Canadian Pacific Kansas City Ltd (CP) 2004 Q4 法說會逐字稿

Good morning ladies and gentlemen, thank you for standing by. Welcome to the Canadian Pacific Railway's Fourth Quarter Results Conference Call. [OPERATOR INSTRUCTIONS]. Following the presentation, we will conduct a question and answer session. [OPERATOR INSTRUCTIONS]. I would like to remind everyone that this conference call is being recorded on Thursday, January 27 at 11a.m. Eastern Time. I will now turn the conference over to Mr. Paul Bell, Vice President, Investor Relations of Canadian Pacific Railway. Please go ahead, sir.

Thank you, ladies and gentlemen for joining us on our fourth quarter Teleconference this morning. Before, I turn the presentation over to Mr.Rob Ritchie, our President and Chief Executive Officer, I'd like to make you aware of the following. 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 our annual report, annual information form in this presentation on slide 2, and in the press release issued this morning. This presentation also contains non-GAAP measures as outlined on slide 3 and is further explained in the press release. All dollars quoted in the presentation are Canadian, unless otherwise stated. Our slides are available on our web page. We've also appended slides on labor status, FX, fuel price, and hedge for your ready reference. Please follow along. I will now turn it over to Rob.

Thanks Paul and good morning ladies and gentlemen. With me here, in Calgary it's snowing, I've got Mike Waites, our CFO and Fred Green, our Chief Operating Officer.

So, to begin with, I'd ask you to please turn to slide No.5 and to start with, I can say that I'm reasonably pleased with our fourth quarter. We continued to have strong revenue growth with 6 of the 7 commodity growths showing improvement. And this is mostly a yield story, as our carloads remained relatively flat in the quarter. I'm also pleased with our fluidity. We continued to drive compliance to our integrated operating plan at all levels in our organization, and we are doing this at record traffic levels.

We have to overcome a spike in fuel prices, which saw the WTI surge past $55 a barrel. That increased our fuel cost by above CAD 25 million in the quarter and the Canadian dollar strengthened and again this had an impact diminishing our revenues by over CAD 30 million. In the face of this we still posted an EPS of 73 cents on an adjusted basis, that's up 3 percent over 2003 and it's our fourth consecutive quarter of year-over-year improvement.

I'd ask you to turn to slide 6. Here you can see our EPS for the full year came in at CAD 2.27, again on an adjusted basis and that's up 10 percent. And that's in line with the upper level of our guidance. We finished the year with strength. We ended up handling 6 percent more carloads on the year and that's a record for the CPR. And train miles only increased a modest 2 percent. And we achieved these productivity improvements, I can say, with better service to our customers. If you look back over the year, our fluidity obviously suffered big time in Q1, and that's the result of that major league avalanche that we had. But it got progressively better as the year unfolded. And we ended the year with a industry leading improvement in velocity and that's the metric that we believe that we can continue to improve on.

On the people front, we qualified over 600 frontline earning trade employees to handle those record volumes, but the overall -- we managed to contain our headcount, and that was through our planned administrative reductions. So, as I said in the face of strong headwinds, I'm pleased with what our team accomplished in '04 and I'm optimistic that we are poised for an even better year in '05.

So, Mike is going to take you through our financials and he will turn it over to Fred, who will discuss the success of our integrated operating plan and how that worked out in improved service, higher revenues and better yields. Mike, over to you.

Thank you Rob. I will start my comments by talking about the quarter. Turning to slide No.8, in the income statement, we can see healthy top-line growth of 6 percent, freight revenues were up 7 percent, other revenues were off 9 percent but no big stories here as before your number came in at CAD 174 million. That is consistent with the guidance we've given in the past. Operating income increased to CAD 11 million or 5 percent to 233 million. So, net income on an adjusted basis was 116 million, up 2 percent with modestly higher interest expense and income tax expense up CAD 7 million. As Rob noted, adjusted EPS was 73 cents versus 71 cents, up 3 percent. Moving below the adjusted income line on slide 8, and tying out adjusted income to report it. The Canadian dollar strengthened over the last quarter and consequently we had CAD 56 million after-tax gain that's versus the CAD 72 million gain in 2003 vis-a-vis foreign exchange gains on long-term debt. Again, I remind you that these are largely unrealized gains, we exclude them in discussing our operational results for the quarter. However, they do reflect our strategy of using US dollar debts as a hedge to offset foreign exchange impact on revenues.

Moving further down to the CAD 43 million item, we have 2 other specified items to discuss this quarter, which we've also excluded from operational results. But first is the CAD 55 million after-tax charge relating to environmental remediation of the property in Minnesota. We've noted this issue in our MD&A disclosure for approximately 1 year now, and now have sufficient information to quantify the liability, working with the state on a response action plan. Cash payments associated with the action plan will span over approximately 10 years.

The second issue is a CAD 12 million after-tax reversal of our prior period labor liability. You may recall in the second quarter of 2003, we recorded a special charge relating to restructuring and the writedown of unproductive assets. The pretax labor liability of about $16 million or CAD 19 million dollars at today's exchange rate, was recorded for our US Northeastern operations, and this is essentially been reversed as we were successful in restructuring the D&H working with a number of Class 1 railroads including the Norfolk Southern. So the combined impact of these excluded items is an after-tax gain of CAD 13 million to get to reported income of a CAD 129 million versus the CAD 174 million last year.

Turning to slide 9, operating expenses rose CAD 48 million or 6 percent. The major expense drivers for the fourth quarter were comp and fuel expenses. Overall, comp and benefits expense rose CAD 21 million or 7 percent, and let me breakdown that CAD 21 million for you. In terms of what we normally expect to see, higher unit comp increased CAD 7 million, pension and benefits expense combined were up about another CAD 6 million. So, all in a 4 to 5 percent unit rate increase that's consistent with what we've spoken to you about in the past. The higher volumes drove another CAD 5 million increase. The reduction in staff resulted in a CAD 7 million decrease. As you can see from our summary of rail data, our average staff count was down slightly, notwithstanding the 3 percent increase in GTM. The balance of the increase was driven by higher variable incentive and stock-based compensations, with the latter impacted by the bump in stock price in the fourth quarter. Together, these -- this last increase was worth about CAD 15 million.

