Canadian Pacific Kansas City Ltd (CP) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Canadian Pacific Railway first-quarter results conference call. This presentation contains 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, annual information form, and this presentation where applicable, and in the press release issued this morning. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and answer session. Instructions will be provided at that time for you to queue up for questions. (OPERATOR INSTRUCTIONS)

I would like to remind everyone that this conference call is being recorded today, Tuesday, April 27, 2004, at 11 AM Eastern time. I will now turn the conference over to Mr. Rob Ritchie, President and Chief Executive Officer of Canadian Pacific Railway.

Good morning, ladies and gentlemen, and thank you for joining us today. With me in Calgary, I have got Mike Waites, the CFO; Fred Green, the Executive VP of Operations and Marketing; and Paul Bell with Investor Relations. Before I start, just let me reiterate that caution outlined by the operator, and they are on slides two and three, and also draw your attention we use the Canadian dollar and Canadian GAAP.

Let's start on slide 5. This is a good news/bad news type of story. We got off to a decent start, but we had a series of derailments, severe weather and an unusual and extreme avalanche on our busiest quarter, which dramatically impacted our operations. We did recover and since the latter part of February, we have seen a significant improvement in our operations, improvements that we are seeing also right through Q2 today. Fluidity has returned, train productivity has increased, speed and service has improved.

Overall for Q1, carloads were up 11 percent and train productivity was up 7 percent. And again this quarter, the strong performance was masked by foreign exchange which had a negative impact of $13 million. To give you a proper sense of the run rate on the Railway, if you exclude the impact of the stronger Canadian dollar and the avalanche and related weather problems, we would have seen over 30 percent increase in operating income.

Moving on to the EPS which is on slides 6, reported EPS came in at 15 cents, due to a $79 million swing in currency gains and losses of foreign exchange on the long-term debt. Excluding that non-cash item, EPS came in at 24 cents versus 23 cents last year.

Before I turn it over to Mike, I would like to say a few words on the opportunities and challenges for the balance of the year. We have very strong business fundamentals. Demand is high for our service. The railroad since the disruptions is running very smoothly. We are producing big volumes and have significantly improved on service. Fred and his team are driving train efficiencies and scheduled train operations, as can be seen in the weekly AAR statistics. We are experiencing unprecedented demand, well in excess of customers' forecasts and across most lines of business, particularly so on our Western corridors.

Clearly, the China factor is having an impact on global trade patterns of our customers. We are planning for double-digit tonnage growth on our Western corridor between Vancouver and Moosejaw, and high single digit growth on our corridor between Edmonton and Minneapolis. Montreal to Chicago also has significant growth opportunities. Because of this, we are bumping up against capacity in selective corridors, and this is a challenge for us. The question that has to be asked is, how sustainable is the demand that we are seeing.

To accommodate this growth to date, we have invested in locomotives, in cars and in crews, but the issue will become one of when to invest in track infrastructure capacity. We are working with our customers and forming our own independent assessment of volumes and margins to firm up the demand. Obviously, we are looking for strong signals that these are long-term positive market conditions. With such strong demand, our yield program is obviously critical, not only for proper returns on existing investment but also to justify new ones. Given the strong demand for our services, we expect yield improvement of 2 percent.

In addition, we need the whole supply chain to be harmonized. Customers cannot just look to the rails to handle the surge. Capacity needs to be added in other areas such as port infrastructure as well, and we need an investment environment that is stable. So, in short, we need the entire transportation sector to work together to address this issue. We are taking a very disciplined approach to long-term infrastructure investment. We will invest only where the project economics have attractive returns. We are doing the planning on these projects currently and will have more for you as this year unfolds.

I will now ask Mike and then Fred to take you through the details. Mike, over to you.

Thank you, Rob. Before we go through the income statement, let me clarify that our prior-year's numbers have been restated to reflect accounting changes under Canadian GAAP, having to do with asset retirement obligations. Most of you are familiar with these changes which has affected the entire industry. This change was implemented by the other Class 1's under U.S. GAAP in 2003. I'm not going to get into the details, but the net effect going forward is to realize these expenses. They are largely track removal costs. We'll realize these as period expense, most of which will be in comp and benefits versus depreciation, the net effect of which is immaterial.

As a result of the restatement, 2003 adjusted EPS has changed from $2.11 to $2.07. We've attached the detail in the summary of rail data which you should have as part of the press release package.

Turning to the income statement, overall revenue increased $8 million, driven by a $19 million increase in freight revenue. Fred will cover this in a few minutes. Other revenue was down $11 million to $33 million, reflecting timing differences in smaller land sales and equity income from affiliates. As in the past, this item swings between quarters, but we expect to see about $177 million for the full year 2004. That's slightly below the $181 million that we saw last year.

Total operating expenses were up $10 million, resulting in operating income of $116 million. Interest expense was down $4 million, as we benefited from our long U.S. dollar debt position, the stronger Canadian dollar reduced to U.S. dollar interest expense. The effective tax rate was 34 percent, and we expect to see about 32 to 34 percent effective tax rate for the full year. So adjusted net income was $38 million, up $1 million from last year.

The difference between adjusted and reported income is a balance sheet gain loss on the U.S. dollar debt which we've spoken about before. The accounting rules require us to fully recognize the exchange impact on the U.S. dollar debt that is by and large an unrealized gain or loss. While the Canadian dollar has strengthened year-on-year, we saw the Canadian dollar weaken slightly from year-end 2003, which generated a $14 million exchange loss and resulted in reported net income this quarter of $24 million or 15 cents a share.

