Canadian Pacific Kansas City Ltd (CP) 2003 Q4 法說會逐字稿

Good afternoon, 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. Rob Ritchie, President and Chief Executive Officer of Canadian Pacific Railway. Please go ahead, Mr. Ritchie.

Good afternoon, ladies and gentlemen, and good morning to you on the West Coast. Thanks for joining us today. I am here in Calgary, and with me I've got Mike Waites, our CFO; Fred Green, our Executive Vice President of Operations and Marketing and Sales. You have met and heard from Fred in his old role as Senior VP of Marketing and Sales, but this is his first call being responsible for both Marketing and Operations. I also have Paul Bell with me from Investor Relations.

I might just add that we have a fire alarm situation in our building. It has been cleared and there's no fire. But I mention that because the strobe lights are still flashing, and you can hear some piercing whistles and announcements. But it is perfectly safe here.

Okay. Before I start, just to reiterate the caution outlined by the operator and contained in slides 3 and 4. I also draw your attention to the fact that we use Canadian dollars and Canadian GAAP.

So to start, please turn to slide 5. Canadian Pacific Railway was certainly a very busy railway at the end of the year. We set an all-time record for volumes handled in any previous quarter. Our freight revenues are up 10 percent, or $94 million, before the impact of the stronger Canadian dollar, which was 19 percent higher than '02.

You saw in the third quarter the positive impacts in train productivity due to changes in our scheduled railway. As we promised, Q4 operating statistics were impressive. Train productivity up over 6 percent. Unfortunately, these strong fundamentals did not stand out as they could have because of the tough compare that we had in last year's Q4. Comp and benefits, depreciation and fuel price were all higher, causing our operating income, before other specified items, to come in at $226 million. I should point out that on a comparable basis and at constant exchange rate, our operating income would have been $250 million, up from 238 million last year.

Turning to slide 6. On a full year basis our freight revenues would have been up 6 percent, again, if it not been for the 11 percent appreciation of the Canadian dollar. This is a very strong performance for any railway, but particularly so given that we had the poorest grain volumes in 35 years in the first half of 2003.

Looking back at the year, we had a tough first half operationally, but we took action. We announced 820 FTE reduction program over three years, and we substantially met our 2003 targets, eliminating 360 positions by year-end.

On the safety front, we once again achieved the lowest train accident frequency in the industry for the sixth straight year. Other headwinds, including the rise of the Canadian dollar that I talked about, but also the higher fuel price and the persistence pressure on benefit costs face us going forward. We also took effective action in our pension costs in Q4.

Despite these pressures, CP's business fundamentals were solid in '03. We moved record volumes. We exceeded our yield targets on a same-store basis. And we added close to $200 million worth of business at that constant exchange rate. We exited the year on a strong note.

And with this background, let me then turn it over to Michael, who will take you through the numbers.

I will start by bridging the gap between the reported EPS numbers and the operational story. So turning to slide 8, reported EPS was $1.10, up from 79 cents last year. The full year EPS came in at 2.51, down from 3.11.

As in the past, the stronger Canadian dollar is driving a large unrealized gain on our U.S. dollar-denominated debt. And this fact, combined with other specified items skews our results. Currency impact in the other specified items is summarized on slide 9.

This quarter included a $29 million pre-tax loss on the transfer of assets to IBM. We announced this transaction back in November. And the employees that are involved in these operations are continuing on to work with IBM, so there is no labor liability. The loss on the assets is the difference between the going concern value and the liquidation value. You might think of this as being analogous to the value proposition of driving the new car off the lot. The impact is even greater when it comes to IT assets. The key point to note is that this is a noncash charge. The EPS impact was -11 cents.

The remaining adjustments all relate to income tax. We had a reduction of future income tax liabilities as we become more current on tax audit years and trued up our liability position in the process. This had a favorable impact on EPS of 37 cents. However, at the same time we saw an unfavorable 33 cent impact as a result of the Province of Ontario's decision to reverse previously announced rate reductions, and in fact increase rates. The net impact of both these tax adjustments on EPS was 4 cents favorable.

On a full year basis, you will recall our second-quarter provision for staff reductions and the D&H restructuring, this reduced EPS by 94 cents. And last year we had a favorable settlement of tax litigation. The remaining difference between the reported and the operational numbers is the unrealized foreign exchange gain on the long-term debt.

So turning to our adjusted EPS numbers and moving to slide 10, EPS totaled 72 cents for the quarter versus 75 cents last year, and 2.11 for the year versus 2.56. I want to set the context of slide 11 by building on Rob's comments. We have very strong business fundamentals with the return of the bulks from a very busy railroad. The improvement is masked by the strength of the Canadian dollar. And for clarity, this is the negative translation impact of the stronger Canadian dollar, with our U.S. dollar business translating to fewer Canadian dollar earnings, if you will. Notwithstanding this impact, our challenge is to drive the increased volumes and get the operating leverage benefit to the bottom line.

Starting from the left-hand side the EPS impact of the additional revenues, this is net of volume related operating expenses, is worth 32 cents. And Fred will cover revenues in more detail in a few minutes. The stronger Canadian dollar reduced EPS at the operating income level by 11 cents. The higher unit rates for comp and benefits expense, net of FTE reductions reduced EPS by 2 cents. And in addition incentive comp was up, reducing EPS by 6 cents. This was largely due to an $8 million increase in bonus expense based off the strong fourth-quarter performance. This was accrued entirely in the for the quarter versus a small credit that we saw in 2002. As an aside, a full year's bonus expense would typically run in the 30 to $35 million range for us.

