. Last year it came on stream in January. We will be implementing our pilot operations in our yard operating system called [Ties] at the end of this first half, and then fully implement it by the end of the year. And we expect that the last mile of utilization from the yard to the shippers dock and back and then through the yard -- we are going -- that operating system together with other rigorous planning that we do, will allow us to sort of get that sweat out of the car asset utilization.

So, you know I look at our assets metrics every month. I measure the miles per month, the locomotives, the kilowatt hours. We look at miles per day per car type on our fleets. We have some pretty rigorous objectives. But then also, any new equipment we buy we look at trying to get the highest payable deteriorate ratio from our new assets that we have fewer cars. So we are looking at any place that we an sort of sweat those assets and make them more productive. And I'll just show out the example of the 15% train starts as an example of how we decided to sort of push it to the red line.

And just a follow-up if I could. Maybe for Fred, could you talk a little bit about pricing, it was mentioned the -- one of the slides 1.9% with I guess more than half of that being [pure] price as the most of mix. It said not a -- exceeding 1% came from real price. Can you just give us little bit color about what is going on there?

Yeah Gary, the way we've got it set up, we recognize that since [Parkium] is not a perfect measure, because it's influenced dramatically by a mix. Over the last year we have instituted; we created a yield department about a year and a half ago. And maybe even 2 years ago now, we put in place some very rigorous processes that have now been transferred into the business groups if you will. So what we have done is created some tension within our organization between the marketing and sales forces.

And those that are charged with helping the leaders of each of those three business groups understand the pricing activities. So we have disciplined pricing plans. They are not looked at simply an aggregate; they are looked at by lane. And as we go through by lane, we establish within the broader strategy we are trying to pursue in that particular segment of business. Show me the rational and the pricing plan that you have, show me the yield on those pieces of business. So this may sound a little granular, but that is how we are doing it. And we believe that by doing that we will institutionalize that line of fraud, which is to command value for what it is that we are selling. To do that you have to work backwards and say do we have perfect clarity about the product definition that we are selling, what are the features, what aren't the features.

And if you have that clarity, can you go in and command the premium or command a better value than you historically have been. If you cannot because of market forces, is there some way that you could eliminate some of those features and the expenses associated with those features and still we came in business, if the individual is not prepared to pay for it. And a third component is the capacity management side, which we are moving into now. Now that we have a better comfort level with out understanding of what is and isn’t included in the product, we are starting to merge together our train capacity, our corridor capacity, our fleet capacity, and we are starting to move to directing our sales forces to go and sell what we have available as oppose to custom building every solution that a client might want.

Obviously, there are clients who need custom solutions, but there is also the ability to reach on to the shelf and say, "We have this kind of car moving in this direction, on this type of train and its available". They're whole lot smarter for us to and sell that and instill that. And, we have of course to be more nimble in our pricing capabilities in that regard. So, in particularly in the box(ph) car side or the merchandise side, we’ve reorganized the organization a year ago. We are now at a point where we’ve got a centralized pricing activity under the direction of the Vice President responsible for that group, and he and his associates established how they can best optimize the assets that we have, and the pricing guidance is given to the balance of the marketing sale scheme within [with bands] of course, and encouragement.

I will go further and tell you that in Q1 and Q2 of this year, you will see us implemented an incentive compensation scheme for all of our marketing sales people, which will have no upside on it. It's a model we have tested and we are satisfied; it is [leaving] a kind of orientation to growth and hunting mindset that we want to put into this organization.

And by the end of Q2 this year, we will have our sales force automation tool, which captures the whole pipeline of [lead], qualified [leads] through to sales consumptions. So, we've got a lot of focus on price and on yield, but it’s being done in a very systemic way. And I would argue that many of the principles that Ed has institutionalized now in the operating side of both discipline and rigor in detail and that all adds to a good result in the end, is where we are taking the marking sale side.

Thanks. [Right], we have got time on this one last question, then we will move on to the telephone line. Okay we’ve got it. So operator we'll turn it over to the telephone then.

Thank you. Our first question will come from [Joseph Leinwand] of RBC Capital Market. Please go ahead.