Turning to operating expenses, expense management continues to be a key story for us, and clearly we still have more work to do. Expenses rose $10 million to $771 million. While revenues and tonnages were up, we were targeting to see more of the $46 million foreign exchange benefit. Fuel expenses fell $6 million. These higher prices and increased volumes were offset by improved unit consumption and foreign exchange. Our hedge position is summarized in the appendix, with 18 percent of our requirements hedged under forward contracts at roughly $21 a barrel for 2004, with another 6 percent covered under costless collars with a ceiling of $23.60 per barrel US.

Equipment rents expense was down $8 million, largely due to the stronger Canadian dollar which was also the story for purchased services. Comp and benefits expense rose $22 million to $309 million, due to a number of items, and I will step through this explanation on the next panel. Beginning on the left-hand side, the unit rate increase is $13 million, and that is consistent with the annual 5 percent unit rate increase that we have spoken about in the past.

We had a favorable exchange benefit of $13 million, but last first quarter we had favorable prior period adjustments of $14 million. The net effect of the staff reductions previously announced was worth $6 million, and we are on target to deliver to this objective. The higher volumes increased expense by $3 million, and then we get into two key issues. First, training cost. Training for our TYES, our yard management system, and extra training of running trains for anticipated increases in volumes totaled $4 million. For clarity, this is over and above what we would normally expect to see for training expense. Fred will speak about these items in a moment, but the challenge is to match training as close to the volume increases as we can. Early training is an insurance policy.

Finally, increases related to inefficiencies totaled $7 million. Inefficiencies stemmed from the combination of weather-related incidents and record volumes. This is an area where we must improve on going forward to get the benefit of the increased business to the bottom line.

Turning to diluted earnings per share, this next chart summarizes the quarterly earnings performance. Key take-away, as you can see on the left, is a strong set of business fundamentals which enable us to grow volumes by 32 cents before the currency impact, offset by related volume expenses of 8 cents. Moving to the right, we have spoken about comp and benefits, and the 3 cents you see here is the annual rate increase, the 5 percent net of the FTE reductions. Depreciation is up by 5 cents, due to capital additions and rate adjustments.

Stepping more to the right, these are the items that we are trying to claw back as we move forward. Higher fuel prices totaled3 cents. The negative impact of the stronger Canadian dollar was 2 cents. That's after the benefit on the interest expense. Training reduced EPS by two cents. The timing issue around other revenue cost us 4 cents, with the balance of 4 cents, and about 3 of that last 4 cents has to do with the inefficiencies that I just spoke about.

Clearly, we must drive the strong business fundamentals to the bottom line, and a key part of this is in the comp and benefits area. We are seeing encouraging signs as we exit the quarter and going through April in terms of operating efficiency. We will keep the pressure on as we move forward.

In concluding, I want to give you an update on our outlook for the year. Full-year EPS growth is expected to be in the 5 to 10 percent range on the restated 2003 adjusted EPS of $2.07. This assumes a number of items which we have highlighted for you in the top left-hand corner of this panel, including a normal grain crop, an exchange rate of $1.33 or 75 cents if you like it the other way, an average WTI crude price of $33 per barrel U.S., and an effective tax rate in the 32 to 34 percent range.

Adjusting for the revised assumptions, this is directionally and consistent with what we gave you last November. A tough start, but demand strength leaves guidance intact, and we must drive the efficiency improvements over the balance of the year. Fred, over to you.

Thanks, Mike, and turn to slide 16. As Rob noted, our performance in the first quarter was significantly impacted by the avalanche on our Calgary/Vancouver corridor. We also experienced several derailments. You can see the drop-off in volumes was almost 25 percent. However, and importantly, we recovered, leading to fluid network operations by March, and we were able to record a 10 percent year-over-year workload increase in the remainder of the quarter.

We estimate that the interruption to our operations reduced operating income by $25 million between lost revenue, operating inefficiencies, and service penalties. I thought I should also include slide 17, so you could see what a major avalanche looks like. This snow bank is 25 feet high and 525 feet long. It took 3 days to clear and 7 days to restore full service.

Turning to slide 18, you can see that we did recover. Train rates improved steadily as the quarter progressed, and we were 7 percent up quarter over quarter. TTMs per employee ended the quarter up 8 percent. On slide 19, you can see the results of our Max Stax initiative. As we promised in November, we coupled the higher carrying capacity of our new double-stack cars with our new AC locomotives to run longer, heavier intermodal trains. We posted impressive gains in both intermodal train length and train weights, and we are ahead of our target to deliver a 16 percent increase in train productivity on transcontinental trains by the end of the year.

Mike has already spoken about expenses in general and comp and benefits in particular, but I would like to provide more detail on the latter. On slide 20, you can see a breakdown of our training cost for 2004. A significant amount is being spent on the implementation of our new yards management application, TYES. The application rollout will be completed by year-end. Related training costs will be negligible in 2005.

Also, 2004 is a busy year on the crew training front. We began our training program in Q2 of 2003 to prepare for the return of grain in Q4, but other businesses increased dramatically in the past four months. We are also entering into an area of retiring baby boomers. Hence, we have chosen to train heavily in 2004, increasing our ranks by almost 350 qualified crew members this year. We sill calibrate our second-half training based on demand and productivity accomplishments. Please remember that we pay our running trains' employees by the mile, and we can adjust staff levels through layoffs as demand dictates. Over $12 million of the $30 million are one-time in nature and will disappear in 2005.