Fuel expense rose, reflecting the higher posted crude prices, which was a negative 2 cents. The materials, rents and depreciation together reduced EPS by 8 cents. The remainder was mostly due to swings in smaller onetime items. All in all, resulting in a 72 cent quarter.

Let me say comp and benefits expense continues to be a focus for us. We had set a target of 370 staff reductions back last June. And we met that goal, as Rob had indicated, with a reduction of 360 staff from those specific initiatives. However, the increase in volumes resulted in a higher field operations count of some 200 or so. And this, again, masked the improvements somewhat.

Also, we continue to incur stepwise increase in crew training and related costs. While this positions us to deal with more volumes in the future, we do not directly benefit in the current period.

Turning to 2004, our guidance which we gave last November, remains unchanged. I want to quickly review some of the challenges and the opportunities we have looking forward. First, in revenues we expect solid revenue growth from the year in the 4 to 6 percent range. On the expense side, as we mentioned, we expect wage inflation to remain in the 3 percent range, and overall comp and benefits expense including pensions to increase at approximately 5 percent.

To normalize our comp expense for 2004, we would expect our incentive comp to increase by approximately $30 million. That includes approximately $5 million of stock option expense. We will continue to position to reduce the staff counts, targeting some 330 to 340 in 2004.

On the fuel front we have 18 percent of our requirements hedged in 2004 at $21.20 U.S. per barrel, with an additional 5.5 percent covered under the costless collars strategy that we have. These collars have a floor of $20 and a ceiling of $23.60. I have to say, I like the prices, given what the current spot prices are, I just wish we had more in the way of coverage. But all in all, a very solid hedge position. We provided sensitivity around the change in the price of West Texas Intermediate, as well as the exchange rates in the appendix. So you can plug in your own productions for the year.

I also want to highlight some of the more unique puts and takes on expenses in 2004. We will be impacted by the asset retirement accounting rules. AROs are expected to reduce depreciation expense, and move dismantling expenses to comp and benefits and other expense items. However, the reduction in depreciation won't all flow to the bottom line, as we expect a net increase stemming from ARO of about 10 to $15 million. I should say about $5 million of this is due to our abandonment obligation for grain dependent branch lines, which we ultimately hold, and for which the new accounting provides, or requires us, to provide for in a current period expense, rather than us incurring those costs in later periods.

So the net result is depreciation is expected to increase year on year by approximately $40 million. That includes the benefit of the accounting ARO offset. We also expect a net incremental increase of approximately $20 million in other expense line items as a result of the ARO, and the fact that we are expensing some of the IT cost that were previously capital.

To summarize, net effective ARO capital additions, rate revisions and the IBM transaction will be a net incremental $60 million year-over-year versus what you otherwise might have expected in the $40 million range in terms of an increase in depreciation expense.

Interest expense will increase by approximately $25 million, representing the lower interest income from the lower cash balances and interest expense stemming from locomotive financing is about to be completed. Finally, on the tax run, our effective rate will bump up to between 33 and 35 percent, following the Province of Ontario's actions that I spoke about earlier.

So some headwinds, as we have spoken about, but a strong business environment. We will continue to work the expenses and the headcounts. Fred, over to you.

During our third quarter and November presentations we told you about our plans to prepare for what was expected to be a very busy fourth quarter. The plans are outlined on slide 14. And I'm pleased to advise you that we successfully executed them, which increased our revenue generating capacity and enabled us to handle increased volumes in a more efficient manner.

By now you have seen a summary of the results. On slide 15, let me review just a few important metrics. Workload, as measured in gross ton miles, increased 8 percent to set a new Company record. We ran the longest, heaviest trains in our Company's history. The fuel consumption rate improved by over 2 percent, and set a new record for a fourth quarter. Employee productivity increased 9 percent to set another record. And with a significant uptick in volumes, the productivity of our locomotive and car fleets continue to improve.

Importantly, we did all of this safely, posting a 10 percent improvement over 2002, and maintaining our industry leadership position with the lowest FRA train accident frequency. Clearly, we had a strong finish to 2003. Importantly, we have strong momentum going into 2004.

Turning to slide 16, and looking forward, I expect to see steady improvement in service consistency as we roll out our new yard management system, TIES (ph). To keep pace with expected volume growth, we will expand the conductor hiring program launched last year. Capital spending for capacity expansion projects will be modest, but directed at opportunities with attractive and immediate returns.

With respect to productivity, we have firm targets and supporting strategies that will produce additional improvements. Unrelenting attention to metrics like train lengths and weights will be the key to making every train count.

Turning to the revenue front and looking at slide 17, the momentum that began in the third quarter continued through Q4. Compared to the fourth quarter of last year, freight revenues at constant foreign exchange were up 10 percent. And importantly, this was accomplished against just a 6 percent increase in carloadings. For the quarter, foreign exchange reduced freight revenues by $78 million.