Thank you very much gentlemen. Just couple of questions, No. 1, [knows as] your free cash flow number is edging up and you said your balance sheet of 47% was approximately where you wanted it to be. Give some guidance of the CAPEX for '03 and any thought that you might be recommending to the [porta], or raising dividend or something like that?

Michael you want it.

Yeah. What we are looking up to '03. Joe is bear in mind, of course, in 02, we did not acquire locomotive; we came in with addition, the property of roughly $560m. Those locomotives are worth a $125-130m, so in round numbers, that will pitch up around the 700 number. He would have equalize that if he will in '02-'03 [equates] to about 635 for each one of those years, but this year, 700-725 range.

You can see we are running a little bit extra cash on the balance sheet at this point of time, $285m. We have adopted a bit of a conservative financial position, and we'll firm up the capital program as we go through the first quarter, as we will, with respect to any additional announcements on any other use of cash. I will say on the debt, I am very comfortable with where the balance sheet and. I don’t see a paying down debt as a priority for us.

All right. Just one another question -- and just, with regards to the [coal, the west] terminal train situation. Can you quantify, is that a significant event, or I think it is not going [to be] response from the background and what you are doing to get around that problem?

Okay, [inaudible] it's not significant. I'll let Fred give you some granularity on it.

Joe, I think as Rob says, we don’t consider significant. We've been in extensive discussion with all of the parties, and it’s the collective belief that there will be no significant impact over the course of the year. I think it’s probably fair to assume that as we go through the first couple of months of readjusting to something that's different than was in the normal pattern. You might see a little bit of a dip for a month or two, but it’s really very modest. And over a long-term, as I said, I think this consortium that’s being formed is actually a great piece of news and as a result we are expecting a much stronger second half.

Thank you. Other people ask questions. Thank you.

Thank you. Our next question will come from Randy Cousins (ph.) of BMO [Netware Burns]. Please go ahead.

Good morning. My two questions, just a reference to the whole merge of the coal complexes in [Southeastern] BC. It would strike me that there might be some huge opportunities for a better logistics management, which will result in a cost savings for both Canadian Pacific and for the coalmines, associated with it. Can you give us some sense, as to sort of whether that is correct? And, secondly on that same vein, do you guys have a long-term contract with [inaudible]. How does this transaction affect that contractual relationship, or do you see yourself, sort of, reviving the whole process?

Okay back to Fred on that Randy.

Randy, our view is that the consortium quite logically, as you suggest probably leads for a great opportunity for a continued pursuit of the efficiencies in the system. All of the parties are involved, all of the parties will be looking to optimize. That said, from the perspective where we stand, we have long-term contract with the parties involved and we don't that to be impacted. Over the long-term, if there is mutual benefit to further discussions, obviously, we could consider that.

So, you guys don't see having sort of an impact in terms of I do, the [year] cost performance or your ability to get unit cost down in terms of sort of moving coal?

Well, may be I wasn't clear. My point is that I believe there is an opportunity that will emerge for us to reduce cost, if we collectively work together in the supply chain. In the absence of that, everything is under contract unless it makes sense through a negotiation for terms to change then we don't see any impact on the prices that we command for the services we offer.

Okay, my second question has to do with the sort of business that you've picked up as a consequence of diversion in the Vancouver? You guys have basically indicated that you hope to hang on to that business. How much do you think you actually picked up and how much of it do you think you can hang on to?

Well, it's a little difficult to assess that perfectly. But I think for [ball park number, Randy you could probably use a figure in the 15m range that we think was probably diverted now upon reflection, and it's our expectation that we'll hang onto all of that; however, it will obviously be spread over 12 months instead spread over 5-6 months.

Okay, thank you.

You are welcome.

Thank you. Our next question will come from Lorraine Gloster (ph.) of First Associates. Please go ahead.

Yes, I wondered if you can comment on just the purchase services. You did talk about that being the focus for 2003 and with the revenues forecasting up to 3-5% and yet earnings only 1-3%. I want to know, how much of that was due to purchase services, and I guess also if you can talk about the [inaudible] program? Is there any cost that are being up, you know, being put into the system to make sure that program goes according to the plan?

Mike, first purchase services.

Purchase services, that line item is comprised of a great number of cost elements, contractor services, consulting, utilities, rents, casualty costs, [rent] cost and so. So, it is really a composition of a large number of items, and we have increased our focus in terms of responsibility for some of those component parts of that line item, and it is an area of opportunity for us, I think, going forward.