Turning to fuel, the price of fuel increased from just under $30 per barrel for West Texas Intermediate last year to nearly $50 per barrel average this quarter, that is whopping 65 percent increase, which drove the CAD 25 million increase in fuel expense. Fred will talk to how we're managing this later in the presentation.

Elsewhere, materials and purchased services combined were up slightly, with the number of puts and takes. Equipment rents declined by 15 percent in part because of the improved fluidity with less foreign cars online. Though no news on depreciation and amortization, this is in line with the earlier run rates. I would point out that when you exclude the increase in fuel, all other expenses increased just 3 percent.

Slide 10 slice the quarter out from EPS basis using the waterfall chart. You can see the strong revenue growth from volume and price of 33 cents per share offset by the related volume expenses of 6 cents. Inflation on labor and benefits accounted for 12 cents of expense, of which 6 cents was due to the increase in variable incentive and stock-based compensation. The FTE reduction gave us 2 cents back, fuel price cost us 14 cents, and because of the timing of the spike, we are only able to pass 8 cents of that through to the customer with our surcharge program this last quarter. More will be recovered in the first quarter of 2005 on this as well, as contract choosing annual industries with higher prices are factored into those industries. All other expenses including a negative variance for foreign exchange of 3 cents and increases in interest and taxes took us down to 73 cents on the quarter.

On slide 11, you can see our full-year performance. I am not planning on spending a great deal of time here. Revenues up 7 percent, expenses up 6 percent yielding an adjusted income improvement of 10 percent and an EPS of $2.27 that's right on the high end of the range we guided to throughout 2004.

Turning to the next slide, just a few words on slide 12 regarding the balance sheet and financial position. We ended the year with cash of CAD 353 million, it's a little high. We have a CAD 250 million debenture maturing this June and we took advantage of some very attractive locomotive financing rates in the first half of 2004. Like I said before , I'm comfortable with the balance sheet with debt to debt plus equity now standing at a solid 43 percent. Free cash flow after dividends for the year came in at roughly CAD 40 million, as well the capital program of CAD 674 million that's in line with expectations. In fact that's following slightly higher pension cash funding payments. To summarize we are in a strong financial position going into 2005.

Turning to slide 13, I'll conclude with a few words on the full-year outlook for 2005. Essentially, the outlook remains unchanged from the guidance we gave at our Analyst Day in November. Fred will take you through the revenue outlook of 6 to 8 percent improvement. We have no change on how we are looking at Elk Valley with a very conservative outlook for coal revenues for 2005. Even though the final offer of arbitration went in our favor in December, and EVCC is recording some record sales prices, we will not change our conservative outlook until the appropriate time.

Our other assumptions remained unchanged as well. Foreign exchange at CAD 1.25 or 80 cents and fuel at $48 per barrel, West Texas Intermediate. I'd like to point out that our hedge position has now increased to 33 percent of our 2005 requirements, and that price that we hedged that is just over $35.50 a barrel. So, we remain committed to the 2005 EPS growth. We're projecting growth in the 14 to 16 percent range.

I'll now turn the discussion over to Fred.

Let's turn to slide 15, and start with freight revenues. Our guidance for the year was that we would grow revenues by 6 to 8 percent. Full year revenues were up 7 percent, or quarter of a billion over 2003. After the appreciation of the Canadian dollar, 2004 revenues grew by 10 percent. On the quarter, freight revenue performance closely mirrored the full year story, also up 7 percent versus 2003 with positive revenue growth in 6 to 7 commodity groups. In grain, our new team is paying dividends. Car cycles improved and revenues for grain were up 6 percent versus 2003. This was achieved despite the late Canadian harvest.

Let me take you through coal in detail. First, there were no change in Q4 to our approach to export revenue recognition as Mike said. Secondly, on non-export rates we've settled with Elk valley. This is only for rates covering movements to North American points. This is good news as it solidifies a key market segment through 2005. This agreement includes substantial price increases over the 2 years.

Record Potash volumes, price, and Chinese sulphur demand drove sulphur and fertilizer revenues up 10 percent. The merchandize group also delivered strong results with both forest products and industrial products meeting their goals for price and targeted growth. Improving service and fluidity enabled our merchandize group to leverage more value in the market place. In the forest products sector, Q4 revenues were up 7 percent. These gains were accomplished against flat car loadings demonstrating the results of our upward focus on low margin business and some key truck conversion wins in the Eastern pulp and paper market. Annualized, these represent about 15,000 truckloads.

On the Industrial products side, we had good success in the steel, chemicals, and aggregate sectors. The Chemicals segment was driven by strong export LIFO volumes to Asia. Autos, as we predicted was down due to sluggish domestic producer shipments. Total intermodal revenues continued to grow and on the quarter was 6 percent over last year.

Turn to slide 16, and I'll walk you through our yield performance. The average revenue per carload was up over 7 percent. The embedded fuel component is approximately 2 percent and the 5 percent balance reflects the team's hard work on contract renewals, market programs designed to trade up on account quality and a the new yield initiatives.

For the quarter, the average rate increase achieved on contract rate renewals was in the 6 percent range. On our multi-year rate escalation contracts we averaged just below 3 percent. Our pricing programs have kicked in and the carry-over effect along with the improved service levels should give us a good yield platform as we head into 2005.

Turning to slide 17, I will provide quick update in fuel costs. Last quarter increased fuel prices caused an incremental CAD 43 million. As I've said in the past, almost 90 percent of our contracts contain some form of fuel protection, long-term contracts or indexed and we are migrating to our new fuel surcharge program as other contracts renew. These programs and improved consumption rates offset the expense spike by CAD 23 million, hedging contributed another CAD 10 million, net we were left with a CAD 10 million increase on the quarter. Due to the timing lag in our fuel surcharge program and indices, a portion of this gap will be picked up in Q1.

Moving to slide 18, I will turn to operations. We closed out the year on a good note. The personal injury ratio improved substantially but we did have an unacceptable rise in severity, and something that Neil Foot and I are very focused on addressing in 2005. In addition, our related productivity metrics covering network and employee productivity in train showed good progress. Fuel consumption efficiency hit a quarterly record as a result of improved fluidity as evidenced by our train speed improvement. We also made excellent progress on the alliance and co-production fronts. Our work with ENS will soon start to bear fruit, our Canadian initiatives with SCN and our CanAm-UP interline efforts have supported our fluidity objectives and capacity enhancements through smarter asset utilizations as opposed to CapEx.