Looking at the commodity details, please note that my remarks focus on the bars describing revenues exclusive of foreign exchange impact, while the arrows depict reported revenues. The bulk recovery continued. Grain was up by $44 million, or 27 percent, driven by higher production and an early start to the winter export program through eastern Canadian imports.

Strength in our U.S. grain volumes continued through the quarter due to the strong production and export demand over the CNW. Coal improved over $17 million, or 17 percent, driven by strong global demand for metallurgical coal. Sulfur and fertilizers were up 7 percent, driven by strong sulfur commodity prices and offshore potash markets.

The merchandise group, comprised of forest products, industrial products and autos delivered mixed performance. Soft demand for pulp and newsprint depressed forest products volumes, but we experienced improved activity in industrial products. Slower sales and lower production dampened automotive revenues. On the intermodal side, we experienced another period of quarter over quarter growth, 11 percent over Q4 2002. West Coast handlings drove the import export growth. All in all, we were very pleased with the Q4 traffic results.

Turning to slide 18, covering yield, we will start from the left. On fuel cost recovery, we continued to manage our exposure, and now have nearly 90 percent of our contracts protected with escalation clauses, or fuel surcharges. The latter delivering nearly $9 million for the quarter. Same-store yield was up 1.5 percent for the quarter, well above our 1 percent target.

In terms of mix, a major impact to overall rates was due to the 22 percent increase in bulk volumes, which as you know, generate lower revenue per revenue ton mile. The decline in auto volume also had an impact.

However, foreign exchange at 28 cents was the big hit by revenue for RTM results. Adjusted for foreign exchange, revenue per RTM was down 6 cents on the quarter, but it includes 11 cents in negative mix impact as noted on the chart.

Let's turn to slide 19, the year in review. As you know, 2003 got off to a difficult start. However, we did recover to surpass our 4 percent growth target, closing the year up 6 percent exclusive of foreign exchange. The homerun story for 2003 was growing freight revenues fast enough to offset the $186 million foreign exchange impact.

We also finalized negotiations with several key customers to lock down long-term contracts with a lifetime value of $500 million. The result of our initiatives on price and yield exceeds targets. And I will continue to drive focus on targeted growth and price to deliver further yield improvements in 2004.

Looking forward on slide 20. Targets for 2004 are modeled against constant foreign exchange. For clarity, we're not predicting the level of the Canadian dollar. You understand our sensitivities to foreign exchange and can apply your assumptions going forward.

Bulk demand is strong. First-half Canadian grain will be stronger given the 2003 crop recovery. New crop grain is being modeled on the basis of a normal crop. For Canadian grain this could mean 90 to $100 million upside in 2004. For U.S. grain, new crop modeling is for normalized production compared to the last two exceptional years of production. And that could temper U.S. grain revenues somewhat.

For coal, world demand, tight supply and strong prices all suggest a good year for metallurgical coal. Our model suggests a double-digit coal revenue growth rate. Sulfur and fertilizers are tough full year calls, but they both look promising for the first half, driven by domestic and offshore potash demand and healthy sulfur commodity prices. The strong bulk demand plays well to our strength as the low-cost bulk commodity carrier.

The merchandise sector is strengthening. In this market our focus is on targeted growth and yield improvement. Pulp and paper remains in the doldrums, but housing starts and low interest rates will drive modest overall growth in forest products. The fundamentals for industrial products will move with any economic recovery.

Automotive production and sales are expected to improve marginally. Our opportunities will be focused on our strong position with key customers such as Toyota and Honda. Intermodal growth is expected to continue, but at a more moderate pace than in recent years, reflecting a strategy focused on attracting the top end of the truck conversion market.

Additionally in 2004, we will be concentrating on transforming a good intermodal business into an even better one through our max stacks initiative, meaning more double stacks, higher slot utilization, mid train power and longer trains.

Specific yield focus initiatives include aggressive terminal storage assessments, changes to our domestic repositioning program, and a rapid trailer to container conversion effort. As I noted in November, after successfully delivering 1 percent yield for two years, I have raised the yield bar. And I aspire to deliver 2 percent yield, although our plans are built on a minimum of 1.5 percent.

In summary, freight revenue growth is expected to be in the 4 to 6 percent range consistent with our indications in November. With the return of the bulks, and a generally strong demand, we will face some peak demand challenges. We're working with our customers to right size our assets and manage seasonality. In summary, our business model is sound, and the market is shaping up to play to our strengths. Over to you, Rob.

As you heard, our growth outlook continues to look very good. Canadian grain, coal and intermodal, they will all continue to perform well. With volumes as strong as they are, we're very, very focused on yield, as Fred said.

On the productivity side, you heard Fred speak to our improved train metrics, our max stack initiative will only get better as the year unfolds. You can expect continued quarter over quarter improvement in train waits in this area, particularly as the new double stack cars come on line.

Our FTE reduction program it is ongoing, and we will reduce another 330 positions in '04. However, we will add other volume related train employees as traffic dictates. Our yard performance will improve as we rollout TIES, our new yard management IT system. And our system fluidity will improve, delivering better asset velocity and dock to dock performance for our customers.

We will be announcing our final plans for the D&H over the next few months. And going forward, obviously, there are some challenges that remain, which Mike took you through. But we're committed to driving solid EPS growth and improving our performance for shareholders and for customers in the coming year.

