Canadian Pacific Kansas City Ltd (CP) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Canadian Pacific Railway conference calI.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded today, Tuesday, July 26th of 2005. I would now like to turn the conference over to Paul Bell, Vice President of Investor Relations of Canadian Pacific Railway. Please go ahead.

Thank you, Mary and thank you, ladies and gentlemen for joining us on our 2005 second quarter teleconference.

The presenters today will be Rob Ritchie, our President and Chief Executive Officer, Mike Waites, our Chief Financial Officer and Fred Green, our Chief Operating Officer.

This presentation contains forward-looking information. Actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described on slide two and in the press release. All dollars quoted in the presentation are Canadian unless otherwise stated.

This presentation also contains non-GAAP measures. Please read slide 3. The slides are available on our website, so please follow along. Here then is Mr. Rob Ritchie.

Thanks, Paul. Good morning, ladies and gentlemen.

To begin, could I ask you to please turn to slide number 5.

Once again it's a pleasure to present these kinds of results. For the sixth consecutive quarter, we've increased the adjusted EPS on a year over year basis. And our company delivered these excellent results in the middle of the major capacity expansion program. Now, I'd find that particularly gratifying.

As you can see on the graph in the top right, our second quarter EPS came in at C$0.87 which is up 34% from last year. Year to date our EPS is up 57% to C$1.40. We accomplished this by relentlessly pursuing our three-point strategy.

First, CP is focused on achieving quality revenue growth. We have delivered with revenue per car load up 14%, brought about by a strong yield program and a measured disciplined approach to selectively upgrade our overall book of business.

Second, on the work force front, we are pleased with the overall level of engagement. As an example of this, we've just concluded negotiating a five year contract with the IBEW. When ratified, 100% of our Canadian unionized employees will be under contract.

Things are also stable in the U.S., as we await the conclusion of national bargaining before finalizing deals with our employees on the Sioux and the DNH properties.

Another example of safety where our employees are demonstrating that working safely and productively go hand in hand -- they set a new company record for the low level of personal injuries per employee and matched the lowest train accident ratio in a quarter.

The third strategic thrust is on the cost management side. Here, our scheduled railway, what we call Integrated Operating Plan, is delivering critical results. We handled a record workload while concurrently progressing our normal work programs and the 25 individual projects of our C$160 million Western Capacity Expansion Program.

That program, I'm pleased to say, is on time, on budget and it is not impacting customer service, a tribute to the preplanning and the hard work of our operating teams. You're going to hear from Mike and Fred and they're going to talk to you about our scheduled railway, how it has delivered improved productivity, which will give you a sense of the depth and the sustainability of the change initiatives that we're putting in place.

So the bottom line -- CCP delivering a record second quarter operating ratio down 2.5 percentage points from last year to 75.5%. I will now turn it over to Mike Waites.

Thanks, Rob. Let me say I'm pleased with our results for the second quarter, given that we maintained our traffic volumes while performing major maintenance and construction programs. The increase in the bottom line shows, I believe, that we're on track with our yield fluidity and people initiatives.

But let me take you through the financial details starting with slide seven. When we get into this discussion, I should remind you that these are adjusted EPS numbers. Starting on the left-hand side of the waterfall you can see that our Q2 story is all about yield, which generated C$0.37 of EPS.

Volume growth was not a key factor, but Fred will take you through how we managed our book of business in a moment. That's a very important story. As we move to the right, you can see that much of the yield improvement is finding its way to the bottom line. That's a key take-away from this slide. Fuel, another key story, was managed very effectively, as it only had a net impact of C$0.02 EPS.

While West Texas Intermediate prices were up 39% year over year, I'm glad to say that the benefits of our fuel recovery and hedge programs covered the vast majority of the increase.

Wage, pensions, and benefits inflation came in slightly better than planned, and that accounted for C$0.05 of EPS. Depreciation cost us C$0.04 EPS which is consistent with the direction that I gave you on the first quarter call. Moving along, you'll notice that the impact of the strengthening Canadian dollar cost us only C$0.03. All things considered this is a good story, as the Canadian dollar appreciated C$0.10 this quarter versus last year. As I have indicated in the past, our strategy of using U.S. dollar debt to offset the currency impact on revenues -- the translation effect, so to speak -- works as a natural hedge for us.