Turning to slide 19, when I look back over 2004, I am pleased that the operations team really stepped up. They owned the fluidity challenge in 2004 and in Q4 the key indicators pointed in the right direction. On the year, we grew gross ton miles every quarter and brought train speed up over 2 miles an hour. This is good progress for an extremely buy rail road with a high proportion of bulk business. Through the rigorous integrated operating plan design work and a bulk metering approach the team was able to handle both the growth and the fluidity challenge simultaneously. Train speeds in Q4 were up about 4 percent versus Q4, 2003. Overall train speed improved above the 25 mile an hour threshold, a clear sign that our IOP and fluidity focus gained traction.

On the year, we handled record GTMs, achieved record train weights, and began to see some operating leverage. Train miles again increased below the growth rates of gross ton miles. On the year, GTMs grew 6.6 percent while the additional volume that was handled was just over 2 percent increase in train miles.

Turning to slide 20, the commodity forecast for 2005 generally being similar to that which we provided in November. First, grain. In the last month we've heard some talk about softening on the Canadian export side. However, it will not have a major impact on our revenue model. Total risk is probably in the 5 to CAD 8 million range. I will deal with coal separately in moment. Sulphur and fertilizer markets are expected to continue strong. Potash growth will be aided by the new Capitex cars and the rifle shot capacity that we put in place on the CanAm quarter to service the Portland export traffic.

The fundamentals for industrial products and forest products continue to look good for 2005. In forest products, housing starts are solid and pulp and paper demand is holding study. In industrial products segment, we are pleased to announce that we have recently secured an exclusive long-term deal for a 100 percent of the new nickel concentrate volume from Voisey's Bay mine through the St. Lawrence river ports. The traffic will run on our existing train service to Sudbury and Manitoba, an example of our targeted growth strategy selling into lines of plenty of capacity.

Automotive production and sales are expected to improve marginally. US volumes look flat but we expect to see some improvement in the second half of the year driven by stronger Canadian volumes. Intermodel for 2005 will again be a year of targeted growth and price. At the port of Vancouver we will keep our allocation system in place to proactively manage demand. That said, our MaxStax program still has some upside capacity and it will allow us to continue to grow the transcontinental volumes above the GDP level. Overall, based on a foreign exchange rate of a $1.25 and $48 WTI, we still expect revenue growth in the 6 to 8 percent range.

Turning to slide 21 and coal, we commenced mediation on January 20. Talks continue, our objective is to get this behind us without sacrificing shareholder value. As you can appreciate discussions are sensitive and extremely confidential, but I do want to stress that the 2005 export rate beyond April 1st, is still being booked at conservative levels. On slide 22, I will update you on 2005 operations and the forces that will drive improved fluidity. From a locomotive perspective, we are in good shape getting into the year. In the last 3 months we took delivery of 34 new locomotives bringing our total fleet -- our total 2004 fleet additions to 74 ACs. We will use the short-term leased market to meet any demand above our original plans.

On the crude side we are now aligned with the demand curve, and have a net increase of over 400 running trades employees qualified to run trains. Additions in 2005 are basically designed to backdoor retirees. And our 2004, rifle shot capacity projects position us to capitalize on our Chicago and Pacific Northwest laying opportunities. All in, our assets and resources are sized for the projected growth.

On the labor front in Canada, we recently ratified a contract with the Teamsters, representing the running trades. And we have a tentative deal with the Teamsters representing Maintenance of Way employees. We are in dialogue with the CAW, representing our mechanical employees, and the IBEW representing signal and communications workers. In the US we reached agreement on 5 collected agreements on each of the Soo and D&H properties in 2004. The appendix on slide 26 includes all the details.

Finally in 2005, we will also be placing a major emphasis on terminal fluidity. We have our team in place and they are charged with the lining and improving terminal processes, key leveraging our entire system and supporting our merchandise max flow initiative. I've set some very aggressive targets for the team and I have their commitment to the new fluidity model. In summary, I believe we are ready to handle the 2005 growth and to maintain network fluidity. Back to you Rob.

Thanks Fred. Before I open the floor to questions, let me summarize where we are on a few major issues and this is on slide 24. Now let me sat about Elk Valley Coal. This is a complicated issue. The fact of the matter is that these are confidential business arrangements between us and our largest customer. So, it's difficult to communicate to shareholders on a current basis what's really going on, but as Fred says, you can be assured that we will continue to push towards resolution, and at the same time protecting the company's interests. Also as Fred said, both parties are sincerely engaged in mediation to find a solution, so it's not going to be helpful nor can we answer all the questions you're going to have, no matter how skillfully or obliquely you frame them.

On the revenue front, although demand for our services remains high. Our commitment to earning to the plan is going to continue to improve our fluidity and service offering. With that is going to come continued improved yield. Our forecast for a fuel for 2005 remains unchanged at the $48 WTI per barrel. On the capacity expansion front in the Pacific Coast, we remain committed to make any decision on our Western Corridor by the start of the construction season and as been previously stated. The labor front, I am pleased with the recently announced settlement with the running trades I believe it's a good one for both parties. Also, we are looking forward to the ratification of the recent agreement reached with Maintenance of Way union. So, CP is in good shape in this area and I'll refer you to the appendix.

And finally, railroading in the North in the first quarter always presents its challenges with weather conditions but we've got good people who are doing the job and keeping our railroad fluid. So, we are doing well and the traffic is relatively curved. So, I am looking forward to a good year from the team and we are off to a good start. So, operator I am going to open the floor to questions and if you could set it up and we will start.

[OPERATOR INSTRUCTIONS]. We will take questions from analysts first, followed by the media. [OPERATOR INSTRUCTIONS]. Tom Wadewitz, Bear Stearns.

I have 2 questions for you. The first one, perhaps for Fred on the yield side. The numbers came in a bit stronger than I had in my model and I guess it's always a little bit hard to know how much exchange rate is going to affect those. But do you think looking into first half of '04 that the run-rate type of yield growth levels are sustainable? As there was pretty strong yields in the quarter.