Operator, I will now open the floor to questions. So if you could queue the respondents, and we will get on with the Q&A.

(OPERATOR INSTRUCTIONS) Thomas Wadewitz with Bear Stearns.

I have got two different questions here. One for Fred, if you can give us a little further color on the pricing side? I know we had not that long ago the analyst meeting and you talked about going for 2 points of price instead of 1 this year. And superstrong volume environment, and maybe some constraints in the system for the railroad in general. Can you give us a sense of the contracts you have renegotiated, or what you have done with customers? Are you getting more pricewise than you expected? Are you asking even more than you expected, or is it really kind of 2 percent is the number?

Tom, I think the proper way to answer that is just to put in context that the whole portfolio doesn't come due at one time, as everybody is aware. I can assure you that on the contracts that come due, we have raised our expectations. In fact, if one was to go into our Growth Sales Group or our General Merchandise Group, there our numbers where we might have originally thought, even as late as the third quarter last year, that we would be asking for 3 or 4 percent. We're asking for 6's and 5's, and beyond that in cases where the numbers are not meeting our minimum expectations in a busy railway.

I think it would be inappropriate to get too specific with any one contract, but I can assure you that across the board we are able to command in the markets numbers that give me the confidence to say that we will certainly lock in on our 1.5 percent that is in the plan. And I think we will creep up. But I want to get a little more flavor. It is only three weeks into the year yet.

Sure. Than a question for Mike. You talked a bit about the comp and benefits pressure. Just in terms of modeling purposes, if we look at kind of an average headcount reduction, maybe there is 100 or so or maybe 200 overall net of what you're going to add. And then we look at the comp and benefit on a per worker basis, can you give us any sense where everything nets out? Or is it 4 or 5 percent per worker, or how does that come out in '04? And what helps you slow down inflation a bit?

What we're seeing, again, as a base rate -- what we described as a base rate, Tom, which would include the impact of benefits and pensions would be about 5 percent. Now bear in mind, you're going to see comp and benefits move a little because of the strong volumes. You are also going to see some impact from the change in the accounting with the ARO accounting. But certainly on a unit rate basis, that would be the guidance we would stick with, around 5 percent. And that than on a volume basis you would also take into account the benefit of the reductions, which I would say would be about $25 million net net for the year '04 versus '03.

In terms of what we're doing about it, clearly managing the headcounts is a priority for us, but it stems through everything that we're doing in that area. I think our HR people have done a very good job, again, rationalizing the benefits expense, trying to get down to key suppliers and single source suppliers on the benefits provisions, or the supplier service itself. We are making our people pay at the margin for consuming the benefits. And again, that is a time-honored technique. We're looking at many areas to control benefits in particular. So the headcounts and the benefits cost of the margin remain a focus for us.

Right. One last one, if I can, just to toss in to Rob. Anything new on Delaware and Hudson or expectations, timing-wise?

As I said, Tom, we're looking at the next few months. We're working diligently. This is a complex issue, a complex problem. But we have had some significant talent down there over just before the new year. And we're analyzing the results of that work. And we're working with potential partners. I would say within the next few months you'll see some progress in the area.

James Valentine with Morgan Stanley.

I had somewhat of a follow-up question here in that, Tom, am I doing the math right? I am not in the office today, but I think it looks like your cost per employee went up about 10 percent. And I think is with the benefit of a weaker U.S. dollar. Is that approximately about the right magnitude?

Jim -- it's Mike. If you take the numbers that we saw in the fourth quarter. And I did speak about the incentive comp, which was booked in the fourth quarter. So that is skewing the numbers a little bit. But you're seeing probably a number more like 7 percent versus a number that it sound like you're using on the phone.

One thing I would point out there is we're still seeing expenses in comp and benefits related to training, as an example, with the increase in volumes with TIES implementation and so on. So candidly, if you ask me if I am happy with the unit rates on comp and benefits, I don't think we are quite where we would want to be. We're not getting the benefit, if you will, on the revenue side of those expenses. Round numbers that is probably worth about $10 million. But full year those numbers are still in line with the guidance that we have given in the past. And I think that will be the story going forward.

And if I can drill down a little bit more on this bonus accrual. It sounds like, given that a bonus was paid in the fourth quarter that management was fairly pleased with the progress. And I'm trying to understand what those metrics are that you used, because at least relative to my expectation and relative to the Street, it looks like there's a bit of slippage here in the fourth quarter on those whole issue of labor costs. I'm trying to understand, do the metrics tie back to operating income, or is there some maybe some use of capital or something that doesn't tie back to these quarterly expenses?

Right. All non-union employees are on an incentive plan. And we design the employees -- for design compensation to be competitive with the outside industry. So we need to pay over a period time towards our design comp. Last year we did not pay a full pension or a full bonus either. In fact, we paid half. This year what I went to the compensation committee and said, look, the lower groups of employees have up to 50 percent of their bonus plan based on their personal performance, and the other 50 percent percent based on the Company. The Company obviously didn't make it. So no one is getting any company bonuses. All they are getting is the personal one, and at half of the personal performance as well. So if you have 50 percent of your bonus on your personal objectives, you're getting, depending on how you do, up to 25 percent of the design bonus.

And so the reason why is it looks -- it stands out this quarter you're saying because none of that was paid a year ago?