Lastly, purchased services and all other would have reduced EPS by C$0.03 but two tax settlements that we're expecting in the second half of the year came in at the end of the second quarter, generating an additional C$0.02 of EPS, so that results in a net reduction of C$0.01. This brought our quarter in at C$0.87 EPS, representing an impressive adjusted EPS growth of 44% powered mainly by our yield and quality revenue program.

Turning to slide eight, I'll give you a quick overview of our reported earnings. Starting at the top with freight revenues, Fred will give you the details of the 10% revenue growth later. Moving down, I'll talk to operating expenses -- they were off 7% on the next slide. Combine this (delivered) an operating income improvement of 23% but, focusing on below the operating line items -- interest and other expenses were each down C$4 million and our effective tax rate came in 44%, that's within previous guidance.

Adjusted income, this is before currency losses on long-term debt, rose to C$140 million, up 37 million. (Tying out) adjusted income to reported, the Canadian dollar weakened. Now, this is from the first quarter of 2005. And that generated losses on the U.S. dollar denominated debt. So that resulted in a net loss of C$17 million, the currency lost C$17 million after tax compared to a comparable C$20 million loss in 2004.

Reported net income then was C$123 million versus 84 million last year. So you can see that the diluted EPS growth over 2004, on a reported basis up 45%, adjusted basis up 34%, impressive in either case.

Now, let me take you through the operating expenses on slide 9. The big stories here are comp and benefits and fuel. Comp and benefits are only up 1% of C$4 million in the quarter. This is quite impressive, given an increase in work load of 2.4%. Unit rate inflation of around 4% and the fact that we're operating around major work programs in 25 expansion projects throughout the quarter, we're able to offset these cost pressures by continued FTE reductions. We did get some help from foreign exchange in the second quarter. We further saw an improvement in train crew operating costs.

This demonstrates that our scheduled integrated operating plan is beginning to bear fruit. Fred will give you more color on this in a moment.

From the balance of the year, we still project unit rate increases for wages, health and welfare benefits and pensions. That's all (inaudible) of roughly 4%. Though I should say the higher volume is offset in part by the continuing labor efficiency gains, will add a couple of percentage points to total expense for the second half of the year.

In terms of total head count, year over year, we are seeing growth in head counts, being driven by engineering personnel dedicated to capital programs as well as running trade employees being brought on in preparation to handle future workload. I am pleased to report that our original FTE reduction program is on track to meet the 820 target by year end. Fuel continues to be a major challenge in operating expenses.

Our fuel bill was roughly C$44 million higher in the second quarter versus last year. Fortunately our fuel hedge program, which covered 34% of our fuel requirements at a price of $36.40 per barrel, U.S. dollars, as well as some help from currency, has been successful in mitigating the higher fuel prices to just C$37 million at the end of the day.

However, the big untold story here is our fuel recovery program which allowed us to pass through C$35 million of this increase and this shows up under revenues. The equipment rents were down slightly with some help from currency, favorable to merge settlements and car fleet management efforts, notably moving foreign cars off line. Depreciation and purchase services are all in line with our expectations, in part due to a reduction in casualty expense. So to summarize expenses, a good story on cost containment for the quarter, excluding the impact of higher fuel costs, expenses are up less than 2%.

But I should hasten to add that the work on expenses is never over. We need to continue to push on this front.

Turning to slide ten, I'd like to reiterate the financial highlights for the quarter. Operating ratio is 75.5%, an improvement of 2.5 percentage points. Net debt to net debt plus equity of 42% versus 47% last year. I'm very comfortable with the balance sheet. You did see us pay off a C$250 million debenture with cash in late June. You also saw us active on the dividend and equity fronts -- in the quarter we bought back 432,000 shares. An average price of C$43.58 per share.

Finally, we continue to see improvement in our return on capital employed. So all in a very strong financial quarter. I'd like to wrap up on slide 11 with your outlook for the year. The key message here is very strong. EPS growth is up 43%, the upper end of the range. While we've had a number of puts and takes to date and likely more to come, no change in guidance at this point.

