Canadian Pacific Kansas City Ltd (CP) 2003 Q1 法說會逐字稿

All participants, please stand by. Your meeting is ready to begin. Good morning, ladies and gentlemen. Welcome to the Canadian Pacific Railway first 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 reports and annual information forms.

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

Thank you, Melissa and good morning, ladies and gentlemen. Thanks for joining us on this conference call.

As the operator said, I'm Rob Ritchie, the CEO of CPR. With me in Calgary today I have Ed Dodge, our COO; Mike Waites, our CFO; Fred Green, our SVP of marketing and sales; and Paul Bell from our investor relations. Before I start, If I could just draw your attention to slides 3 and 4. The operator told you about the forward-looking, but we are also using Canadian dollar and Canadian GAAP. There is also some non-GAAP EPS references, and the reasons for which are described in our press release.

So I ask you to turn to slide 5. Canadian Pacific obviously had a difficult first quarter. We faced many challenges in a quarter which has traditionally been a tough one for our company. As I said at the March 18 teleconference, issues facing us were by and large external and temporary. At that time, I spoke of three issues that we had to deal with. First, we had to deal with fuel prices higher than expected and remained high throughout the quarter. This has affected the entire transportation sector. Second, the severe winter weather conditions have affected operating efficiencies, both for ourselves and our connecting partners on land and sea. It also affected some of our customers. Ed will review the impact this had on our net fluidity and the related operating costs. Finally, we had some tough comps compared to last year when we had a large insurance recovery. Mike will take you through complete breakdown the increases in our purchase services and other accounts. Now, looking back at the results, we also know it was the worst quarter for grain revenue in recent memory.

These circumstances are extraordinary and the good news is I believe CPR managed them well, all things considered. Regardless, the issues did take their toll. Our operating income which came in at 118 million is down 33%. Our operating ratio rose to an unacceptable 86.5. On slide 6, you can see that our earnings per share came in at 24 cents before non-recurring items and foreign exchange gains on long term debt. That's in line with our guidance given on March 18. The reported earnings per share came in at 64 cents, down almost 26%.

Turning to slide 7, let me give you the high level breakdown of the changes year over year. So moving left to right on the chart, first, we have pointed out Q1 at a credit of almost 15 million which boosted the EPS last year. Next, you see the full impact of the change in fuel price. When we were hedged at 57% at U.S. $23.70 per barrel, we could not overcome the WTI prices in excess of $34.00 per barrel. The severe winter operating conditions brought us down 8 cents and the increase in casualty and derailment cost cost us 2 cents. On the positive side, add almost 3% growth in non-grain revenue, all of which I said, was offset by the worst grain quarter in recent memory. Add two cents for all other items, and you end up with an EPS of 24 cents.

On slide 8, there were some positive signs as we exited the quarter. We made a conscious decision to add assets and resources to meet the customers' needs. These are now being eliminated as we get back to normal. I'm also very pleased with the exceptional way our people have responded to the operating challenges. As promised on March the 18th call, we have made dramatic and swift improvement in our operations over the last two weeks of the quarter and into this month of April. Ed will show you how many of our safety service, and productivity metrics have improved. We remain focused on returning our operations to the level of scheduled consistency and efficiency that our shareholders expect. We have also been pleased with the strength of [INAUDIBLE] in almost all categories. The fact that has been masked by the impact of the strengthening of the Canadian dollar in our revenues. Fred will speak to the key commodities and give you some insight into our current outlook for the balance of the year. Finally, Mike will take you through the expense and the action we are taking.

I will now turn over the microphone over to Ed.

Okay. Thanks, Rob.

Quickly, I will review the tough conditions that we faced in the quarter, most of which was covered in our March 18 call. I will then speak to the actions which we took to recover our service and give you a sense of the magnitude of our recovery to date. I'm now on slide 10. As I stated on March 18, there were two reasons why our operations got significantly out of balance between January the 20th and March 15. First, we had record low temperatures between the middle of January to the middle of March in the central portion of our network. This caused us to operate shorter trains at slower speeds which increased our train starts and operating costs in this corridor. The record cold weather was also a factor in the increase in the number of main line derailments. We had a total of eight of them, five in Ontario alone, and this is more than double the number in 2002. Normally, when we have line outages, we would detour on other railroads but they, too, were having their own challenges. Hence, it was tough to keep our operation in a balanced mode. To mitigate the customer impact, we took numerous actions. For example, we brought on additional rail cars, decreased our train lengths, leased 20 and brought 40 locomotives out of storage, out of mechanical and engineering forces and incurred more overtime in these areas. We worked with our running trade unions to open up the miles, another form of overtime, to increase train starts and moved experienced managers from around the country to the affected areas to assist in the recovery of our operations. We made these decisions consciously to protect the need of our customers. We knew if we kept a backlog of traffic to a minimum, we would be able to return to a normal fluid of state and a balanced operation as quickly as possible. I'm satisfied that our response to these extreme winter conditions was excellent as confirmed by one of our major customers who told us we were among the best at handling their traffic throughout this winter. However, I personally remain frustrated when I see my key safety, service, and productivity metrics drop. I know we are not unique in this area, but I can assure you that we are reviewing our operating plans with a goal to significantly mitigate the impact of this type of extreme and extended winter conditions on our performance.

Turning to slide 11, as you can expect, the cumulation of these of these events had a negative impact on our asset productivity. As these graphs show, our average overall train leaves were down 5%, and our gross ton miles per active locomotive in a day dropped 10%. Because we had to run shorter trains, our unit labor and fuel cost per cargo increased, and our terminal dwell time also increased which also impacted our asset velocity. All in all, it added $18 million of dollars of extra expense to our operations.