Let me wrap up ops on slide 21 by focusing on what was achieved. In March, we moved more business than in any previous month. We set new standards for train productivity and we saw velocity and terminal dwell improve. April's metrics are even better. Our service metrics returned to satisfactory levels. They are not good enough, but they are vastly improved over February. Looking to the balance of 2004 with our new AC locomotives and more crews, you'll see these trends continue positively. We are ahead of our plan to hit 5 percent productivity improvements that we made last November, and we will be positioned with crews and assets to support our strong revenue growth.

Compared to the first-quarter of 2003 freight revenues at constant FX were up 9 percent. For the quarter foreign exchange reduced freight revenues by $58 million. All of my comments will describe revenues exclusive of foreign exchange impact; the arrows on the chart depict reported revenues. (indiscernible) were up over 11 percent for the quarter, Canadian grain revenues were up 41 present, U.S. grain revenues declined by 13 percent owing to weather plus poor terminal and rail congestion on the Pacific Northwest route. Coal improved 15 percent over Q1 2003 driven by strong global demand for metallurgical coal and excellent train cycles after the recovery.

Sulfur and fertilizer revenues were up 7 percent on the quarter, 12 percent growth in potash was driven by robust offshore demand. The merchandise group was essentially flat on the quarter. The automotive sector reflects the tough '03 comparison and are consistent with our previous guidance. Canadian autosales sales decreased over 6 percent on the quarter and inventory levels were generally high. Forest product volumes were weaker due to weather related shutdowns in lumber and our continued focus on shedding low margin segments.

Strong performance in industrial products driven by steel, aggregates and plastic resulted in an 8 percent increase in revenues. On the intermodal side revenues jumped 17 percent driven by increased handling at the Port of Montreal and huge import and export volumes at the Port of Vancouver. Clearly some of this growth was driven by the CM (ph) strike. And while we had some volume backup at the Port of Vancouver, due to the unplanned volumes I'm pleased to say that we continue to run our disciplines maxed (indiscernible) program and the unplanned volumes are now diminishing.

Turning to slide 23, we've been working the yield side hard. As shown on chart at the left, in the first-quarter of 2004 we renewed 435 contracts and tariffs at an average rate increase of just over 5 percent. In addition, we continue to secure 1.5 to 2.5 percent escalation on the ongoing contracts with indexation clauses. Almost $10 million was collected in fuel surcharges in the first-quarter.

On the intermodal side we have successfully transitioned virtually all of our trailer business to containers; we've converted nearly 7,000 empty marine movements to revenue loads, and we've increased our intermodal terminal service charges. We are also adjusting our total book of business by addressing the bottom quartile traffic with our upper out rig program. Overall our yield program delivered in excess of the minimum commitment of 1.5 percent on the quarter. As 2004 unfolds I'm comfortable with my goal to surpass 2 percent.

On slide 24, please note that we've adjusted our 2004 planning model to reflect a foreign exchange rate of $1.33, down from our previous reference point of $1.41. Canadian grain second-quarter volume should be up by over 15 percent. At this point in time we continue to model the new crop as normal or 49 million metric tons. U.S. grain markets remain strong both domestically and offshore. In our territory we are calling for new crop production to be lower than the last two exceptional years. On the coal side our model continues to suggest double-digit revenue growth for the year.

I note that Elk (ph) Valley Coal Corporation has given CPR the three-year advanced notice of the intention to renegotiate our contract. As you know, all five mines are now amalgamated under one ownership. With the recent change in management contract discussions were slowed but we are working our way through that situation, and as we are in active discussion it wouldn't be appropriate to comment any further.

Sulfur and fertilizer remain solid for the first half driven by domestic and offshore demand. Domestic fertilizers volumes have been -- should be decent going forward based on the improving grain prices. The merchandise sector is firming up. Our focus here remains on targeted growth and yield improvement.

We expect automotive to remain sluggish in Q2 and perhaps for the full year. Current forecasts suggest that Canadian sales will continue to lag 2003 and we're starting to rear rumblings of summer production curtailments. Housing starts and low interest rates will support lumber and panel growth in the forest products segment, however over the last several quarter we have demarketed some low margin traffic which will result in reduced carloadings year-over-year.

Industrial products should see continued improvement in steel, plastics, aggregates and chemicals. Intermodal growth is expected to continue but at a more moderate pace as we focus on serving our key accounts and targeting the top end of the truck conversion market. In summary, last November I forecast growth of 4 to 6 percent at a foreign exchange rate of $1.41. I have growing confidence in the demand and as such I will hold to that growth target even though we're now using an exchange rate of $1.33 in our model.

CPR will face some peak demand challenges over the next year. We are working with our customers and our suppliers to right side our assets and proactively manage the heavy demand. We have delivered on our promise to size up on mobile resources to be ready for a very busy year and we are confident we can achieve our current growth targets. Over to you, Rob.

Clearly the overall reported numbers for the first-quarter are not satisfactory, but you now have a clearer picture of those items which are delaying us from taking this growth in business to the bottom line. These issues are for the most part I believe temporary in nature. The railroad is fluid. Our momentum is good and it's continuing into the second-quarter. The environment for yield improvement is positive. The team's focused and it's committed to taking the cost out as we go forward.

I've repeatedly said that we are a second half ball team and I remain committed to our earlier guidance given in November adjusted for the reality of the higher fuel prices and a 75 cent Canadian dollar which should see our 2004 EPS grow between 5 and 10 percent over 2003. With that, operator, I will now turn the microphone over to you to open the line up for questions. Thank you.

(OPERATOR INSTRUCTIONS) Fadi Chamoun, UBS.