Capital programs should come in in the 900 to C$920 million range, including phase one of West corridor expansion, so we're on track. The reason we have a bit of a range in the free cash flow number is due to a range of outcomes in terms of the timing of funding of pension plan contributions. But we feel confident about the outlook and the upper end of the cash flow range at C$100 million. I should point out that bear in mind, we're at funding also net incremental C$160 million of West corridor expansion, so the cash generation is there for us to deliver. That concludes my financial comments. I'll now hand you over to Fred.

Thanks, Mike. Please turn to slide 13. As you know, our key drivers are quality revenue growth and fluidity improvement. Our price yield and book of business upgrading programs in marketing are now how we do business in CPR, on the quarter we grew our revenues by 10% on flat volumes. Starting from the left, foreign exchange reduced our top line by C$35 million or about 4%.

We exited about C$10 million of our low margin business and we back filled with almost C$20 million of targeted growth. Our fuel recovery program generated an incremental C$35 million. Price contributed another C$89 million for a total of about one-twenty-four.

We are tracking to beat our same store sales price target of 6% and we are improving our fuel recovery performance.

Turning to slide 14, I'll walk you through our revenues in carloads for the quarter. Car loads are on the left, revenues are on the right of the panel. Starting with grain, revenues were up 7% and car loads were positive. On the Canadian side, we moved more long haul volume due to crop quality. On the U.S. side, we had a great quarter, driven by strong wheat demand, longer hauls and improved pricing. In coal, revenues were up 48%. Overall car loadings were largely down on the quarter due to rationalization of low margin U.S. coal business. However, Canadian export volumes were up on the quarter, despite (Rushor) terminals maintenance problems in April.

We added two train sets for export service in June and were able to claw back export volumes and finish the quarter up 3% over last year. Fertilizer and sulfur revenues were down for the quarter. On the quarter the market remained strong but low producer inventories cut into available domestic supply and reduced car loadings by close to 5000 units. Going forward, this will be addressed by the addition of nearly 3 million metric tons of new pot ash production, some of which will come online in the near future.

In our forest and industrial markets our focus is on targeted growth and yield. Revenues for forest products were up 4%, despite the rationalization of some 1500 units of low margin lumber business that touches our busy western corridor. Industrial products was up 7%, with strong mines and metals growth offsetting a spotty plastics quarter. Automotive revenues were down slightly from last year. However, we did see a revenue per car growth of 9% excluding the impact of foreign exchange. (More) revenues were up 10%, domestic loadings were a bit spotty. However, price initiatives, trailer demarketing and selective pruning and short haul markets led to a substantial increase in average revenue per unit.

International revenues were up as a series of recently negotiated Vancouver contracts kicked in for both export and import. This is good evidence that our directional balancing program, another max facts initiative, is taking hold.

So, overall, double digit growth on fewer car loads. Success with the formula, which we pursued as we position ourselves to lever the expansion on the western corridor. On slide 15, I'll update you on the grain crop, the most recent forecasts are outlooking very strong crop yields. Manitoba rain damage is well publicized but this represents only something like a 2% loss of total western Canadian acreage.

Both Saskatchewan and Alberta crops appear to be above average. We also expect higher quality and have a higher carryover inventory and on a final note, the revenue formula is up 4% which would bring a yield boost to the regulated sector.

On the U.S. side the wheat crop potential is excellent and the corn and soy bean crops are also looking good. Slide 16 is our revenue outlook for the remainder of the year. Key assumptions, I remind you, are WTI of C$55 and a foreign exchange rate of one-twenty-three, or $0.81 U.S. Also please note that all revenues are exclusive of West Cap expansion.

The coal outlook looks solid. We expect strong second half export volumes and our June performance tells us that we can ramp it up when needed. East bound coal also looks stronger.

On the fertilizer and sulfur side we expect revenues to be solid for the remainder of 2005. The temporary inventory blip we are experiencing may slow our year over year growth a bit but the market is strong. I'd also like to take a moment and share some very good news in this area.

We recently extended our exclusive 100% market share contract with (Campatex) into 2012, a great step toward solidifying our relationship with an anchored tenant on our western corridor. This is a great new story in terms of solidifying our investment decision and with the expansions announced by Agrium, PCS, and Mosaic, this will continue to be a growth business for us at improved prices for years to come.