Tom, I think if I recall correctly, in November what we said was that we were pumping up our expectations on same-store prices and I was kind of pushing or stretching the team to aim for a 3 percent, which was big a jump over the 2 percent that we were aiming for last year. Obviously, based on the fourth quarter early results I'm growing increasingly comfortable that we can do that. We had some big numbers in Q4. So, I don't want anybody take those and extrapolate them over the course of the year. Those are big. It'll be great if they happen, but I have no reason at this point to believe that we can go beyond the 3-ish percent same-store price increases that I am targeting. There are lots of puts and takes as many contracts you can do, as you all know.

In terms of what you are asking for though, I think there is -- there is no reason to assume that you would ask for any less in terms of price in a negotiation today versus a year ago and perhaps would be asking for more. Is that fair?

I think that is a pretty good assessment. It's a very strong market. For our services, the quality they are offering is -- has improved and people are recognizing that. So we are certainly in a -- commercially we are in a good position to command value for the quality offering we have.

Okay, great. Thank you and one other question. I am not-- not going to ask you about Elk Valley, but I will ask you about the CTA. Do you have a lot of confidence that that February 4 date will hold and that they will give you a ruling. At that point do you think that is a kind of a soft type of date and they might extend that to give you more time in the negotiation with Elk Valley?

You know Tom, I think, that Rob characterized it correctly for us and that is that, we've got a very sensitive and very important negotiation mediation underway with our major clients. And I don't want to comment on any aspect of it that could in any way send any signal to anybody, particularly our business partners at Elk Valley. So, my preference is, I don't want to talk about that. It's a confidential issue and it is going to resolve itself in -- hopefully in the coming period. So, I'm just -- I'm just not going to go there.

I mean, can you say historically whether the CTA has tended to keep those timing commitments?

I think, that will be one of those oblique questions, Tom was it?

All right, I figured you'd give it a shot.

James Valentine, Morgan Stanley.

I had a question about coal, but I think this is one you may be able to the answer. You saw your coal yields go up significantly here from the third quarter to the fourth quarter and I think some of it is due to the change in short haul business in the US. But I was wondering I think it is about CAD 125 million of revenue, but what I am wondering is, how much was that and then how much of it was this mention that you had about changing the rate for domestic business with Elk Valley and was that in the fourth quarter?

I am not sure I have the split exactly in my head, Jim. I guess, the key thing is that nothing changed in our assumptions to the West, which I think is clear and you've stated that. On the -- on the East bound, there was a retroactive settlement in the fourth quarter for the full 2004 year.

How big was that?

Orders of magnitude, I'm into a confidential price situation, Jim. But -- let's say that it's a well under CAD 10 million. I guess it's not a very large number on orders of magnitude and then as to your point there is some change emerging with our local US thermal business. But it's -- I would say the majority, if I can put it that way of whatever impact you saw on the coal could be attributed to the one-time retroactive settlement on the East bound coal.

Okay. So, what do we think about modeling '05? Should we though have -- we'll take up that one time under CAD 10 million number. But then, should we model in an increase because the Elk Valley domestic or non-export coal rates have gone up?

Yes.

Mike, can you give some us some sense for one other question now. Is the 3 percent rate increase you said on same-store sales? I am confused by that. Does that mean that you are expecting 3 percent for everything including whatever has escalated? That presumes some of the business you are getting 5 to 10 percent rate increases on.

Again, Jim what we've tried to do is use the metric as of -- not as substitute but as a vehicle to give an indication at in portfolio as we've been through before there is lots of puts and takes. We are optimistic that the indexing that has lagged over the course of the last year or two will make a substantial jump forward on the basis of some of the high cost of steel and fuel and other things finally kind of catching up. And the indexes will now be higher. I want to recognize that the waiting of annual contract renewals plus indices does not match exactly with same-store pricing because you have business that comes and business that goes and changes in that regard. So I am pretty comfortable with the 3 percent. Even though we said those are stretched target, I would say the market place is leaving us feeling comfortable we can lock a number in that zone in pretty comfortably. And if we do better than that as a result of our negotiations obviously there could be some upside there.

And do any of your assumptions here assume that you pick up business over risk of a CM strike sometime in the year or are customers coming to you right now starting to give you some business over fear of a strike?

In the first part of your question, Jim, the answer is no. There is nothing modeled into reflect that. And in the second part of your question I would say that we have not seen or felt any great surge of shift and to be candid with you, we have put mechanisms in place that we are not as solid perhaps as I would have preferred last year that would prohibit massive volumes or any substantial volumes shifting over other than in locations that make sense to everybody in the sense that we had plenty of capacity. We will not allow volumes to shift on the temporary basis to our property that could impact or fluidity. We will stick with our original game plan.

Ken Hoexter, Merrill Lynch.

This Jeff for ken Hoexter. I was wondering if you can just give us a quick update on the integrated operating plan as far as what kind of leverage do we see in 2005. Now I realize your targets are for operating expenses to be up 5 to 6 percent in '05. So I was wondering if there was anything within the integrating operating plan that could may be drop some leverage down to operating ratio?

I think Jeff, it's Fred, I will give you kind of my perception from an operating metrics perspective. I don't know if Mike wants to attempt to quantify that but there is one of our slides, I don't have that in front of me, one of the slides made reference to our ambition to improve by about 10 percent the fluidity through our terminals. That obviously will manifest itself, for instance, in fewer car days and hopefully also more efficient use of our yards switchers that type of thing. I also look at a modest improvement in train weights and train speed, which is the fluidity aspect. So hard to give you the direct correlation to particular line items but I hope as you can see by those, I'll call them, operating metric standards or what we have planned to approach, you can see that those will manifest themselves obviously in one of the line items as far as expenses are concerned.