Now to slide 12. I told you on March 18 that the recovery was underway. I am pleased to say that thanks to the extraordinary efforts by our employees and some quick changes to our independant operating plan, I saw our operations begin to come back in line with my predictions made to you earlier in the year. Compared to that eight-week period of extreme cold weather, we saw the pace of operations for the last two weeks of March increase significantly. For instance, total gross ton miles per day why were up 15%. Train weights were up 10%. Fuel consumption for GTM improved by 10%. Customer service as measured by trip planned compliance improved 5% to well over 80%. This performance improvement in the pace of operations continues into April. I still expect our Q2 operating performance to match the record set in Q4 of last year. Our volumes remain very strong and we are on record pace for April.

Let me close by saying that I'm very concerned about our service level this quarter and the adverse impact it had on our customers as well as the adverse impact on our earnings. Many things went very well, and our speed of recovery and the magnitude of the increase and the pace of our operations speaks to that fact. However, as I said earlier, there are issues that we have to tackle differently, and my team is working on solutions for next year as we speak. While it is too early to commit to specific plans, I can say that the genesis of our 2004 winter plan has already been put into place, and it contains some innovative and new thinking. I will give you more details later in the year.

Now I will turn the phone over to Fred.

Thanks, Ed.

I will start on slide 14. On the revenue front, the first quarter unfolded largely as we suggested it would except for grain, revenue was generally strong. Demand was generally strong, and non-grain revenues up 2.9% on the quarter. The wild card was the strength of the Canadian dollar. I was outside of our planning range, and as a result, foreign exchange which was proximately $1.53 or a 65.5 cent dollar negatively impacted revenues by about 20 million dollars.

I will touch on a few of the commodity stories. Grain as we expected was the worst in memory for the first quarter. We dealt with the impact of the drought and the prolonged movement as a result of Vancouver grain handlers issues. We partly offset this with strong U.S. shuttle train programs with export of soybeans and corn to Alberta plus a reasonable Canadian export winter wheat program. Coal tracked slightly blow 2002 as we worked through the logistical adjustments to address the temporary loss of the two ship loaders at Robert's Bank in the January wind storm. Strong export potash leveraging 100% market share drove the growth in sulfur and fertilizers. On the car load traffic side, both industrial products and forest products were relatively flat as they were affected by winter operations. We had a strong quarter in automotive, with the new GM business and new Chrysler business in the east, more than offsetting the closure of the other GM plant. Our inter mobile group set a very strong quarter led by international. We experienced good growth on both coasts. In Vancouver, we secured business from shipping lines including light Columbus and China shipping.

Moving on to slide 15, yield management. Starting on the left of the chart, our same store yield is tracking to target for the year. In fact, we actually exceeded our first quarter same-store yield targets. Fuel surcharge revenues are also up versus the same period last year. Significant shift in traffic patterns offset these positive achievements. As context, our Q1 length of haul increased by 3.3%. Key areas impacted were industrial products, sulfur and fertilizer in the green sector. This, as you know, typically has a dampening impact on the RTM measures even though it is a very valuable business. While, mix had the largest yield impact, the effect of foreign exchange was substantial. All of our sectors had weight in U.S. dollars, U.S. grain at 100% and a greater than 100% auto, industrial products, and forest products sectors were among those most affected.

Let's turn to our outlook for the balance of 2003 starting with grain on slide 16. While it's too early to tell what new crop levels will be, moisture levels have improved versus the last two years particularly in the southern regions of the Canadian prairie. Also, south central Manitoba reportedly has reasonable subsurface moisture content. These are all positive signs. While conditions have improved, we continue to model a crop in the 85% of normal range. I remind you that even at 85% of the average Canadian crop, this could mean $35 million dollars in Q4 and over $100 million annually.

Turning to slide 17, I'd like to get a quick update to coal. The west shore coal terminal ship loader damage will be fully repaired by July. The coal partnership has gone into operation and we see this as a good news story. We are actively working with the new management to explore expanded sales to Canadian metallurgical coal. Our model indicates that coal will deliver reasonable Q2 for the second half which should result in similar year over year revenues.

Now turning to slide 18 and the balance of our business outlook. Our outlook remains consistent with what we provided in January. For clarity, I would like to note that I have calibrated our outlook to reflect the foreign exchange rate of Q1. That was $1.53, 65.5 cent dollar. This softens our topline revenue growth, however as Mike will explain, the impact of this is negligeable on earnings. With present gas prices, fertilizer and sulfur looks strong for the balance of the year. Recent events in forest products have caused us to modestly recalibrate down our outlook for the balance of the year. While we still see growth in the sector, the rate of growth is slightly under what we had originally anticipated. Industrial products fundamentals remain solid with the expansion of steel, and we expect productivity will be up for the balance of the year. We anticipate that growth will continue at this pace in automotive. Some inventory appears to be building and we will play this conservatively until the balance unfolds. We expect to be off marginally, so no change from what we had previously reported. Motor remains strong for both domestic and international traffic and should approach our growth rates despite some tough comps. The interpretations are positive for growth in activity with some great upside in grain and Q4.

I will pass it it over to Mike.

Thanks.