Good morning, gentlemen. One quick question first on capacity. You mentioned that there's some tightness in some areas; my question is assuming this demand level remains the way it is now for the next 12 to 18 months, at what point would you have to face this (indiscernible) of increasing capacity in terms of cars or in terms of the tracks? Do you have room in the meantime to sort of focus on improving the product mix or returns ahead of that? If you can give us some guidance of what are we looking for in terms of the timing for potentially increased capacity.

Certainly, as I said, the environment for price increases is there because there's such a strong demand, and as Fred says, we are using price to rationalize the business that is not attractive to us to literally clear the track for more attractive business. Secondly, overall I would say that the commodities are going to have to compete for what capacity there is. We can increase capacity with increased locomotives which we've done. We can increase capacity with increased crews and also by more efficient cars -- Max Stax being an obvious one, but there's also aluminum coal cars and higher capacity lumber cars, etc. Those are all the techniques that we have been using in this company to increase capacity going forward.

The day will come, however, when we will be -- it'll be more economic to put more track down to get more trains over a section of track with more fluidity. That is what we're determining right now, when that day will come. And we're not in a position to say what that date will be. However, because our customers frankly earned in that position. So we are working with them and doing research ourselves to see if the sudden uptick in coal, the sudden uptick and grain, U.S. grain going exports, sudden uptick in fertilizers, import containers, are they long-term sustainable? If they are I think it would be more economic to be putting assets on the ground instead of increasing the rolling stock in crews. We will come back to the shareholders later on this year when we have an assessment with our customers of what the longer-term market looks like.

Okay. My other question is on the -- do you feel that you are properly staffed now for the level of demand that you saw in the first-quarter and potentially continuing for the rest of the year or are you planning more hiring in the quarters ahead? And if you can also give us some update on if you are still on target with the 320 or some -- or around that -- of the SG&A staff reductions that you had planned for this year?

I'll deal with the running trade side and tell you that we are in very good shape. We are ahead of the curve. And at this point in time we're satisfied that we have enough people clearly to cover the first half of the year. Train (indiscernible) for crews is not proving to be an issue at all. That said, this demand is strong and we are -- at this point in time we still have the likelihood of continuing to hire another group of folks -- a couple more training classes. We're going to calibrate whether we do or don't do that as we go through the next quarter. If our productivity continues to improve us as we believe it can, we may not hire as many people as we anticipated. But I would say at this time we've probably hired two-thirds of the people for this year and they are in training. We'll make those calls in the coming quarter or so on whether we put the rest of the gang in the classes and go for it. Maybe I'll through it over to Mike on the other issue.

On the announcement we made last second-quarter, you may recall the numbers were 370 staff to come out in '03, 330 in '04 with the balance of 120 in '05. If you take a look at year-on-year we did take some out in the first quarter of '03 so the year or on year impact that we're seeing right now is about 350 staff coming out, that's right on target. If you take, and you may recall the IDM (ph) outsourcing transaction, you would otherwise expect to see us down about 440 or so staff.

Clearly the volume increase has been very significant so we add back roughly 200 for that; everything else remaining the same you would expect us to be down 200 or so. We're down 130 and we're missing, if you will, 70, that is we're higher than what we thought we would be by about that amount. And the major reason for that is the inefficiencies that I spoke about; that's the opportunity for us going for. Having said that, to get back to Fred's point, we are training. The way it currently works is we have those costs in the system but while we're training people we don't count those FTEs, so incidentally there's a reason why the unit rates are higher on the quarter. But an important point to note is once we train those people, if we do not need those people we will not have them on the payroll. So we have that flexibility but that's the summary on the headcount.

My last question is in terms of the labor negotiations, are there any specific (indiscernible) that we should be watching for for this year and early next?

In Canada we have now got some clarity on our running trades and we are moving forward again with the labor negotiations. There was a union change from the old traditional UTUBLE into the Teamsters. We hope that will get momentum and we anticipate no problems. The same representational issues apply to the maintenance away (ph) workers in Canada. So again we are waiting clarity for that. That one is not quite as far progressed and what union is going to represent, that group of employees, when that is clear we don't anticipate any problems.

We have staggered Canadian contracts in our union make up and there are longer-term contracts which are setting the tone and the pace going forward. With respect to the CAW which was in the News recently with our Canadian competitor, that contract for us does not expire until the end of the year. In the United States we are following the main table bargaining for the big four down there and we are making satisfactory progress. I would anticipate no problems there.

Thank you very much.

Scott Flower, Smith Barney Citigroup.

Rob, I wanted to maybe start with you on sort of a big picture topic you raised in terms of synchronizing the supply chains. And I agree that's a laudable goal but how much progress can you actually think you can make there because it seems one of the problems of the industry is really synchronizing supply with demand and that the rail industry constantly gets used as surge volume and there doesn't seem to be adequate capability to quickly respond to that either being able to (indiscernible) the operations or being able to gait it with price. I'm just trying to get a sense of when you say that what things do you actually pragmatically expect to come out because it just seems like it's been a problem with the industry for a long time and it just -- as thing get -- tighter capacity it's even harder to manage.

Especially with the quick run up that we've had. It's interesting, coming off of very weak commodity prices with low-volumes and then having that quick run up, people are chasing the market and we have tendency to make short-term decisions that I think in the longer-term are not the proper ones, and that's what I mean. We need to -- as you know, when you have a contract say for bulk materials you have origin detention, you have online detention or what we call constructive placement. We also have detentions at ports.