If I could tag in their Jeff, I mean clearly when Fred talks about IOP compliance and fluidity, a lot of that is taking variability out of the system. Obviously, a number of metrics we look at from an operating standpoint, but they have to manifest themselves into the financial performance as well and we all understand that. So when we look at crew starts to train starts, we look for improvement there, that shows up when we see improvements there, that shows up in comp and benefits expense. When we look at the reduced variability, our debt heading expense tends to improve and all of those things we look for and that would be in purchased services and other. All of that to say is that to the extent that we can deliver the increase in volumes with very little increase in expanse taking out variability and car cycle times is another thing that we focus on. We would expect to see that come across the P&L on a broadbased sense. Some are very focused on that going into the '05.

Hey, Mike and Fred, it's Ken Hoexter. Can you just talk a little bit about the grain outlook. I know you said there was a little bit of risk to a couple of million dollars -- is this likely to start moving the great harvest that we saw last year, do you think it starts moving as soon as we see volumes pick up and then just, Mike, can you just through out the CapEx outlook as well?

Ken, I think the -- I just wanted to be as candid as we could be that the market is just not consistent. We anticipated a little bit of stop and start with the inconsistent quality that's out there. We are frankly starting to see demand firm up a little bit but I think what people are finding is that the ability to sell this product is not clear at this point in time. So as a result of that -- and it's because of the diverse quality of it -- and as a result of that we are just hearing signals in the market that -- orders of magnitude this is pretty small. But it is a gentle softening so, I don't consider this a major issue. I just thought I should share with you we are starting to feel a little bit of softness. And I can tell you that other markets including the US green market are pretty strong. So, I don't think it will make any difference at this point, any difference in our overall outlook, and over to Mike maybe for the second question?

Sure, can the CapEx number in round numbers for this year we're given guidance on -- it is CAD 750 million? I should qualify that as Rob had mentioned we are still assessing this issue of the West Corridor expansion. If we were to proceed and obviously we'd have to be convinced that that's a very compelling case for us. We have disclosed that that would be an additional CAD 150 million in round numbers of capital, and as Rob indicated we are still assessing that the base would be 750.

Jacqueline Boland, CIBC World Markets

Can you talk about where capacity levels are right now for you overall railroad and in some of the bottlenecks that you are facing?

Jackie, it's Fred. The railroad is running very well right now. We have had about -- I would say 10 to 12 days of exceptionally cold weather, which really stretched almost all the way from Thunder Bay to Alberta. And as a result of that what happens in an environment like that is you have to run shorter trains because can you get the air through the train, and as a result of that we built up a little bit of backlog pretty well across the breadth of our commodity groups nothing major, nothing substantial, but important that we dig in and get catch up on those handful of trains in virtually all of our businesses that we are little bit behind on.

So, you will see -- you have seen and will see just a little bit of slow down. This is a very planned event, so people understand it. When the temperatures go as they did across such a big piece of the property down to minus 35, particularly for a sustained period of time, we put our cold slow orders on. It's a safety issue that we don't want to run the trains at normal regular speeds at those temperatures because the risk is higher of a broken wheel or broken rail. So, you will see our trains speeds probably for the next data that comes out for the next week or 2 reflecting the previous 2 weeks, reflect some slow down in our system, and a little bit of slower processing in our terminals. However, I can tell you particularly for the last 3 days our numbers have really come back and the railways have run very, very well today.

Now, that said, talking about maybe the bigger picture of bottleneck scenario. We are running very well down on our line to Chicago and the capital improvements, the modest capital improvements that we did, but we did do them both on our line to Chicago from Alberta to Saskatchewan and on our line from Alberta to connect over East port with the Union Pacific, both of those modest rifle shot capital investments have paid off and we are moving volumes just as we anticipated with no backlog other than when there is the * 10 or 12 hours with minor incidences etcetera.

To the west, we have over the last 2 days, we're running up in 30 above trains and in winter operations with a little bit of stop-start due to some rivers flooding and some -- we have to go in and shoot out the avalanche risks that type of thing in a proactive way. I'm quite pleased with those kinds of numbers at this time of the year. So, at this point I don't feel as though we are facing, I'll call it bottlenecks relative to operational means. There have been a kind of natural occurrences with flooding and avalanche shooting that have given us a bit of stop- start, which has constrained us a little bit. So, I'm pretty comfortable we'll get our legs back underneath as we're over the next -- what we have over the last couple of days in the next weeks or so, and don't anticipate major problems with regards to bottlenecks going forward.

And for your MaxTrax program, could you talked maybe about the profit differential for adding Intermodal with the MaxTrax and kind of doubling up as opposed to adding further trains for the cars and at what point it becomes a step growth function kind of thing?

I think, what we've done in the past Jackie is try to give an indication that, I believe, based on the analysis that our team has done is that we've already, over the course of the last year, improved the value of that product by over 20 percent. I think that we will continue now to really go in and dig out every opportunity that--get our stock utilization right up, make sure every train is right to its maximum length before we put on any new trains. I do not anticipate at this point in time adding any new MaxTrax trains in the foreseeable several months. But we will do everything we possibly can to ensure that we have filled out those slots and I can tell you that in our contract negotiation and dialogue with the international community, this is going to be shipping lines, import-export containers, every single can that moves in any direction has to command the value for it that perhaps in the past was bundled in with loads and empties. We are now commanding value for everything. So, at this point in time it's a good practice gotten better, we can continue to make it better and I do not have a projection on when we would add new trains at this point in time.

Okay, and final question, Union Pacific as we all know has run into some weather issues, larger weather issues this quarter and is still seeing some backlog, etcetera, et cetera. Can you talk about your relationship with them and how it's affecting you?

We've had some very good success, I think because of the intense focus of our joint teams on the trends at times over, what we call Eastport Kingsgate, which is the line in Southern BC to the Union Pacific has almost no or virtually no change at all. In fact, as I said with rifle shot changes the performance this year is vastly superior to last year. So, I think at this point in time our prospective is that -- others may have different views, but my for my prospective our Union Pacific partners are doing a great job interchanging with us and we are not feeling any dramatic impact.

The California issues on the WP unfortunately hasn't hurt us.

James David, Scotia Capital. Please go ahead.

A couple of questions. Fred on the grain, you mentioned obviously there was some crop quality issues that may effect export demand. And I think agriculture in Canada actually pointed to a bit of a softer export number this year. How important is the carryover from last year in supporting volumes right now? The reason I ask is -- we look to next year, obviously we are going to have a carryover from this year's crop. Does it reflect -- should we then -- we look at the next year and assume a normal crop but with a lower quality carryover might be seeing a sort of -- sort of flat volumes extending, assuming again a normal crop next year?