Exactly.

Okay.

Well, it was paid a year ago, but it was accrued over the year last year. And this year we were not planning to pay, but it became evident that we could start to lose employees, so we accrued it finally in the last quarter.

Okay, so it would be safe to say there is some catch-up in the fourth quarter that probably should have been spread out throughout the whole year?

Exactly.

No bonus last fourth quarter accrued in the positive sense, Jim.

So this is basically a bonus that was paid for their annual efforts, but pretty much it all came together in the fourth quarter in terms of it showing up in the income statement?

Exactly.

And final one question, probably for Fred, I guess. In terms of grain, each year it seems to be anyone's guess as to how the Canadian Wheat Board is going to sell into the foreign markets. It is sometimes front-end loaded, back-end loaded, or evenly spread out. Can you give us some kind of feel for, with what you know, how we can try to model grain sequentially, or at least on a year over year basis in terms of what you think is going to be the strongest quarter for the rest of this grain year?

Jim, I think as we spoke about right at the tail end of last year, they started a winter wheat program, a winter grain program, which moves off the eastern ports. And it has run certainly much heavier this year than I have seen in a number of years previously. I also, in November, I think, indicated that we were predicting kind of a 48, 52 split, which means 48 in the 2003 calendar year and 52 or thereabouts in the first seven months of 2004. We haven't seen anything to indicate that those kinds of spreads would change dramatically.

The East Coast business continues to move very strong. The West Coast business has moved at a pace that we anticipated somewhere in the 1,200 to 1,500 cars for us each week. So I would say that the guidance we provided -- I certainly cannot predict how they will sell the second half. I would say with the guidance we provided, it is about the best I can offer at this point.

Jacqueline Bolen (ph) with CIBC World Markets.

Not to go again into compensation and benefits, but just to clarify, then the training added probably about 10 million in the quarter? And you're saying the bonus added 30 million?

No, the bonus added 8 million. What Mike said at a normal bonus year, if we paid out at the design level, it would have been about 30 million, but it was only 8 this year.

And the demand hiring that you did, the edition of crews. Can you kind of split that out and how much that added as well?

Well, I would just say, Jacqueline, that in round numbers the $10 million I was talking about, about half of that was related to -- a little more than half of that was related to accrued training expenses and so on. And the balance is due to a number of items. We're still are seeing costs in the system with TIES implementation and so on. So we don't have a concise split on that. But those are the two main drivers of that. And I was trying to point out that we're really not deriving a benefit from that in a revenue sense.

And the extra training, how long will that last ? Is that just this quarter or will it last into Q1 as well?

It will last -- sometimes certainly going through 2004 with the volume that we're experiencing. It certainly should come down. Now this is subject to where the volume is go towards the end of year, but we will see that for at least another couple of quarters.

On the coal side, you have been working on the Fording contract, is there any conclusions there, or is that still in the works?

Jacqueline, as you point out, we're in the midst of very, very important opportunity for both of us to grow a great franchise. And as such, I think I would prefer not to comment, other than to say that both of us have it in our collective best interest to go forward with an opportunity to move even more tonnage than we have historically moved into the global markets. And we're both anxious to find a way to do that for our mutual benefit.

Scott Flower with Smith Barney.

Just a couple of quick questions. And one of those is just a clarification. I know that Fred mentioned on the grain crop in terms of '04, and more of a normalized Canadian crop, that for the current year we could see perhaps revenue increases in the 90 to 100 million range. I am just wondering two things. One is, what would be netting effect perhaps if we were to take some of the downdraft in U.S. grain -- if we were to net those two and just say net grain.

And two, would the carryover for the first seven months of '05 be an equal amount to the 90 or 100 million that you are looking for in terms of an uptick with the normal crop in Canada?

Scott, I think with the U.S. grain, they feel to me like they have been running at somewhere between 10 and 20. Pick a number, $15 million a year on our property, more than the average day of the previous five years or so. So I think you could net out say 15 off the good news on the Canadian grain.

I think in the 2005 season, should the full crop materialize, we realistically could have another 30 to $50 million of upside available to us on an annualized basis, again, assuming that 2005 had a good crop as well.

Then just just a couple of quick clarifications. Just directionally, I don't need specifics, but you have mentioned obviously locking in some base load customers in order of magnitude of 500 million. Was the pricing on those major customers commiserate with your yield targets or where they less or more?

We at least met our yield targets. And in one case in particular they substantially were higher than that.

And then last question. Could you, and you may have mentioned this, so forgive me. But could you give me a little more elaboration perhaps on exactly how the TIES implementation rolls out during this year and exactly when you expect completion?

The TIES program, we have a pilot that we have run up in the Edmonton area. We have elected, given the difficulties that it takes to run the railway in the winter months, not to go forward and rollout until starting in May. We have a team in advance that goes in and establishes the processes. They have a scorecard, that until that scorecard, which means compliance to this new processes, turns all green. And that would kind of thumbs up on the change management aspects. At that point in time, and only at that point in time, will we implement the TIES software, if you will. We will start in May in Vancouver. And we will roll across the country in an eastbound direction until probably November, maybe even December next year before we have got the last of the facilities fully implemented.