What I'm referring to is that as we look at significant higher volumes in bulks and in containers, if we don't signal properly with the proper online detention charges and origin of destination charges we will be suboptimizing the system. So when I say it has to be coordinated, Scott, either the customer puts in or their agents put in the proper equipment at origin and destination or we get paid for the delays that take place along our line. So whatever is the most system efficient manner, I think what I'm referring to is we've got to refer to that now and not just assume it was yesterday's old games with yesterday's old rules if these volumes and prices are for real going forward.

And then one other question, and I know this may be premature but obviously it's gotten some focus, but on the grain side I know that you're sticking with a normal forecast and that would make sense given that far into the process -- but obviously in terms of some of the precipitation levels, particularly in Alberta they've been below normal and I'm just wondering a couple things. One, when -- and obviously until it's in the bin it doesn't count -- but when will you look toward from a timing standpoint having a better outlook? Is that June timeframe, July timeframe? And secondly, how much of what is your sourcing, if you will, come from Southern Alberta where the drought -- at least the current point -- seems to be its most pronounced versus the three major grain provinces?

Scott, probably the fastest way to answer that question is to tell you that 20 percent of our grain business comes from Alberta. So it's only Southern Alberta that seems to be a little bit uncertain at this point in time and as such that's left us reasonably comfortable that this is not sufficient an issue to cause us to move off the average year at this point in time. I don't think -- I think we've been through this now enough years in a row that after we get through the drought situation there will be something else before we're really confident all the grain is in the bin. But I think it's probably about four to five weeks, the seeding is occurring as we speak and they do need moisture some time in the next four to five weeks to be sure of a reasonable crop. We'll be monitoring it carefully and it doesn't take very much to kind of get them through that next cycle so we're not going to go into panic mode at this point.

Thanks very much.

James David, Scotia Capital.

Fred, you probably touched on this in your discussion already, but could you provide a little more color please on efforts in intermodal to both either -- I'm not so much looking at the yields but more in terms of customer behavior and driving better balances and how much success you're having on that front?

It's a critical focus. When we introduced Max Stax last year it was an effort to work with the marketplace but help the marketplace understand that we could not be just pushed around my whatever they chose to do, they being the many parts of the marketplace in the intermodal side. We put in place a very disciplined process; it has ex amount of feet running on a regular basis to various locations. Because we got in some trouble with the avalanche we felt an obligation to do some things to kind of dig out of the backlog that materialized in February. So we made those efforts and hopefully that was appreciated and respected.

Unfortunately the market continues to go much harder than we had committed to or that anybody had indicated to us. As a result of that we spent the last several weeks working with the Port of Vancouver, with the terminal operators and with the shipping lines and we basically put a permitting system in place. The details of that will be out over the next coming weeks, but effectively people understand that if they were, whatever, 1,000 Teas a week (indiscernible) and we've agreed to grow by 5 or 10 percent with them, that's the amount of footage that they can expect to get.

We must continue to find balance between the need to move both commodities and our many other customers as well as containers and we just had to introduce a mechanism -- goodwill and nice thinking wasn't getting the job done so we've introduced a much more firmer approach whereby the shipping lines will have clarity as to the footage they can expect and the shippers who work with those shipping lines can have insight into what they can expect.

Is this generally still related largely to the international customers as opposed your domestic intermodal?

Very much so as far as origin is concerned, but recall that off the Port of Vancouver, and I presume it's similar on the U.S. west coast as well, there's a reasonable amount of transshipping that occurs and as such some of our major retailers are also in the process of transshipping those 40 foots or 20 foot containers into 53 foot domestic equipment. you can't treat them in isolation; the driver is the amount of merchandise product trying to come in off the coast obviously. So we have to coordinate our activities on the international side together with our domestic queue (ph) program. We are actively engaged with our big retail customers to ensure that we take care of their needs.

Sorry, and last question on the intermodal, and I apologize if this has already been touched on. But of the 20 percent -- I think it was 20 percent intermodal volume growth, can you sort of isolate how much of that might have been CN (ph) spillover during the strike and did it have any bottom-line impact that's material?

Well, I wish I could. The difficulty is that it came in disguise through brokers and other parties. Obviously we had attempted through communication to limit the amount of product that came our way because we had to take care of our existing customers. I would declare myself resoundingly unsuccessful in having done that. They came and we couldn't decipher who was who so, again, there's no way to quantify it other than to say that I think it led to a lot of the inefficiencies or a portion of the inefficiencies and we're not very happy about that but that's life and we've worked our way through it now.

Okay, thank you.

Joseph Leinwand, RBC Capital Markets.

Just getting back to the infrastructure problem, I just want to clarify it. Is this basically a problem with lack of double tracking? And if so, your capital expenditures have been running around 15 percent of revenues -- I know it's a little too early for guidance, but if you added an expense of double tracking in Western Canada would that number bump up to 18 or 19 percent?

Let me put it this way, Joe, it's not a problem, it's an opportunity because what we're looking at is revenues and income obviously that are not in our model and I don't resume in anybody's. So the capital that will go into it you can't look at it as the capital that would be part of the regular CAPEX program which runs anywhere from 600 to 700 million a year.

Having said that, we are looking at surface double tracking in normal mountain areas. It's mainly in the Selkirk and Krutiny (ph) mountains so it's not national parks, it's not big dramatic canyons, gorges or tunnels, but you are talking about some significant capital. Like we said, next year we should be about 100 million free cash. We would be putting some of that free cash -- how much? I'm not sure because I haven't done the final engineering yet, but we believe we can fund it out of free cash because it will be able a multi year project.

That 100 million free cash flow you're referring to is 205.

205.

Thank you very much.

Jackie Bolind (ph), CIBC World Markets.

For forest products you've added some lumber cars over the year and you're calling the business. Can you first talk about how much revenues you've kind of -- you're demarketing here?