You know James, it may actually work in an odd way very favorably. The reason is when we first looked at the split, traditionally it's never 50:50 between the fall and the balance of the year till the crop year in August. But it is usually weighted not too far of that and you may be call November I said instead of being kind of that whatever 51:49, it was probably going to move the other way, which is I think I said at the time in the high 40s and low 50s for the second half of the crop that was into the 2005 year. And if anything I think what happened in the fall was less moved and so that positions us may be to be more like 43 percent moved in 2004 and the 53 percent is still yet to move and -- I think what everyone is guessing -- with I am not going to pretend to be a grain broker here. But I think there is a process underway, James, where people are trying to determine can they wait for the new crop and can they blend a higher quality new crop with some of the stuff they have in their bins to get a better price for what they have in their bins today. And I think that's part of the process, leading to a little bit of spottiness with regard to where the grain is and do they have -- do they want to sell it or not sell it.

Perfect, just on the second point you did obviously rightly pointed you had some good fluidity productivity numbers this year. But in the fourth quarter they kind of slid from -- I mean we're still good -- but they slid from the run rate you'd given at least on some metrics for the first 9 months. When you were talking earlier about sort of stops and starts, were you referencing the fourth quarter in terms of what kind of events might have caused bit of the slowing in that momentum?

No, not really. I think the fourth quarter was a busy, busy quarter, and it had a huge compare to against in the previous fourth quarter. And we were running -- I think very well in the fourth quarter with -- like every other business there is the odd little thing but nothing substantial. The stop starts that I was referring to, frankly, is the last 10 or 12 days with this minus 35 over a big chunk of the property, and we had a river banks that took us 24 hours to get back in action, and we've had to stop and start the west quarter 2 or 3 times for the cross Canada Avalanche Control, which is all really smart business and a good thing to do. But it just -- it gets you go on then your stop and then you start. So we -- it's kind of typical first quarter stuff that we just have to work our way through.

So, if I understand you correctly, it's not so much something exceptional the fourth -- it may have just been that the fourth quarter of '03 was exceptionally strong?

Yes. And if you look at the data, I think you will see James, it was a very good quarter, and we were better, but not better proportionate as we were in the previous 3 quarters.

Bill MacKenzie, TD Securities

Good morning Mike. Can you give us an update on your fuel hedge position for '05, and I was just wondering if there is any 2006 numbers at this point? I know it is early but I was wondering if you'd give us numbers for '06? And, also just wondering from a strategic perspective what you guys are doing in terms of adding new hedges? Is there any sort of systematic approach or change in strategy, in terms of adding to your hedge position?

Okay, well the -- first of all, our position for 06 is we have 13 percent of the requirements hedged at an average price of $30.51. So clearly, not where we want to be, but a pretty good position at this point for 06. As you know, our program provides for us to go down the curve, and that typically what we do, we looked down the curve a little farther and try and accumulate position. When you look down the curve at this point in time, those prices are still pretty high, they are north of $40 for the most part. So, we have temporarily suspended acquiring hedge positions at this point of time. However, that is a temporary suspension, we will come back in and buy down the curve, when we see those opportunities. So, we said before, we would like to be hedged in any given year 25 to 40 percent, and I anticipate that we would work up towards that numbers as we goes to 05 as the opportunities arrive.

So, no change in strategy Bill, as Mike said, just an opportunistic, but not an automatic accumulation.

Okay. I understand, Great, Thank you. And secondly, just a point of clarification on the changes in rates, with Elk Valley on that the non-export side. When were those effected? Do we see the benefit that in the quarter or is this for is this kicking in 2005?

Bill, it's Fred. You saw a retroactive settlement in Q4 for the previous -- for all of 2004, which is why you got that kind of a bump in the rates in 2005 reflect a further increase on top of that going forward.

Horst Hueniken, Westwind Partners.

Good morning, I have a one operating question and one financial one. First, on the Port of Vancouver, they are facing a huge backlog of containers, there's been a complaints the railways need to add trains to help whittle down the backlog. CN has added some trains to help out. Might CPR do the same, and if so, how disruptive might this be to your goal of improving fluidity?

Horst, I would say that the best way to answer that question is that the parties with the issues are dealing with some, and we don't plan to change our plans and I feel that you'll read between the lines on that answer.

Okay, fair enough. For Mike, financial question, I notice in the foot notes that your provision for restructuring environmental remediation stands at about CAD 449 million and about 275 of that relates to labor liabilities. Can you give me a sense of what the cash outflows will be in '05, '06, and '07?

Now, Horst, the clarity is that solely on the labor component or --?

Well, ideally both.

Yes. I think the next year we would expect to see labor cash payments around 70 to CAD 80 million, and environmental that can move in any given year, its not the same amortization base, if you will, as labor, but CAD 10 million in round numbers is not a bad number.

Okay. When you say next year, did you mean '06 or '05?

I beg your pardon, '05.

Fair enough. And is it reasonable to think of a similar number in '06?

The numbers in '06 are scheduled to come down as you know those labor liabilities that we took in the earlier years, stem over several years, they decline as the initiative are put in place, and the number of people that they apply to are smaller in number. I would say a CAD 60 million or so in '06. And you have to add a comparable 10 for environmental in '06.

And declining there after presumably?

Right, yes.

Randy Cousins, BMO Nesbitt Burns.

Mike, I wonder if you can give us some clarification just on the accruals that you put in for Elk Valley just so that we don't double count. Everybody has their view about sort of where this thing is going to settle out. And I am sure there is a thousand different views. But my sense is that in '04 you did not accrue the full amount of your entitlement and I want to get a sense that in 2005 the new contract comes into place notionally the coal prices are up substantially. Does that mean you change the accrual? Are we going to see a lift in the accrual in the first -- I guess in the second quarter? How do you handle it or we just go with the same accrual rate that we have been using all through 2004?