Turning to slide 20, clearly expense performance is the key item for discussion and I will come back to this in just a few minutes. Rounding up the income statement, review, other charges were down 8 million dollars largely reflecting the rail life foreign exchange gain reflect the U.S. dollar. That reflects the strengthening of the Canadian dollar. Interest expense improved by 6 million dollars following the repayment of a high interest bond. I should point out we were very successful in placing a 250 million dollars U.S. 30-year note in mid-March. We had a coupon rate of 5.57% and spread that over treasury, we were very pleased with that.

Turning to taxes, our effective tax rate was unchanged at 32%. Tying that out to the reporting numbers as we noted in the past, we are now required to recognize the full impact of exchange rate in our U.S. dollar-dominated debt. There is a tax gain of 65 million dollars this quarter. Reported net income was 102 million dollars, and that's compared to 136 million dollars last year and that last quarter benefited from 72 million in favorable tax related to prior years. Turning to operating expenses, overall expenses rose 61 million dollars or 9% with fuel and purchase services as a big ticket item. Briefly, compensation and benefits expense were down 4 million dollars or 1%, not counting that our average head count was up slightly. Wage increases drove expenses up 5 million dollars while benefits and pension expansion were worth another 400 million dollars. The base of compensation was down 5 million dollars due to the weak results from the quarter. We were not accruing incentives due to these numbers. Again, with other items of recovery and help from foreign exchange, overall expense fell 4 million dollars. Key points on a unit basis, we expect comp and benefits expense to increase in the 4 to 5% range this year and that's consistent with the statements that we have made in the past.

Next to the fuel slide. Fuel expense rose 22 million dollars, or 26% notwithstanding the strong hedge position. The fueled analysis is summarized on slide 22, and that would provide additional details in the appendix that you could refer to. Crude prices averaged roughly $34 per barrel U.S. in the first quarter, compared to about $20 per barrel last year which increased expenses by roughly $34 million. This is partially offset by a hedging gain of $19 million as we had almost 60% of our required pension in the first quarter. The severe winter operations increased expenses about 5 million dollars while the additional volumes added another 3 million dollars for a net increase of 22 million dollars.

Turning to slide 23, services were up 34 million dollars or 27%. About half or 15 million dollars of the increase was due to the timing of the favorable insurance settlement we noted last year. In addition, insurance premium expense rose. Casualty rose. In addition, the impact of the severe winter operations resulted in an increase debt hedging, snow removal and contract work which had the effect of another 4 million dollars increase. All other net is at 7 million dollars. Let me say the operating conditions impacted these costs, driving down the range under 500 million dollars is a top priority. We have a full court press to do this and that's our focus at this point in time.

Slide 24 is a key slide that takes us from the operating income in the first quarter of 2002 to the operating income of this quarter. The point I want to make is that in projecting the operating expenses in 2003, we were looking at 150 to 160 million dollars versus the 118 actual performance we delivered, but the key point is we were off about 30 to 40 million dollars off the full year operating income target. For example, we knew we would not have the benefit of the insurance settlement that we had last first quarter and this quarter. To summarize, on the right-hand side of the slide, basically winter operation, the additional fuel cost, the key point to make is that another operating model is still sound. The cost of performance, however, is unacceptable and so we'll take all actions to mitigate these impacts including those we cannot control. But in summary, the winter weather was worth about 18 million dollars to us. 5 million dollars in fuel, 3 million dollars in equipment rent, and 4 million dollars in purchased services and other.

Turning to the next slide, I wanted to say a few words about foreign exchange. While we featured that discussion this quarter because of the significant impact on revenues, foreign exchange typically does not have a big impact on adjusted EPS. A stronger Canadian dollar reduces revenues but also benefits expenses. The net impact on annual offering in income is about 2.5 million for each Canadian one-cent change versus the U.S. dollar. Therefore, that same one-cent change benefits interest expense by about 1.5 million dollars for net impact of about 1 million dollars pre tax or about a half cent on the EPS calculation. Separately on fuel, we have a strong hedge position going forward with about 30% of our requirement for the balance of the year. That's comprised of a 6% collar with a floor of proximately $4 and a ceiling of $24 and a base, future program of about 24 to 25% of our requirements coverage averaging 22.50. Gained a pretax sensitively for $1 a barrel U.S. change in the crude price. Our expenses changed by about $10 million dollars pretax. Looking forward to the balance of the year, we are focused on trying to recover the first quarter slippage of roughly $37 million dollars. Obviously, it requires corrective actions and these are over and above the cost management actions we implemented at the grain drop, but on the next slide you can see our actions going forward. We have spoken about reduced head count, which is underway. The fact that we will be at the upper end of the 300 number and we will be accelerating the timing on the balance. Discretionary expenses are being cut, and you heard Ed speak about getting the train productivity back, which will help us notably with fuel and crew costs. Key considerations going forward include the assumption around the Canadian grain crop in the fourth quarter. We do remain cautiously optimistic. You will have to plug in our own crude oil assumptions, but our original premise of $25 a barrel U.S. may prove a bit optimistic for the balance of the year. All in, we're looking for earnings for the balance of the year to outpace the same period last year, particularly in the second half.

Rob, back to you.

Thanks, Mike.

I'm now on slide 28. Okay. So there you have the story. In operations we made the conscious decision to add assets and resources to help our customers to minimize the impact of weather-induced problem and they have in their supply chain. We reacted quickly to get our railway fluid as rapidly as possible. Yes, it cost us money but we recovered quickly as well. You have seen the service and productivity improve dramatically. Our volumes are strong. We are cautiously optimistic about the prospects for the Canadian grain crop. As Mike said, it could have a 35 million dollar positive impact in revenues in Q4.