Jackie, I don't know that I want to get too specific. On the lumber and panel side we continue to be active, that's a market that we want to be in. There's some short haul business over the course of the last six months that we exited. I'm going to guess in total a couple thousand carloads. That would be across the breadth of pulp and newsprint as well as a little bit of short haul lumber.

Okay, but you're talking about some positive growth for the quarters coming up, what would be driving the change from -- we've seen the revenue declines -- is this pretty much in through the numbers now or --?

Jackie, what I see unfolding is that the paper and pulp business will continue to be modest growth and maybe even some decline because of the demarketing activity in that area. The forest product side in the sense of the lumber and panel side will continue to grow. There's very, very strong housing starts in the states and the panel products have just been going through the roof. I think the -- on a go forward basis I think you can expect to see for the balance of this year good strong lumber movements, demand on a weekly basis is stronger than anything our shippers had forecast so we continue to try and spin our cars faster to address that need.

Okay. On the winter weather last year -- last year the first-quarter had some tough goes with some tough weather as well. You mentioned that the avalanche cost you 10 cents. Can you remind me how much the winter weather cost you last year? And also you implemented improvements to kind of deal with the winter, can you talk about how that helped or if it was unable to help with this kind of -- the avalanche?

When we talk about the last first-quarter, 2003 obviously, it was a tough quarter. That was the quarter where we saw the freezing of the Great Lakes in many areas. You may recall coming out of the previous conference call I was holding out a higher expectation for what we would deliver this first-quarter. All of that to say is I think the magnitude is not dramatically different in terms of the impact on EPS. Obviously we take steps to mitigate that impact with winter preparedness plans and so on. I think the important thing to point out here is exiting the quarter our numbers were very good and we've seen that continue into April. It's full speed ahead for us at this point in time.

I would suggest, Jackie, with regard to the preparation that we undertook, we did put a group for wreck recovery up in -- I think it was White River we had them in last year which is up in Northern Ontario -- and it did, in fact, allow us to quickly expedite. We had two or three incidents throughout the course of the tough six or eight coldest weeks and it allow us to expedite relative to past performance on getting the lines open and getting the traffic going again. That said, unfortunately they all occurred kind of right on top of each other in the sense of within about 10 or 12 days we had three or four incidents we had to deal with. And as a result of that it had kind of a compounding effect and that didn't help us in the East. In the West there's nothing anybody could have done with regard to an avalanche of that size. The parks managed it in a proactive way, the avalanche control, but that one got away.

I would see it more on the positive side too, Jackie. I think you're seeing a lot more fluid railway because of the quality of the locomotive fleet, one of the better ones I'd say proportionally in North America. I think the Max Stax initiative just worked out perfectly. The increased -- the number of sightings in Ontario that allowed us to run those longer trains, putting the robots in intermodal allowed us to attack the winter issues across Northern Ontario and in Western Canada. So I think, Fred, your team did a -- you could see it in the way we exited the first-quarter, I think we recovered very quickly. It doesn't mean we didn't learn but I think we're getting better at handling weather and we will continue to improve.

And final question. You talked about the fact that you're bumping up against capacity in some areas. Can you just go into a little more detail on what areas and how you plan to deal with that? There seems to be demand across the board, as you know, for all the rails. So just kind of want to see how you're going to deal with it if it continues to increase. We seem to see beyond growth expectations for a few of the Class 1 rails.

Jackie, Rob has already referred to the mountains, so I won't repeat that -- that's an area that we'll look towards obviously. But the other areas that we found a little busy last year and as we've moved into early this year we're down to our interchange with the Union Pacific at a place called Kingsgate Eastport. We've got some targeted rifle that's already within the envelope that Mike has referred to for our 2004 program that we'll be putting in a couple of sitings to ensure that Gateway is fluid and can handle at least another train and a half or two trains a day. We are putting investment into portal at our Gateway going into North Dakota and another long siding further down south, I think it's Inderland (ph) a little further down into North Dakota.

Both of those investments should improve the capacity by a couple of trains a day on those two key corridors, north and south. We continue to have an upgrade program, for instance, on some of the speed of sitings between Calgary and Moosejaw Saskatchewan which is a very busy corridor for us. We're upgrading some of the siting speeds in there which will give us another train or two a day. So that's the type of rather modest rifle shot investments that we've been selectively pursuing in an effort to improve our capacity. And as Rob said, we'll deal with the bigger and longer-term issues over the coming months to salvage what we need to do there.

And we have to determine -- are we a step function out of the growth rates that for us used to be 3 to 5 percent. If we are, then obviously we're going to have to step up some of the investments and that's what we're trying to get our mind around.

Okay, thank you.

(OPERATOR INSTRUCTIONS) James Valentine, Morgan Stanley.

I wanted to ask about guidance and that it looks like the middle of your guidance is going to come out to be about 222 Canadian for the full year and concensus right now is at 238. Given currency, given that it looks like the number -- your number came in a little bit light here in the first-quarter, I'm trying to understand, is management saying in effect that 238 is too optimistic or are there some other things going on out there that I'm just not aware of or aren't real clear?

I think the answer is that the 238 is too high. Obviously we'd like 238 but we can't commit to that at this point in time. Some of the other events that we're dealing with -- one of which I'm not sure everyone understands is a higher provincial tax rate in Ontario. That's having a bit of an impact on us -- 3-4 cents. That's coming off the 238 number so that's part of the explanation. And I think the reality is coming out of the first-quarter given a bit of a tougher go we want to stay sober in terms of the guidance we get we want to be realistic. Having said that we are exiting the quarter strongly and obviously to retain where we were looking last November in terms of guidance to retain that level given that first-quarter means a stronger last nine months performance and we're very confident of that. But the answer is it's -- 238 is too high and I'd stick with the 5 to 10 percent.