I might add that we're late. We announced that we were going to delay it because of the rail traffic controllers strike we had in the summer of last year in '03. The people who were to implement TIES in the yards were mainly ex-dispatchers, so we brought them in and continued to run the railway. And we felt that that was a very good investment in people's time, given the fact that we signed good contracts that we need.

The discussion on comp and benefits, on pension, on insurance, all of those things have -- made me focus with Fred and his team on what we need on yields. We must recover the railway's inflation. We cannot be giving away our productivity increases for what we invest in. So I am extremely keen on this. Fred has got good people in place. Excellent processes. Excellent people. And as I said in the past, the commodity managers are being motivated, being measured on what they get on volume and what they get on yields.

I guess one aside, congratulations on Railroader of Year, Rob.

Thanks, Scott. Thanks a lot. I have a great team here, is what I said to them. A lot of people are pretty pleased with the recognition the Company got. So thank you.

James David with Scotia Capital.

Just sort of first is a big picture question. Grain revenues and coal revenues -- big volumes. But the revenue is coming in even after currency in the sort of mid double digits -- teens. And these are businesses typically that bring significant premium margins with it, yet we're not seeing the turn in earnings momentum. I'm trying to determine, sort of looking through what you have presented and what you're saying. Is there to some extent -- one of two things is happening. One, you have a series of onetime expenses, and it is not onetime in terms of non-recurring, but (indiscernible), if you will in the quarter. Or is there some degree to which you are potentially staffing up, or over equipping, to create a buffer against these big volumes, and therefore they aren't coming in at the margins you would like in an optimal sense?

Can you, Rob or Fred, perhaps characterize how I should interpret the fact that these excellent numbers on these two commodities now translate into a strong turn on the EPS line?

James, why don't we let Mike take a shot at her, because he's got all these exceptionals broken down.

James, it is a very good question. The answer to the question is your latter point. If we look at a quarter and you can't, as you well know pull all the conclusions out of one quarter, that is the challenge, and in my view, somewhat frustrating challenge that we have. It is a challenge and an opportunity to get the operating leverage and the benefit of those bulks to the bottom line.

If we take a look the quarter in and of itself, we did see overall incentive expense. The 8 million that Rob has been talking about on bonuses (technical difficulty) go in there. The swing on that basis. And as I mentioned there's another $10 million of expenses in there that are not commensurate with the revenue performance. So on a quarterly basis, there is $20 plus million of expense in there that on a runrate you wouldn't automatically attribute, given the revenue performance.

Having said that, as I said, the focus in '04 is to get the operating leverage benefit to the bottom line. Particularly as you point, this is bulk business. There are solid margins, and we will be driving that through '04.

So you would perhaps want to lead me away from suggesting that maybe there is some volume buffer built into the system, be it labor or equipment? Just because you might have been concerned so much you didn't want to leave any of that on the table and potentially sacrifice some margin as a result? Is that an avenue I should explore? Is that perhaps not --?

You mean that we've staffed up? We have added equipment and that is impacting our normal run rate? Is that which you mean?

Yes, exactly, Rob. Just to sort of protect against dropping the ball on volume.

Well we did, as Mike mentioned -- if you go back to the previous conference calls, we got ahead of the curve early on covered hoppers. So that probably impacted what was still a good news story on car rents, but that had an effect. We have hurried up some locomotives and we have leased some locomotives. So that is having an effect. The additional volume of people is having an effect. Not only are we paying them, there's the pre-upfront training.

So there is that. I don't -- as you said to guide you away. Whether it is -- I wouldn't say that it is the big issue. I think is the other one that Mike has --.

Yes. I would say that there's probably 10 to 15 of buffer in there, James, if you want to approach it that way. These are good decisions to make depending on the volume growth coming forward. But, yes, there are expenses showing up in the current quarter.

Fair enough. Just a second question. Fred, in talking about intermodally you mentioned a focus on your domestic intermodal customers. Is there anything -- in saying that are you deemphasizing international customers? And the reason I ask is CN has been very vocal with the container customers being, I think, a challenge for them. And I'm curious, are you seeing a desire to deemphasize international? And moreover, have you seen any flow-through from Halifax to Montreal because they have been demarketing or anything to that effect?

We have not seen any flow-through. In the last year or so Montreal has been a robust, but reasonably flat volume. In fact, if anything our share has moved maybe a pointer or two lower not higher. We're very focused, James, on margin and on yield in that business. We are pursuing growth with existing customers. We are pursuing yield improvement. We're prepared to sacrifice growth for yield with those customers. And amongst those big long-term contracts I was speaking about, one was an international shipper. And that was a good, robust debate and dialog where we introduced several features into that, which improved its margin considerably, not just on price but on such things as repositioning their empty cans from certain places, and some of the storage charges, and things like that.

I think the summary answer is, we still value very much our international customers. We have a franchise that has in-land terminal capacity we have spent a reasonable amount of capital on over the last four or five years. And we're trying to find the best possible balance. But in a world where demand exceeds supply it is obviously in our best interest to seize the moment and insure we command a good price yield for that value we are offering.

(OPERATOR INSTRUCTIONS) We are accepting questions from the media. Randy Cousins with BMO Nesbitt Burns.