Mike has told you about the actions we have taken to reduce costs in the areas that we can control and to improve upon the performance of last year through the remaining three quarters. Our business model remains intact. It is a good model. We remain focused on our stated long term objectives. We are back to normal railroading, and you can expect to see improvement in safety and service productivity as the year unfolds.

I will now open the line to questions, and I would ask you to limit yourselves to two questions. Time permitting, you can come back with subsequent questions. Operator, please take our guests through the instructions.

Thank you. We will now take questions from the telephone lines. If you have a question, please press 1 on your telephone keypad. If you are using a speaker phone, please lift the handset and then press 1. If at any time you wish to cancel your question, please press the pound sign. Please press 1 at this time if you you have a question. There be a brief pause while participants register for their questions. Thank you for your patience. Our first question is from James Valentine of Morgan Stanley. Please go ahead.

Hi guys, good morning. First, I just want to tell you you guys do a great job in terms of detailing all these in terms of specific numbers and unusual items and so forth. It's really helpful. Going through the quarter, I guess, Mike, you had mentioned you were just at the tail end of your remarks, did I hear you right that you are still looking for up EPS?

On the guidance, we are not providing guidance today.

I'm sorry. I thought you made some kind of reference here about you are still shooting forward to have an up year or something like that?

Last quarter, Jim, which is what we said earlier. The second half, we are looking for a stronger year second half. We didn't issue guidance on the year.

I guess what I'm trying to drill down to is, your presentation and probably reading too much into it, I thought maybe you were implying that I think 37 million shortfall from budget could be made up for the remainder of the year and I just want to make sure that -- I want to see if I'm missing something or reading too much into your presentation.

I think it's fair to say you are reading a little too much in. What I can tell you, Jim -- and on obviously you understand it is too early to call. We are very focused and we plan to have the 18 back on winter. Obviously to try and get the fuel back as well in the full year is going to be difficult, but what we need to do is to finish our work and get back to you and update the guidance in the second quarter.

Okay, well that's admirable, though, if you can try to make up that weather-related cost. I guess the second topic maybe for Fred. In terms of coal -- and I know I have asked this before, so forgive me. I believe you have fixed long-term six or seven-year contracts. So the fact that pricing for coal in the global market looks to be down for this contract year starting in April. That won't be a big deal. I guess if I'm right there, the part of the question that I'm trying to get to is what do you think that would happen starting with the current contract year?

Jim, the outlook -- the fellows did their things yesterday and we have to continue to work with them with regard to inventory, et cetera. At this point in time, we are pretty comfortable that we'll move about the same amount of activities as we did last year, up perhaps a touch. What we prefer to do obviously is to work with them, understanding their marketplaces before we are able to do any more specific than that but we don't see a bad news story. It's just a matter of whether it is good or really good. We are not sure yet until we work with them further.

If they have to take a little bit of pain on discounting coal to get it to move into the global markets, you're not going to feel that pain?

That is correct.

Okay, great. Thanks, guys.

Thank you, Jim.

Thank you, Mr. Valentine. Our next question is from James David of Skcotia Capital. Please go ahead.

Thank you. And good morning. Just two questions. Very quickly, maybe, Fred, you can touch on this this morning. The CTA made a comment with respect to grain revenue caps. Is there any implication we should be thinking about?

James, it's a normal process that evaluates the cost components that go in and it is part of what forms the revenue cap for us. Our challenge, of course, now, is understanding where that will go. How will we, as business, best operate in the marketplace? And the result of that will be we might encourage or discourage certain kinds of traffic. We will probably want to stimulate activity on lower cost type businesses, continue to move towards the shuttle frame mind set. I think at this point in time, it could be premature. At this point, we don't see it as a major impact. It's just a matter of allowing us to work through the new news as of yesterday and figure out how we will take forward our grain marketing program. As I said, in orders of magnitude, we don't see it as a major issue, but the specifics of how we will go forward, you have to wait for us to get that under our belt and be clear with you.

Okay. Thanks. And perhaps added on this question, during the conference call related to the first quarter profit warning, you know, there were a lot of questions swirling about the idea that there are some underlying issues that may extend beyond the first quarter. I only make reference to the use of the language where, you know, things are returning to normal at the end of the quarter but not that they have returned to normal. Can you provide perhaps some color on what exactly, outside of weather related or fuel price related issues that that might be making subtle reference to?

Well, I think I probably should say that they have returned to normal rather than returning to normal. We are very, very busy, and so on the service side we are not where we want to be exactly on the service, just because of the amount of train movement that we have up there. But the other, the productivity metrics are excellent and the safety metrics are excellent. Personal injuries for the year are down 20% and our train accidents since March 18, very few. In fact, we are ahead of last year right now in terms of fewer train accidents. That was just -- you can say that we are in full swing right now in terms of train activity.

And you talked about service. You said you want to get back to that issue later on, but can you provide any indication of what that means? I'm trying to understand if there is some systemic issue that you are making reference to?

No, there is no systemic issues. In reality, you know, when we look at our -- we are at about 85% on our X trains and we would like to be about 90%, so we are talking about 3 to 4% here. We have some pretty fine targets we want to hit on some of these trains, and that's what I mean getting back in.

Many thanks.

Thanks.

Thank you. Our next question is from Scott Flower of Salomon Smith Barney. Please go ahead.