Randy, again we are starting to get into some of those EVCC questions and as we said at our Analyst Day, we have for 2004 appropriately provided for revenue. What I will say is with respect to 2004 I would not expect to see any material change retroactively in '04, certainly not retroactive downwards. And so it is a question I sense that around are you comfortable with your '04 numbers, the answer is yes. With respect to '05 the words we have used is very conservative. I guess that goes to say we don't have a lot in there and just given the fact that we are in the stages of discussions as Rob and Fred have indicated and given the complexity of the situation which needs to be simplified, I think we are all committed to moving forward and trying to get a better way of doing this, but at this point in time I shouldn't say any more.

My second question has to do with the guidance. Particularly on the fuel side, you have increased your hedge. The Canadian dollar is actually a little higher than it is lower on the benchmark that you are using, and yet you are sticking with your fuel guidance increase at 18 to 20 percent. I guess the 2 questions -- I guess the question is right now looks like the fuel increase, looks like it's going to be a little on the heavy side if everything just stays where it is. And I guess a sort of related question is -- in your revenue increase of 6 to 8 how much of that is the fuel surcharge?

Let me try and answer the 2 components of that on the fuel outlook, it's very early in the year. You are correct, we have increased the hedge position. And so at this point of time we are saying might we do a little better I think that's a reasonable question. There maybe a response to say -- maybe a little bit of room in there. In terms of overall guidance, of course, as you know, Randy, a number of other things are moving as well. So when you take everything into account we certainly, at this point at least, wouldn't anticipate changing EPS guidance solely because of that on a combined basis. In respect of the overall fuel surcharge component I think you've heard both Fred and I talk about the fact that the surcharge which is really the key to dealing with this over the shorter period and I'll say less than a year we typically are seeing something like two-thirds of that recovered. A little more than that if we go beyond the year, as I mentioned some of the full year indices kick up because of the fuel component. And so we are also accessing that at this point in time to see how much impact that will have. So that is probably the best answer I can give you. But it may be a little heavy at this point in terms of cost. We may do a little better, but we are still working through the numbers.

So just notionally if we were to deconstruct this 6 to 8 percent that you have given us, what is the mix of volume versus real price versus surcharges just notionally so we got something to work with it. You didn't break it out when you gave us Q4 numbers?

Yes, it's well.

Randy, I think probably because the Q4 prices were high on fuel therefore with the lag we should have a fairly substantial -- for instance Q1 on fuel surcharges to reflect those high prices in Q4. I think it's somewhere between 1.5 and maybe on 2 points that could attributed to the fuel surcharge recoveries.

Scott Flower, Smith Barney.

I guess a couple of quick questions on the eastbound Elk Valley. I am just trying to get a sense of order of magnitude on volumes. What proportion of that -- does that represent of our business. I am just trying to get a sense of how much of these is down on volume? Order of magnitude, rough figures?

Yes, I think just got it's ballpark, it's probably less than 15 percent of the tonnage.

Okay, all right. And then, I guess on the Canadian dollar obviously it has been strong, you are well aware of that. Have you had any discussion with your customers in any of the different commodity segments? I know obviously pulp is a sensitive area, but even beyond that have you with sort of some passage of time and that the Canadian dollar has stayed relatively strong, are you seeing any diminishing or effect on your customer base relative to unit volumes or what their outlook might be as you look a little bit perhaps further into '05? Anything fraying around the edges that you're seeing early signs of?

Scott, On the short term the answer is we are not seeing any impact at all, demand remained strong almost across the board. I'll give you my traditional areas I'm concerned about which would be pulp and paper in particular and perhaps auto. In the medium term, there is the dialogue, as one would expect, between on a COO level about what the impact of the dollar could be and the need for improved productivities across for etcetera. But there is nobody providing any kind of indication or forecast to us that we should back off on our capacities to be able to meet their needs. So at this point I'd say to be answer it is that we are not feeling an impact and -- have not been given indications, obviously, we are doing our own assessments and at this point we are going to keep our capacity in place to meet the projected needs.

And in fact, Fred, I'd just add that on the lumber side I think people would be well advised to pay attention to the kind of real duties that are on that because that's moving and it could that be beneficial to Canadian lumber in the '05 year have a bigger impact than the Canadian dollar.

Then may just sneak a half question and for Mike. When will be evaluation of the western quarter expansion be completed? I know if ongoing and you just look at your business in the long term. But as we look to '05 is there any sense of when you'll have a better sense of go, no go or how that evaluation and analysis rolls out and to managerial decisions?

Well, basically what we said, Scott, is that at the time what we would have to make a decision is the construction season. And without getting much more specifics on that, that clearly means to break in the weather on when we can get going on the work. So it's not too far off and I should leave it like that.

Now we want to get it. Nice thing about this investment it will be completed this year. So it will be earning money in the last month or so of '05 and pumping full time '06.

Gary Yablon, Empire Asset

I guess for Rob and for Fred, can we talk a little about incremental margins? I know everyone seems to look at this thing, this situation a little bit differently but as I fiddle with the numbers it looks like the incremental margin, as price and yield become a bigger component of total revenue growth, is little bit under whelming. I don't know what your thoughts are on that. It seems like there is an enormous opportunity for you but something isn't quiet clicking. And maybe I'm way of base and if I'm not tell me how you get from A to B, can we talk about that first?

Well, it's a complicated question, Gary, and I don't disagree with your observation. I think the whole team as both Fred and Mike and myself said in the presentation, are focusing on how to take the topline growth down to the bottom line. Mike took you through the waterfall chart and there have been a series of issues going against us that makes a compare year over year a little tough and sucks up that revenue increase. I believe and I'm just watching our Company that we have been consistently improving ourselves on the productivity front. That over the past number several years has been eaten away by the revenue decrease on a unit basis. So as Fred pointed out the unit increases are starting to go up. And the productivity increases -- improvements are still there. I think as the year goes on you are going to see that come down to the bottom line. Fred do you want to --?

So am I right, Rob, in thinking that there is a big opportunity for you to bring more of the revenue dollar down the operating line? Am I clear for you?