As I sit in the middle of a blizzard here in the city of Toronto. Last year you guys had a really tough first quarter. You guided with some different practices referenced to distributive power with the trains, and we going to get the bounceback in grain. I guess, I wonder if you could speak to what is happening on the operational front in terms of sort of the fluidity of the this system?

And then secondarily, what does that imply for earnings with the bounce back in the grain and the strong coal? Could we look at sort of -- in terms of Q1 guidance you did 24 cents last year. That was 43 cents the year before. Can we get back to and through the sort of 2002 results for the first quarter?

Randy, I think what we will is why don't I talk a little bit about the railway and the status of it. And Mike can maybe do his best to interpret the second half of your question with regard to the financial side.

Kind of a bad day, quite frankly. The parks west of here have shut down a lot of the roads. And is has slowed the railway down a little bit. But other than not, and minus 40 across the rest of the property, the railway is running reasonably well.

We have the benefit of 26 days or thereabouts of data to indicate that the direction that we provided to everyone in November, about our intention to run longer and heavier trains, that we are directionally moving well. I'm very very satisfied with that effort and the early results. We continue to move a huge amount more grain this year than we did last year. We have moved more coal this year than we did last year already. And we will continue to pursue even more, as you can imagine.

I am satisfied. We have yet to garner the benefits of all of that max stack activity. We have run about -- probably about 30 double stacked trains, mid train powered, off the West Coast. And in December I think we did 5 or 6 experiments out of the East. We have the opportunity to do many, many, many a day. And as we have trained everybody. We have got the power distributed across the country. And the fleet, I think we've got about 41 percent of the full double stack fleet that we're going to bring on.

So my answer at this point is that the early indications on the metrics are favorable. I am satisfied. Obviously, we all want more and we will continue to pursue that. The max stack program, which will give us great productivity, and the low controller, mid train power on the merchandise trains, are all in line and have begun, but we're trying to phase it in carefully and thoughtfully. And it will probably be towards the end of the first quarter before we have a full year rate going, a full year run rate going, if you will.

But we're going to ramp it up as quickly as we can. And as we hit this incredibly cold snap again, this is the perfect time. And we are in fact running a good long train through the cold weather. So we're satisfied with the direction we hope to go.

Randy, it is Mike Waites. With respect to your other questions regarding quarterly EPS and so on, the first quarter of 2002 is 43 cents. This is on a an adjusted basis. The first quarter of 2003 was 23 cents, and frankly not a script we would have written. Obviously back last first quarter you saw us still struggling with a grain drought. You saw back then, as I recall, record low temperatures in central Canada. And frankly, not a great casualty record for us. So we're certainly not scripting another 23 cents quarter the first quarter of 2004.

Having said that, I just don't want to into breaking out the guidance that we have given. We have given full year earnings guidance back in November, 250, and we highlighted the assumptions that we made. Part of that is obviously we're projecting a far stronger first quarter. And given the productivity, improvements that Fred is speaking about, our focus on a variety of expense items, we think that will turn out to be the case. But I'm going to refrain from setting a number for the quarter on guidance.

One last question, I guess for Fred. A bunch of your businesses, some of it is tied directly to U.S. dollars. Are you seeing any pressure from your customers who have been paying in Canadian dollar sort of moving to a U.S. price model for their freight to the extent that if the Canadian dollar continues to move up, as some economic prognosticators feel it will, that could put additional, or increase your sensitivity to the connect buck (ph) U.S. exchange rate?

No, Randy. I can't say that we have felt that at all. In fact, I believe that 2 or 3 percent less of our businesses are denominated in U.S. dollars, I think, last quarter than the previous quarter, or some metric like that. There has certainly been no verbal onslaught at all from anyone suggesting that they would like to reorganize how they denominate the revenues. If it happens, we will deal with it, but obviously we're not going to allow value to escape the Canadian Pacific Railway (multiple speakers).

Yield, Fred, yield.

There is a little coaching going on.

Ken Hoexter with Merrill Lynch.

Squeezing in at the end here. I just wanted to follow up on the grain issue for a minute. We have heard a lot about capacity shortages going on in the Pacific Northwest. Can you comment if you are seeing any of that with your network at all as well? I know the Canadian report has a good assignment going, but I just want to know if you are seeing customers who are getting overloaded in any way? Let me just start with that, and I will come back with more.

With regard to the grain situation, Ken, as I said the eastbound grain is moving very well. The westbound grain is pretty much normal flows. Every now and then you end up with a blip with a wack of potash and coal and grain and intermodal. It all wants to move on a day or two. But with the bulk commodities, one of the advantages we have is that as a general rule is that there is some flexibility. We can move a day or two either way and not compromise the whole supply chain.

At this point, it is a busy, busy railway, but I don't think -- I'm not prepared, based on any experience that I've had, to say that the grain isn't moving because of anything we can't do.

Ken, I would just add too that we have very cold weather. And we have had for the past four days. After the new year we also had a bout of it, Fred. Much colder than we normally expected throughout British Columbia. And you saw, Ken, those snowstorms in Seattle, and Vancouver had experienced the same thing.

We had the cold weather and the snow. And that put the overall system for all trains, coal, sulfur, potash, grain, under stress. And so our volumes weren't all that great, certainly not what the customers wanted, not what we wanted. But we have worked our way out of that. We will work our way out of this little blip of minus 40 as well.