Yeah, good morning, you all. A couple of questions. One -- and I guess this is for Mike. On the labor side, obviously, you have given us your run rate and then you've discretely identified some of the puts and takes. What I missed was what was the recovery that allows you actually to have down compensation in the first quarter? Was that one off recovery? What was that and what did that relate to? There are a number of moving parts on the plus side but I missed what drove that down and obviously the run rate would suggest that that's not something that you would expect to occur in the last three quarters of the year.

That's right, Scott. That would not be an indicative run rate. Again, on a unit basis the run rate is 4 to 5%. Let me try to back out and fill that out to you. We talked about inflation and wage increase plus 5 and pension plus 4. If we subtract the incentives, we are down -- the reduction in incentive payments. We subtract 5, we're down to 4. We had some help from foreign exchange in the 4 to 5% range -- I should say 4 to 5 million dollar range. Then the balance is the combination of higher costs than we otherwise would have had offset by one fine item. Nature of those items is more, as you might understand, going forward at various times, we improved our labor liabilities, we made our best judgment, we tends to be conservative, and as we go and find out what those liabilities are with respect, for example to wage increases and so on, we true up those. And that is the nature of the wage increase.

Got it. And then I guess another one for you would be -- and you may have delineated this previously. I didn't think we talked about it today but can you maybe give us a refresher on exactly what is the composition of the head count reduction? And you mentioned trying to accelerate it. Do you have any kind of current outlook of exactly when we might be thinking about the heat count reduction occurring? Obviously sooner is better, but I'm trying to get a sense of what you think is realistic at the current juncture?

It certainly will be weighted through the second half. Through the first quarter, we embarked on this effort 10 for 30% of the 300 already dealt with. We are wrapping that up, obviously, in the second quarter. Scott, you will see the full quarter impact towards the end of the year. That will be largely second half, and we will run pretty hard with that. Again, the actions are being implemented as we speak and you will see the impact on the -- significantly on the third quarter, now that you will begin to see it in Q2.

And then, just again as a refresher, exactly are these G & A and clerical or exactly what are the components of the reduction? What type of personnel are actually pulled out as a result of that effort?

Well, the focus is across the board. Having said that, we are focused on keeping the trains running and getting the service to where we need. So we are skewing it to areas other than that. As we said in the past, this is an ongoing effort. We are looking to take advantage of technology, ongoing efforts to improve work processes and some of this will come from attrition. Having said that, as far as we are accelerating the program, obviously, the -- we'll be taking a little less from attrition and more from reductions. But it's an ongoing effort, and probably more skewed to G & A than train operations. We are focused on keeping service.

If I could just add to that, Mike. It's Rob. If you take a look, our head count is up slightly. We have had a freeze on all hiring at CP except for line personnel. So you call it G & A and clerical, that is down because of that freeze and the layoffs. What is up, Scott, is running trains. Because of the increased train starts that Ed was talking about. It's all related to specific line personnel on the increase and G & A as in other engineering, mechanical, and the G & A area.

Great. Thanks very much.

Thank you, Mr. Flower The next question is from Joseph Weinland of RBC Capital Markets. Please go ahead, sir.

Thank you. Just a couple of questions for Fred. I think I heard the comment that on 85% crop year, the fourth quarter could have a boost of 35 million in revenue and 100 million on an analyzed basis. Is that based on last year's fourth quarter? I'm trying to get the metrics down on that one.

That's correct.

Okay. Second question then, the numbers were off a bit, you know, exchange rates and product mix. At the Canadian dollar state right now, what can we expect looking forward?

Can you clarify that question for me?

Just, I think we had about a 3% decline in yield, however you want to measure it for car load or revenue per car load, or revenue per ton mile. If the Canadian dollars were to stabilize at this level, would you expect that to flatten out? I'm relating it back to trying to get your 1% yield increase on an annual basis.

Okay. The 3% reduction that you saw is for RTM as you know, and they are heavily driven by the grain dollars, the grain dollars per car load, that is off somewhat. But two fundamental changes, and maybe I can throw a few anecdotal things in to help put this in context for you. The average length of haul being up by 3.3% is a pretty dramatic change in our business for any one short period. Beyond that, I would point to you about thinking about the the consequences of the winter business. We had some trouble as you all know in the first quarter. We had a reasonable amount of northern Ontario or southern Ontario-based business, that is reasonably shortfall, in other words, from those locations to several hundred miles to the border for furtherance into the state. Well, needless to say, during those difficult operating times, it's that kind of traffic that is most susceptible to move to trucks. So we lost a reasonable amount of business in the quarter, some of which is deferred and we can pick up but some of which is literally lost. That tends to be short haul, higher cents per RTM business that disappeared. I can also give you some examples on the other side that is says we were successful picking up, for instance if you think about how cold it was in the east this year, we picked up a couple of LPG moving out of Alberta into the U.S. northeast that we would not traditionally get, so a nice long haul business but lower on cents per RTM. We will some coil steel examples sourced from places further away than usual. We had some chemical movements out of Alberta into Quebec and Ontario. It is that kind of transition between the addition of long haul and some short haul movement that have changed that have driven down those numbers. I think we will feel, in the second quarter, there is going to be some residual impact to us and on a go-forward basis, as the grain crop recovers and the massive swings of grain which obviously we're hoping for, grain coming into Alberta to replace the missing barley, as they get displaced by the Canadian production in the late third, early fourth quarter, we'll see the patterns return somewhat more to normal. And if I can add, if you think about what's gone, it's the valuable wheat that goes for milling, et cetera, that didn't get produced and what is moving it the -- is the cheaper feed grains, which I think you can appreciate have a somewhat more modest price tag attached to them just based on the value of the product.