That is one of our number one issues, obviously. We talked about Elk valley, that's a big issue, but just making this railroad hum and we've been -- I know, you heard us say we've been going through an awful lot of change. But, we have. And I see ourselves coming to the stage where we are in a stable period and we are going to build to make the assets sweat. Locomotives are in good shape, cars are in good shape, and the fluidity on the railway is there. We do -- we have never hid the fact that we had capacity issues. Yes, we had some crew issues, but we still have some tightness on a single-track network. And last year what Fred and the team did on rifle shots has paid off beautifully to Chicago, to Portland. But, with the surge in export commodities, there is no doubt that this railway is a little tight between Moose Jaw and Vancouver. So, we need that breathing room to get the fluidity in there, which produces the good turnaround in cars and gets the assets moving too. Fred, anything else?

I think you covered it well, Rob.

Okay, one more if I could from Mike. Mike, given the bump in the hedging program on the fuel side, and if I heard this correctly earlier, the ability now you are recovering what seems to be may be two-thirds on the surcharge, were the fluctuations in fuel price becoming far less of an issue for your Company going forward?

Yes, I think the answer is yes. When we spoke about the fuel price impact Gary, a $1 change on the WTI. We talked about that having an impact of about CAD 9 million pre-tax on current exchange rates, and that is pre-hedge and that's pre-fuel surcharge. So, you would have to adjust for that. And I think, Fred and his people have done a good job. I think, candidly, we were not entirely happy out of the gate with our fuel surcharge program. We have to get fuel surcharge. When we talk about hedge, and we've done okay with our hedges. As we all know, hedge reduces volatility, you can't always win on the hedge. In fact, in prior years, we've taken hedging losses, very early on. But, I think our fuel surcharge today is a good news story, we have to get that. We can't suck up that. It's our shock absorber.

So, Mike, the CAD 9 million sensitivity per dollar change per barrel. That's the old sensitivity.

The old sensitivity and we always said pre-hedge and pre-fuel surcharge that you would have justified the two-thirds to three quarters number, Gary.

Okay, and is it fair then to follow up and say, I guess if demand is exceeding supply of real capacity, demand on the system, do you feel comfortable, Fred that you can get that surcharge recovery percentage continuing to move higher?

Yes, Gary the market place, I think has come to recognize that these very, very substantial fuel prices that all of the transportation sector is facing needs to be reflected in some way, shape, or form and the vehicle appears to be a fuel surcharge that everybody is moving towards or has bought into. So, I am increasingly comfortable that the best, we really have the best we recovered by some form of indexation or whatever. But at this point in time the receptivity and the acceptance of the fuel surcharge is certainly much higher than it was a year ago.

David Newman, National Bank Financial.

I know, I have missed this. But, what is your free cash flow projection for the next couple of years, and impact of the amended restructuring and the mediation on your cash payments next year and the year following?

What we said, David in our Analyst Day was that we looked over the 4-year period. We expected free-cash flow of 200 plus million and the plus is obviously, some upside depending upon the outcome of a number of items. And what we said on the frontier and again this depends on whether we move forward or not with the West Corridor expansion because whether we do that this year or we don't, that gives us additional cash flow through the 4-year period, but towards the end obviously, and we would incur higher capital costs on the front end but absent West Corridor. This year, I would expect free-cash flow to be about 50 to CAD 100 million range. There are still some things moving around on us and that would take into account the cash payments, the labor restructuring, and environmental remediation.

Now, what is that actual number of the restructuring and mediation for this year and next?

Well, again. You probably did miss it then. We talked a little bit about -- in '06 there will be a CAD 60 million number, '05 would be more like a 70 plus type number for labor restructuring, and then CAD 10 million in each of those years for environmental cash payment.

Okay good. Sorry that my fault, I disconnected there. Any consideration -- you mentioned on the Analyst Day that that you are looking at your deficits. Would you consider -- will that be more back ended in terms of any sort of pre-payments? And you are going to sort of wait to see what the discount rate does?

I am assuming you are talking about the pension liability?

Yes.

Yes I mean at that this point in time there is no change versus what we talked about the Analyst Day. As you know, we made a CAD 300 million prepayment a year ago. We put in a little more in an operating cash flow sense this year than we were projecting. We normally see about 80 to CAD 110 million of cash pension funding payments. We topped up a little more this year at about 160 range and still came in at around CAD 40 million, which is what we thought we do on free cash. In terms of looking at the overall liability, still a lot of things to have happened, as you well now. The basic summery is, last year our assets did very well. Obviously we put cash in so that speaks well for the asset side. Having said that, unfortunately when we got to the end of the year, the interest rates continued to be very low and in fact it dipped a little lower. What that meant is we went down to a 6 percent discount factor for the liability and that increases the present value of your liabilities. All of that said I expect us to be talking about a moderate improvement from a financial accounting standpoint beyond funded pension liability.

Okay, and just on the CapEx spend, I saw that you are a little more confident that you are actually going to spend this money now. Has there been any movement forward on the running rates issue?

I would not -- if, David, we are still in the inflection point on the decision and so we will -- when we make that decision we will answer your question.

Okay, and just last question -- on the carloads they were a little lighter in the quarter. Was that just a function of just your restrained rate improvement, and you mentioned earlier some of the weather issues?

They are flat and -- I think Fred said that the fourth quarter last year in '03 was very, very strong quarter. So I wouldn't say that it's a bad reflection on '04. I would just say a very strong '03 as well.

Okay so just a tough comp.

Okay, operator I think that's it. We had one media question I understand. So we go, if you could queue that up?

Ripley Watson, Bloomberg News

Please could you give us more specificity as to when you will make this desession regarding the capital program that's been

Okay, we do not have to make the decision until the start of the construction season. So obviously we are still working at the commercial side, the regulatory side and on the commercial side that has to do with volumes, that has to do with margins. So those are moving issues. If we can't settle everything before we could -- the ground breaks, then obviously we won't go ahead and if we can, we will. And so that's about as much as I can say right now. So it's something that we do not have to move forward on until the contractors can get in the ground. But we are ready to go if things turn out. That's as much as I can say. Now when does the ground break and this is up in Mountains. I would say, Fred, some time in the spring even it's May. Okay, Rip, was that?

Okay, ladies and gentlemen and operator, we thank you very much. We went over a little, so we apologise for that, but we will talk on the end of the first quarter '05. Thank you very much.

Ladies and gentlemen this concludes the conference call for today. Thank you for participating. Please disconnect your lines.