With respect to trying to reconcile why the earnings are only going up. We've given guidance 1-3% given the revenue growth. There are other items that we are dealing with. We've talked about pensions; we've talked about fuel-mitigated put the hedge to some degree and also insurance premium.

And as you heard this quarter, we are chasing the volume a little harder, in the sense, we got to run more train miles to get those [GTMs] that typically causes us to see bit of an increase in expenses. But we'll focus on those expenses and deliver as much of that from the bottom-line as we can.

Is the 148 a good run rate to you for purchase services then?

Well, it is a difficult question to answer because it varies with volume and so if we are growing, again that's a good problem to have but a 145 perhaps 150 type range is not a bad number subject to the volume level.

And just on the cash for the work force reduction. What do you expect for 2003?

In terms of payments under the restructuring provision, I would expect that to be approximately $90-100m depending again on how the year unfolds and whether we have any additional programs or not, as we said at this point in time they are [non-contemplated]. If the business got tough, we would go back and revisit it.

Okay, and just lastly on the automotive. How much of your revenues would now from transplant?

[Dorian] you got me. I think it's about 35%. They are both from [transplants] that Toyota, Honda type facilities.

[inaudible], we have to move on.

Thank you.

See that you do.

Thank you. Our next question will come from Russell Rivy (ph.) of CIBC World Markets. Please go ahead.

Ross O’Reilly: In light of your comments on the discrepancy between revenue growth expectations and earnings growth and the implications that I guess the operating ratio will -- could trend a little higher. How does your target [over] 73% ratio for 2004 sit; is that still feasible if we got a more normal grain experience in 2004 and 2005 or should we be pushing that target out to another year or so?

[inaudible] it's a focus of us to hit that 73% number. It's very at the forefront of our minds. We did when we talked about a 73% operating ratio; clearly we didn't anticipate a grain drought of the magnitude that we are dealing with. We also at that point in time were projecting a $22 worth taxes in immediate prices and what we said in the past is, if you take a look at the operating ratio performance, for example, in 2002 and adjust that for the Canadian grain crop, which is worth 1-2 points are set apart 2 points on the operating ratio, as well as adjusting for crude prices, you get down to a number approaching the 73% range. So, in other words 73% is not that far away.

Now having said that, if there is a silver lining to some of the issues we are dealing with, we are pushing harder on expenses and you can see in the fourth quarter we have been very successful at growing non-bulk. So, it’s a number that we are very committed to, whether we will get it in '04 or not is dependent on getting that grain crop, on getting the fuel price, but it's the number we will continue to work towards.

We are definitely committed to our [inaudible]. It's going to be a lumpy landing. However, we expected a more smooth trend line, but because of grain and because of fuel, we are going to be pushing pretty hard. 2003 is going to be another year of tough sliding until a new grain crop comes in, coal recovers and we expect fuel to approach -- you know in the longer term get a lot closer to $20 than it is at $30. As Mike said, every dollar [is] $10m -- every dollar in [net taxes] is $10m on our operating income. So you can just see what it's doing to us right now.

Ross O’Reilly: [Excellent]. And then finally if I may, in regards to the tax rate, should we still be looking at something in the area of 30% or little less in 2003?

Well, '03 -- 31-32%.

Ross O’Reilly: So do you envision it ultimately going to the 30% or less still or Mike should we be looking at it settling in the lower 30s?

I think 30% -- 31% is the bottom. Also as you know in Canada we have the announced reductions in the Federal rate, the provincial rates are coming down, and the good new story for us is through tax planning and tax management efforts, we're able to recognize, if you will, that reduction immediately as opposed to waiting for that to come in. So, I think the [floor] is 30-31 and for '03, I would say 31 -- 32% effective tax rate. As you know there are other items and there are permanent differences, different tax rates on the real estate income and so on. But 31 -- 32 for '03.

Ross O’Reilly: Thanks very much.

Thank you. Once again, if you do have a question please press "1".

Operator, hearing none, we are just one minute over our time slot, so I will thank everyone very much on the telephone and for being here in New York and look forward to talking to you at the end of the first quarter. Thank you. Good-bye.