Okay. As part the same question, I will add a little addendum. Wasn't there a comment also made that part of the fuel surcharge was felt in the first quarter and probably felt in the second quarter, or did I misread that? Was that a fuel surcharge metric?

Yes, we did increase our fuel surcharges. It's up to about $6 premium now or 6% premium rather, and the way we've got it set up, even though we wish to migrate are shorter lag time. At this point, there is a 90-day lag so we should feel the benefit in Q2 of the high fuel prices in Q1.

That's fine. I will get off the lien and let somebody else ask a question.

The next question is from Gary Albalon of Credit Suisse First Boston. Please go ahead.

Hi, guys, how are you?

Great.

I guess this one is for Rob. Rob, could you talk a little bit to your longer term goals? You have been public before in talking about operating ratio goals in '04 and beyond. Could you just give us an update? Are there any changes along those lines, more confident, less confident?

We obviously said that we bant want to do that 73% operating ratio of the 200 million cash in '04. Up until the first quarter of this year, Gary, I was still confident that we were going to make it because of the lumpiness of our revenue impacts. But I do caution you that that forecast was made with fuel at $22 a barrel and that is the big swing factor. So I have communicated very clearly to the employees at CP that we need to get to 73% because that gives us a some degree of freedom in free cash and dividend and reinvesting in this plant that companies and employees need. So we are on track to do that. Are we going to be able to do that in '04? I'm watching that I'm not careless and say yes or no that. I'm watching to see how the next three quarters go, and then how the grain crop comes in, and we'll continue to talk about the timing of it. We will be there. It's a matter of when.

Is there a compensation bonus type things that are tied to that, Rob, that are at stake as we speak?

Yes, we have performance options paced on hitting 74% and then 73% in the vesting of quite short-term options.

How much more is there between the 74 and 73, give or take?

It's half of the performance options at 74 and the remainder at 73.

Oh. That's a lot of dough.

Yes.

Okay.

People are very focused. I think interestingly, the options plus the ownership, I can now say that every executive officer who has to have ownership except for two -- and they are just new hires -- are there. So I have a good balance of options and ownership. As you know, 60% of the employees share holders so very focused.

Okay. Understood. Thank you. Mike, purchase services, you talked about getting 160 back down to a level of 145 or so if I heard you correctly. What is it about 145? Why is that about the right number for you?

When we projected the original target, we were counting on a run rate of 145. That was a lot of work put in fact that on the other hand, Gary, we were seeing costs go you up in that area. One we talked about was insurance premiums, 4 to 5 million on the quarter. But as far as making the progress that we wanted to make, we wanted to get to 145. I don't think there is any impression we'd be happy and stop there. If we could do better, we would. But clearly i wanted to indicate, Gary, a little bit of a run rate. As you know, that line item has an abundance of costs, contracting services, building rights, property taxes and so on.

Rob, if I can just come back and follow up. If you miss the 74, in '04, whereas you were going to get half the performance options. If it comes in at 74.1, what does that ratio become?

Gary, let me elaborate on that a little bit? We're getting into some of the details. The technical cut off is 74.9%. So clearly we have clearly designed hitting towards a 75 goal in the interim. The other thing I need to be explicit about is that these are performance accelerated options. And what happens is that in we don't make those numbers, the options don't disappear, but the window to exercise our remaining options is very, very short and obviously that dramatically reduces the option value. And certainly if we haven't made the numbers, the stock price isn't there.

Right. I understand. So it's 74.9 and 73.0?

Yes.

Thank you. Our next question is from Thomas Wadowitz of Bear Stearns. Please go ahead.

Good morning, guys. I've got a couple of questions either for Fred or maybe for Rob. If you can give us a sense of how some of the macro variables affect your customers and your base of business and just so we can -- I think -- view the impact of those things and look at the growth the right way. Currencies and also feed stock costs like natural gas, maybe you could talk about the currency impact on which parts of your business are most sensitive and at what point in the exchange area would you get concerned about volumes and forest products and other areas? And also in terms of fertilizers or chemicals, to what extent do the feed stock advantages drive some of your business, and if natural gas prices came off a bit would we expect to see the growth in fertilizers and other areas slow down?

I'm going to let Fred get into details because you are asking for a lot of them, Tom, and I don't know if we have the time to take each of those major commodities apart. Overall, we are still looking for a strengthening of the economy in the areas which we serve. Fred has dealt grain and coal so we'll just put those aside. Overall, mainly in industrial products, we still are sticking with what we received was an uptick in the second half. You ask, what is the currency going to do mainly on the Canadian producers and in energy prices. Fred, over to you.

Tom, I will try not to go too specific because it is almost a plant-by-plant situation. But in broad terms, we have had discussion with most of our major clients or representatives in the industry. The numbers that we face today, the only one I'm a little uncomfortable with, and I think I have been saying this for several months is that at 68 to 70 cent dollar, it appears that the forest product business is able to produce and prosper. When you start to move up above 75 cents, I think they start to express some apprehension about their ability to prosper in the U.S. market. That said, if you look at the history, you will find that the Canadian producers of lumber in particular have been about 30% of production of the U.S. -- of U.S. consumption of lumber for many, many, many years through all kinds of economic swings and cycles. At this point, we are at least five cents away from areas that they seem to be apprehensive about. The paper side is a piece of uncertainty. I'm not comfortable with. I don't know enough about it. The balance of our business, at this point we are getting reasonable indications that they feel, certainly on the bulk side, that the currency issues we are facing and range we're in today are not substantial or not material for them. Once you move up into 75 cents and 80 cents, that's going to be a different set of questions that we will clearly be continuing to work with our clients to evaluate. With regard to the fertilizer business, history would say that as long as natural gas is kind of is below 6 1/2 to 7 bucks, it seems that the Canadian producers, both anybody who is using gas as a feed stock, be it the plastics business or the fertilizer producers, they seem to keep their Canadian production in play, and when you start to get up into the mid-and high 7 to $8 range, you see a shutdown. I would like to stress that I think the evidence is there that historically, the U.S. -- some of the weaker U.S. plants seem to go down first. That's probably about as good as I can do it right now.