Thank you. And a follow-up to that -- or at least your portion of the presentation, when you had the waterfall slide showing for the quarter the difference in earnings per share year-over-year you had 4 cents of other revenue timing. I'm sorry if I missed that because I had to jump off for just a second, but did you explain what that was?

I did. But Jim, it maybe wasn't as strong a link as I could've made it. At the outside I talked about the other revenues and that's what that histogram is on that chart, that's the time difference of what we see in other revenues versus freight revenues on the quarter. I explained that as being really a function of two things -- number one, what we have in there is a number of items including land sales and lease rentals. We saw timing differences on -- these are typically smaller properties ongoing parts of the railway's operations; and then secondly, we see variances, our income and equity affiliate shows up in that line as well and it gets back to the thought I think the left the group with a full year outlook of about 177 million versus 181 last year.

Okay, great. Thank you very much.

Thomas Wadewitz, Bear Stearns.

I've got two different questions for you. The first one, I think clearly the revenue environment is very favorable and that's great to see, it sounds like that'll continue. I think looking at the first-quarter results I'm trying to figure out how to view this. I guess one way is to say that the weather really hit you and that's one time and just look beyond that. And your strong operating performance continues. The other way is to say that track capacity is really an ongoing issue. Obviously you referred to that which might lead us to believe that there's just less leverage in more of a track capacity constrained environment, more susceptibly to congestion issues. Which way should I look at it? And if you choose the second how much confidence do you have that you won't run into congestion later this year?

Tom, I'm not going to choose either because it is black or white. I thank what you're seeing is a railroad running very efficiently and then if it hits unexpected interruptions, big ones like the avalanche, you do get a crystallization of the congestion. And it takes us obviously longer to work our way out of it than it would if there was less trains on the track or if there was more track. So as I said, it's a good news bad news sort of situation. What we have to do is make sure that we use our scheduled railway techniques to keep the pacing, to keep the railway as fluid as possible; but when you do hit these issues in a corridor, if it's at a time when it's very, very busy you are going to see it take us longer to work our way out of that situation. We said it cost us 25 million and then 13 million on the FX. Again, I would see that the railway exiting at that level is a very, very strong railway and that's where I would support what Mike -- I do support what Mike says going forward, we're confident that we have a good business here for the next nine months.

Given the track maintenance schedule you have coming up, given normal seasonal patterns in volume, do you think there's some susceptibility to further congestion later this year or do you feel pretty strongly that you're well-positioned to handle things?

Let me take that over to Fred who's got the track maintenance issues.

Tom, we're actively involved already in our work program. In fact, we're on our busiest part of our line right now. And as a result of that I can say with pretty high confidence we had some huge numbers over the last Friday, Saturday, Sunday -- big, big numbers. So I'm very comfortable that based on what I see happening in April we will continue to be able to move the kinds of volumes that we've identified. We must be candid and say to people that you can't move everything on the same minute or hour that you might want to, but we can find a way to push it through and at this point in time I'm satisfied to say that whatever we've committed to with regard to revenue we have a way to move it.

Okay, Fred, I've got just one more quick one for you. On the coal yields it sounds like you haven't got things completely resolved with Elk Valley yet in terms of participating in the changes in coal prices. That's been a big positive that we've been kind of waiting and watching for. Have you got any sense of timing when we might see resolution on that? And also have you factored any of that into the earnings guidance or as you get that would that just give us upside to the earnings range we've got?

On the first part of the question, we are in active discussion as you can imagine, but first of all of course it was the reorganization of the many companies into one and then in the last several months it's been the transition of their management team. So it's left us I think both in a bit of an awkward position where people had to come in and get their bearings. As a result of that we've had to go fairly slow. But I think at this point in time both of our perspectives are emerging and we'll be into dialogue -- we are in dialogue -- and we'll be into active dialogue over the coming weeks and months. I don't think there's any question we'll have resolution in this quarter for sure and probably in the next month or so.

But I want that to be simply an observation. The last thing I need to do is negotiate with my biggest customer through the analyst call, so I'm not going to do that. With regard to guidance, I think from a -- we're very optimistic that this is an industry -- a company that happens to be dominant in the industry and Elk Valley and ourselves who would like to grow this business. And what we're really just trying to do is wrestle with the terms of the amalgamation of those many companies into one and how we can both benefit from that by growing and putting more volume into the strong global market. There's already some expectation that we'll get some modest price in there. Obviously we think there's upset, but we also have to take into account that there may be more volumes as well. So I'm not trying to be elusive, I'm just being candid and saying that until we complete our discussions with our associates it's almost impossible for me to say with certainty want one could expect to see come out of it.

Is it safe to say you don't have a big jump in coal yields in the guidance you've given?

We have a modest expectation and obviously an aspiration and expectation that we'll participate in the benefits if the global market allows. We have to put a number in for planning purposes but it's not an outrageous number in our view.

Okay, thanks a lot for the time and the patience.

Reg Curren, Bloomberg News.

I'm just wondering on the volume increase, the 11 percent in the quarter, is that the biggest and how long? Have you had some of those similar numbers recently or has this been sometime since you had that kind of jump?

I don't believe that I can recall a period where we had that kind of volume growth. I didn't go back and do any research so it's off the top of my head. I can tell you, as I mentioned, that March was a record month so it was huge and April is just as busy or busier.