Great. Think guys. Just a quick follow-up as well on unions. Obviously we saw Canadian National reach an agreement with one of their workforces the other day. If I recall right, I think you guys had, was it two unions that had contracts expiring at the end of '03? Any progress, or is that something that we're still seeing talks seeing talk going on? Anything you want to update us on?

Well we still have -- in the United States the situation is common. You are aware of that. In Canada, our running trades, the locomotive engineers and engineers have been without a union contract since the end of '02. However, there is issues going on on who represents the employees in Canada, similar to what is going on in United States between the Teamsters and the UTU. And so we're waiting for that one to get cleared up.

We have told them that we would like to get busy on that and get that the put away before the end of this quarter. The other contracts in Canada is mainly -- what is the other one, Fred? It is BMWE, right? So that has expired at the end of '03.

Right. And, Ken, they too have a little bit of an issue on who is going to represent them. So it is not that we are not interested in sitting at the table, but they've got a bit of -- I don't know if a raid is the right term, but they have got another party attempting to consider who'll represent them going forward. So they are kind of wrapped up, not unlike the running trades, trying to figure who they want to represent them. After they get that settled, we will deal with them.

Those are the only contracts that are Canada that are open.

Thanks, Rob. Thanks, Fred. Just on the productivity you talked about before about headcount reduction, if I got right, that 330 number. Is that -- the 4 to 5 percent employee productivity, is all based on the headcount reduction? Or is it systematic as well, are there systems that are going in place to improve that productivity?

I think the particular one that is interesting is the big uptick in GTMs, and yet the really modest increase in train miles. So that obviously we're getting much more GTM per running train employee. But overall it is a combination of the improvement in train weights and the reduction in employees in non-volume related areas.

Reg Curren with Bloomberg News.

I just wanted to go back to James David's question about the revenue falling -- getting to the bottom line. I take this is both the currency effect and these other costs that you talked about, the training and compensation that prevented that from getting down to the bottom line?

That's correct, Reg. Basically what we saw in the fourth quarter was very strong, as I said earlier, business fundamentals. What you try and do is, given the increase in the bulks, that is good business to have obviously. And we try and delivery that earnings improvement to the bottom line.

We saw a number of items occurring in the fourth quarter. We did pay our people a small bonus. We hadn't accrued for any of that through 2003 until the fourth quarter. Obviously, we're still dealing with high fuel prices. But we're also trying to position for dealing with future volume growth. And so as a consequence, we have had additional training expenses in there. We're trying to implement some information technology, TIES. This is going to give us a significant boost to productivity, but short-term we don't see that. We see the cost of it, we don't see the full benefit of it. And that is a challenge for us going into 2004 is to drive the benefits from these investments that we're making.

On the currency side, I think you had mentioned in Montreal, at least in an interview I saw with us, that you might consider more hedging activity beyond what you do on the debt side. Any thoughts on that given that the dollar did continue to rise after you spoke in Montreal?

Yes, the answer is we're still certainly open to doing that. And we will look at it to see where it makes sense. As we have said before, we have a very strong currency hedge in place. And the way we have done that is by taking our debt, and in excess of three-quarters of that is U.S. dollar-denominated. So as the Canadian dollar strengthens, that U.S. dollar-denominated debt becomes less Canadian dollars, if you will. And of course our interest expense becomes less Canadian dollars. So on an EPS basis, what we said is, for every penny Canadian change, it is worth about .7 cents EPS to us.

We're looking at the forward curves. We're looking at different alternatives. If the opportunities present themselves, I wouldn't rule out taking a further position. We don't see it at this point in time. And we also, from a cash standpoint I should add, benefit to some degree on the capital program, that is to the extent that part of our capital program is denominated in U.S. dollars we benefit there. So at this point no change.

We have time for one more question from Tim Caulfield, Salman Partners.

I just had a question for Fred. Fred, I was hoping maybe you could get -- or give us a little more color on how the system is running in western Canada right now, especially with regards to Met Coal (ph). We have been hearing a few tidbits, things like number of empty ships sitting off the coast right now, and also the producer props being unhappy with how much is being shipped out of Belt Valley (ph) right now?

Tim, probably the best answer is with regard to the last comment is that Met Coal is at record world prices, and as such, they are anxious to ship every possible ton. So everybody would like us to put down the tools for everything else and just take care of coal. That is not a realistic scenario. We're doing a very good job. We're moving more coal, and we have moved already more coal in Q1 by a substantial amount. It is our intention, obviously, to continue to work together with our associates to do everything we possibly can in the whole supply chain, including what Elk Valley needs to do to simplify the operation from our perspective, and what the parties need to do at the waterfront to move as much tonnage collectively as we can.

I can assure you that we set records. Basically if I looked at the averages of the last seven days, which I do regularly, we set some huge volume records. So people say things for various reasons. I'm not sure of all of their sources. So I am not going to say anymore than I have other than to say that we're moving an awful lot of product, including a lot of coal.

Okay, ladies and gentlemen, we're right on the hour. So I thank you for your attention. We've got some railroading to do. It is pretty cold out here in the West and in the east too, Fred. So we look forward to having a discussion at the end of the first quarter. Good afternoon.

The conference is now ended. Please disconnect your lines at this time. We thank you for your participation, and have a good day.