If I can just ask one follow-up. Do you see that fertilizer strength will continue? Are you still pretty optimistic on that?

The potash is very strong right now. Lots of export China sales. It looks like the fertilizer movements have migrated up from the southwest, they are moving into the midwest and volumes are very strong. What we are seeing some of the liquid fertilizers are starting to move quite well. I guess, at this point in time, we are optimistic. The indications are that the gas prices are okay for production and people are starting to buy the products. So we are seeing a reasonable with somewhat positive outlook for that end of the business right now.

Great, thanks, Fred, thanks, Rob.

Thank you, sir. Our next question is from Ken Hoaxter of Merrill Lynch. Please go ahead.

Thanks. Good afternoon, everyone. Mike, just one quick clarification if I can before I start my question. When you said 4 to 5% increase for salaries and wages, was that on per employee basis or is that overall?

That's a unit rate overall.

So that's a total all-in.

It doesn't take into account variations.

Does it take into account the assumptions about the foreign exchange benefit?

By and large, yes.

Okay. My question -- two questions. One on capital expenditures. Can you talk a little bit it, are you still at about a $700 million goal for the year, Mike? And then, Fred, Just a questions SARS. Any impact you are seeing as far as a bit of slowdown in terms of volume or anything, any concerns on some manufacturing slow downs or anything? Thanks.

With respect to the capital, we did -- and you will see in the cash flow statement acquire the locomotive that we spoke about earlier. That was in the first quarter, the full year program, the numbers are 700 to 735 range. If we are not going to make our numbers, we will be in the south end of that range. Last year it was 559. We did not acquire locomotive. Fundamentally, the two years worth of locomotives instead of part of two years, whereas if we average it over the two years, it's about a 635 run rate in Cap Ex. Since we are acquiring them all this year, it puts us in a higher Cap Ex run rate.

And Ken, with regard to the SARS question, in the Asian production areas, anyway, we have not felt any impact so far. Granted, it is fairly early. If anything, the international volumes, particularly off the west coast has been extraordinarily strong. So too early for us to see any evidence or consequence of that.

Okay, great. Thank you.

Thank you. Our next question will come from Randy Cousins. Please go ahead. Please go ahead.

Good morning, guys. My questions have to focus in on your bulk businesses. I guess, Fred, you mentioned again the 35 million dollars. You got the rolling stock. You got the locomotive power. Presumably the people are around. With the grain handler strike last year, if you get that 35 million dollars of incremental revenue picked up, how much of it makes its way to the pre-tax line? Because I'm thinking that the only incremental cost you're going to get is fuel.

I will defer graciously to Mr. Waites.

Randy, you know we don't get into margin discussions by line of business on these calls but your point is well taken. We are positioning to -- as you pointed out, a lot of investments we have made to get it to that bottom line, and that is what we are expecting.

Would it be fair to say that 70% of that incremental revenue could make its way into the bottom line? Again, we are talking incremental.

I think it would be fair to say that a lot of that revenue benefit should flow through to the bottom line.

My second question has to do with the coal business. In February, it's the highest it's been. The chinese steel production is going to run over 200 million metric tons this year. I think the foreign guys have basically come out and said they are looking for a 5% increase in coal shipments. You guys are taking a pretty conservative posture with reference to coal volumes, particularly given particularly what happened in the first quarter. What do you see is the potential to grow that coal business over the next three to five years? And on the coal shipment side, is there a positive bias to the numbers you are talking about?

Randy, I think it's fair to characterize us as having taken a fairly conservative point of view, but if I could, I would like to put in perspective that this is a completely new organization. They have fantastic fundamentals. They are really just getting themselves together. So the ability of that organization to have enough time to work with us about what we can collectively do over the next two to five years has been limited as they tried to get reorganized after a pretty exciting 6 months. I do not feel equipped today, and I don't want to put words into the mouth of my business partners about how fast we can or how big we might grow that business other than to say obviously we love the fundamentals and think its a great upside. Ed, you might want to jump in.

Randy, just to give you an example. This group now ships through Neptune terminal and have been because of the ship loaders. What we have seen there is increased capacity for CP coal to the west coast with this trust. They can use both either west short terminals or Neptune. So we've seen some additional capacity come in terms of the terminals in Vancouver from this trust. So we think that, you know -- we are prepared to invest in new equipment if we have to for growth and coal and we can handle it. In fact, we have just brought some additional sets on trying to handle some peak movements. We are very agile in this area, and we are starting to see some additional capacity for terminals in Vancouver.

The next question will come from Laurie Hahn of Deutsche Banc. Please go ahead.

Good morning, how are you doing?

Very good.

I jumped off for a second so I'm sorry if I repeat. Can we get an update -- I think you mentioned this in the previous call, the last call, what amount of business from the west coast port walkout, if you can quantify that.

Laurie, you were breaking up. I believe you were saying of the west coast import-export container business, what percentage of the traffic that way is diverted to Vancouver will we keep?