And that's based on your tonnage or your carloads?

Based on miles.

And March was your biggest ever?

Yes.

Okay. Mike, just on the -- on the foreign exchange effect on the long-term debt, can you just quickly run through what happens there? It saves you on the interest cost but you're ending up with a swing on the -- with the realized or unrealized gains, right?

Reg, Mike had to leave so it's overdue. Brian Grassby is our Vice President and Controller.

At the end of every quarter or the end of every period we have to mark to market the long-term debt to the exchange rate at the end of the quarter, and so it is purely non-cash (multiple speakers) only settled over a number of years.

Right, but the reason that we're seeing what's happening is the rise of the Canadian dollar from the year ago period.

We actually -- in the first-quarter last year there was -- the Canadian dollar strengthened significantly so there was a large gain. In this quarter the Canadian dollar weakened a little bit and therefore there was a loss. So the combination of the two is a swing of 79 million or 78 million.

But year-over-year the dollar is higher?

No, the dollar is -- it's a swing between the two, the first-quarter last year versus the first-quarter this year. It was moving in different directions, that's what creates the large --.

Oh, okay. Because it appreciated a year ago, it depreciated in the current -- okay, great. Thanks.

Ken Hoexter, Merrill Lynch.

Just a quick question on the Port of Vancouver, I don't think we hit this subject yet. Is the tugboat strike impacting you at the Port? I've heard there's been some backlogs but I heard you -- as far as I saw that you were still moving goods out to the Port. Can you just provide an update there and is that going to impact for the second-quarter?

As it turned out the tugboat strike did not have any substantive impact on our bulk commodities. Virtually all of them could go to stockpile whether it was coal, sulfur, grain had a reasonable amount of capacity left in some of the facilities. We had just a tiny little bit of impact on sulfur but it's kind of a nonissue, we've caught up already. On the container side in some ways it was actually a bit of a benefit because it gave us a couple of days with only maybe half the vessels coming in to continue to dig out of the backlog that was there. And they think they've been back at work since Saturday or Sunday and business as usual as far as I can tell and virtually no impact that I can attribute to the tugboat strike in Q2.

Thanks, Fred. And then just one other follow-up on that. On the auto business, you had mentioned earlier that it was pretty weak on the Canadian sales in the first-quarter. I didn't catch your outlook for that portion of the group, Fred. Did you suggest that we'd see kind of a better environment going forward in the second-quarter?

No, I don't think so, Ken. My sense right now based on inventory levels and the models that we're involved in is that we're probably going to see a fairly soft Q2 which is not news, we thought that would occur. What I'm a little more concerned about and I gave a little bit of guidance on is that I'm sensing that the second half of the year may not rebound which is what we had hoped for. But orders of magnitude, it's a pretty small part of our franchise so it's not a big deal to us, we just thought we'd kind of provide that guidance to people.

And similar flatness from the industrial overall it sounded like?

I'd say the industrial side has got more strength to it. From our experience with the plastics and steel and aggregate side it feels stronger right now. I would definitely rank amongst our business autos feels the weakest of the bunch right now and industrial products actually feels pretty good.

Great. Thanks, Fred.

Randy Cousins, BMO Nesbitt Burns.

Rob, you defined your company as a second half ball team. I wonder if you could give us some metrics that we could work with in terms of for modeling purposes in terms of the productivity issues, you rerun your IOP to the higher volumes that you've got. What could we expect in the second half in terms of GTM growth per employee and GTM growth per carload?

We haven't broken it down do that granular number. I think Fred said what -- he said we were going to do on the year. We've had some pretty good productivity improvements on the year already. I do not have right in front of my brain what it is, what all the GTMs and productivity numbers would be for per quarter. But, Fred, do you have some more indication of -- maybe some flavor, some different ones that you can give Randy?

Again, Randy, it's kind of tough off the top of our heads here, but I would suggest to you that if you look at the numbers we committed to last November with regard to productivity, and I think I referred to some of those in my comments, we have already surpassed those as far as the quarter goes. And I have no reason to believe based on what I see in march which is even -- we had some bad time in January and February. We had a big month in March that made up for some of those productivity metrics, and April just continues to get even better. I'd rather not at this point in time simply because it would be -- it wouldn't be very much science to it to put a specific number on it, but trend wise I'm obviously growing increasingly confident that we can surpass the numbers -- we provide you a number in November on productivity and I think we'll just have to maybe wait until we get another couple of months under our belt before we recalibrate exactly what they'll be.

So would it be fair to say for the second half we should look for an acceleration in productivity?

Well, you sure see in, Randy, if you take a look at the operating ratio of the company and most railways. The first quarter has been historically high for CP, higher than most, and then the last quarter has been historically the lowest, the best. It's lower than most so we have more extreme amplitudes to our quarters I think than other railways. I haven't study that in a deep scientific way, but I've certainly looked at our quarters over the last number of years -- over the last five -- trying to see what we could do to try and improve the lower one. But you just -- I would say look at how we've performed in the quarters on the operating ratio and that tells you I think the story of the company.

I think, Randy, the only thing I'd caution you on is that Q4 started to come on very strong last year and we did some big numbers. I think we're going do have some good metrics Q1, Q2 versus prior periods. I think Q3 will be good but now you're starting to move into tougher comps. So, I wouldn't take a Q1 run rate and multiply it across the full year, you need to calibrate relative to the performance of maybe Q4 last year as a pretty aggressive quarter.

Okay, thank you.

Ladies and gentlemen, we're out of time. Operator, thank you very much. We will talk to people at the end of the second-quarter obviously. Bye.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect your lines.