Right.

Laurie, the answer to that is what I chose to do last time and I will stick with it. We said we diverted about 18 million dollars worth of business and that we would retain 100% of that amount of revenue but spread over the full year instead of over the five months. And early indications are that we will clearly deliver on that commitment and there's certainly some upside based on the activity levels that we are seeing in the first quarter. So I guess the answer is a minimum of 18 and probably some upside based on how the economy goes and Asian production goes, et cetera.

Okay, great. And then just could you comment on pricing and what, you know, what commodities do you think you have the best opportunity to raise prices?

To raise prices, you know, I think we are looking across the board. I hesitate to be too specific. Obviously is it a competitive world out there, and we are not going to be forecasting our plans in advance. But I can tell you, Laurie, that the international side and the inter mobile sides are places we have been pursuing with success. The car load side of the business is a business we believe has opportunity in it, and the bulk business tends to be under longer term contracts so as those contracts come due, we are also pursuing increases. So I think the answer is across board and I apologize. I don't think it appropriate to be too much more specific until we have successfully secured our price increases.

Okay. That's helpful. Thanks a lot.

Thank you. Our next question is from Robert Fay of Kenercort Capital. Please go ahead.

Two questions. One, on the inner mobile side of the port of Vancouver, what's the port currently operating at right now on an operating basis and are there any plans to expand?

Bob, it's Fred. I met with the port a few days ago. They do have substantial plans in place to -- they would describe it this way to make it simple. Let's say they do about and million TEUs today. They think they can bump that perhaps as much as nearly two million TEUs with operational changes some modest reinvestment. They have announced more than a 100 million dollars worth of pieces of investment and production in process and improvement including the cooperation between the roads, the railroads that move products on and off. Beyond that, they have a whole second tier of activity that they are considering, and that would obviously involve expansion that might include another port. When I met with them, I was obviously interested in making sure that we were aligning our cape the and resources and I'm comfortable that the growth that we see for the next several years, the upside side of that growth can be handled with the plans that they have in place and we'll be part of and are, in fact, today, part of the process to consider whether there is another kind of step function improvement or requirement for capacity expansion.

Great, thanks, Fred. Question for Rob. A lot discussion of P-rail potentially coming up for sale. What would be your position or has it changed at all?

It has not changed, Bob. We are still interested. As you know, we participated in the Premier in the Prince George conference. We have been in dialogue with the B.C. government people. The B.C. government is focused in on not only improving the productivity of B.C. rail, but they have firmly in mind when they need to do for service, and that includes competition. We are waiting for the RFP to come out. We have told them how they can improve competition on and off the B.C.R. As you know, it is the only company that is directly connected. But B.N., U.P, and ourselves are very interested in connectivity and participating in the changes. And I don't want to use the term privatization because we are not sure how they are going to go. So we're there. We are engaged and we will play if it's at all possible.

Great, thank you.

Thank you.

One more question, operator and we'll have to cut it off.

Certainly. Our last question is from Reno Bianti of Citigroup. Please go ahead.

Good morning. Saved by the bell. A couple of questions on the cash flow and balance sheet. You have currently have more than $500 million of cash on hand, which is about equal to the remainder of the Cap Ex program for 2003. The question is, what do you plan to do with whatever excess cash you were going to generate in the last nine months of the year?

Generally, and it's a good point. We are carrying more cash than we would otherwise carry. That reflects a number of items. Number one, as I indicated, that's a good time for to us borrow. We get very attractive rates. Number two, we do have a maturing issue coming up in '05 and out thoughts are potential pre-funding, and that was another consideration. And so you see us carry a little access cash leading up to that as a general prudent course of action. Having said that, in terms of the balance sheet, you can see the debt to total capital ratio. My aspiration level is to get into the low 40s. But as I've said in the past, 46, 48, I'm quite comfortable with. There are no plans in terms of a normal course issue or bid at this point in time. I think it's reasonable to expect over time you will see us increase the dividend as our net income trends up. The conclusion is that we are carrying a little bit more cash for a very considered reason at this point.

Thank you. My second question, working capital. It seems like there was a positive 45 million dollars working capital swing this quarter which seems to be driven almost entirely by a reduction of account payable and accruing. I was wondering, is that driven by timing considerations or is this real savings?

It's bit of both. You do see a swing in the first quarter. At year end, we show up the liabilities and the receivables so you can see a bit of working capital swing.

Okay. Final question, help me out a little bit. I was a little bit surprised by the fuel consumption of 9 points, given your car load was up three points. I understand there was en an impact of slower velocity and severe weather. Is there more that I should be aware of?

No, not really. I think that we have brought older locomotives out of storage and they are less fuel efficient. And in a mix of business as Rob mentioned, we had record low grain movements, so there is what we call a mix in fuel consumption, the difference between inter mobile, car loads and bulks. So we have fewer grain trains moving to Vancouver.

And higher horse power per ton on the average.

On the inter mobile business. But, no, there is nothing out of the ordinary and I expect, as I said in my notes, to see that full consumption come down to our plan in April, and I look at horse power per ton as coming down nicely. All the metrics that we have in our locomotives and our utilization of the fuel consumption are ahead of our target right now.

Thank you very much.

Thank you. Ladies and gentlemen, that's the wrap on it. It's safe, productive and quite a busy railroad out there. So as Mike says, our job is to claw back as much as the winter waste, if I can call it that, that we had in the first quarter and we'll talk to you at half time in July. Thank you very much. Good-bye.