We're comfortable with our merchandise outlook. We expect the industrial products growth in metals and aggregates driven by continued strength in the construction market, and the volatility in plastics seems to have settled down. Forest products growth will be supported by spinning our assets faster and a reasonable U.S. housing start outlook. We expect autos to remain soft but still within the range we have provided you. On the (inaudible) side, domestics should be stronger going forward and we think international will see continued growth.

On the fuel front, we are working some revisions to our surcharge program, designed to address the new realities in fuel costs. Program changes are being explored with the state (inaudible). Any changes will likely be introduced in the fall.

So, to conclude, second half units will be up in the 2 to 4% range as we start to lap some of our demarketing efforts. The improving quality of our product continues to support both our targeted growth and yield initiatives.

On the year, I planned to deliver on my previous overall revenue outlook in the 12 to 14% range.

Turning to slide 17, I'll start by updating you on the status of our efforts to ensure we handle the projected volume growth as efficiently as possible. In April we announced our western corridor expansion program and I am pleased to say we have already finished five of our projects and completed more than 50% of the work.

To compliment this capacity expansion, I'd also like to confirm that we have ordered 60 AC locomotives as part of our 2006 program -- 20 of these will support the additional volumes enabled by the network expansion, and the balance are for the 2006 growth and remaining parts on the remaining parts of our network, and expected retirements in our DC fleet. Before I leave this slide, I want to remind you that when fully utilized, this new capacity will translate into an annualized EPS gain of 25 to C$0.40. I will, of course, be providing you with an additional update on our progress on the Q3 analyst call.

Moving to slide 18, in May we reached an important milestone with the completion of our implementation of our new yards management system ties. Significance of this can be seen on the chart on the right. By the middle of May, we started to post sustained improvement relative to 2004, to take us -- to take -- excuse me, to take us into the yard (dwell) target range, which we had discussed at our annual investor conference last fall.

These process improvements -- coupled with initiatives implemented by our yard operations performance team, are making a difference.

In addition to the service and car utilization improvement opportunities, we are increasing the revenue generating capacity of our yards by driving out waste and rework. As well, it was a good quarter for train operations. (Bulk train leaves) increased by 2% as we continued to leverage our fleet of AC locomotives and tweak our train designs.

Also we have placed a focus on adjusting our intermodal merchandise schedules to achieve better directional balance, and reduce train crew repositioning costs. As is said on the Q1 call, we will run our (IOP CPR ) scheduled railway, and productivity will follow.

Employee productivity is measured by GTM's (inaudible) of employee, increased 1%. Given the extraordinary amount of engineering activity on the property, both capacity expansion and our annual track (inaudible) programs, I am pleased with these results but I expect further improvements post work program season. Once again we reduced our fuel consumption rate, posting a 1.7% reduction from a year ago. This equated to a C$2 million savings on the quarter alone.

Nine months ago I told you our productivity initiatives would deliver between 15 and C$20 million savings this year. We are on track to meet this goal and with the traction gained over the last half of Q2 I'm confident that we'll come in the high end of that range. As you can probably tell, I'm excited about our opportunities in the second half of this year.

We know the model for success. Our yield program has and will continue to generate significant benefits for our shareholders. We are pro-active in our capacity planning, putting in place the corridor infrastructure, locomotives and train crews needed to handle the increasing volumes which leverage our fixed costs. Our Detroit-Chicago-NS co-production agreement kicks in on August 10th. One (CM) agreement to northern Ontario started operating in May and another will follow in October. And through our focus on fluidity and strict adherence to the integrated operating plan, our scheduled railway will continue to focus on driving unit costs down. Rob, back to you.

Thanks, Fred. Turning to slide 21, let me summarize the major take aways on where we are today.

First, we continue to see quality revenue growth.

Secondly, our western capacity project is on schedule for fourth quarter completion.

And thirdly, our employees are working very efficiently and, most importantly, very safely. We are seeing real financial results from our scheduled railway. I like what I see. The business model is working. This is a company that has good growth prospects and is building for the future.

Our year end EPS guidance that Mike gave you is realistic and we will update it as the year progresses, and we have every intention of improving on earnings in the years to come. In closing, let me say that Q2 was a very good quarter for the Canadian Pacific Railway, given all the work that we are doing, and 2005 is shaping up to be an excellent year. So, operator, I'm going to open the floor to questions. And I would ask you to have the questioner state their name, their company affiliation and limit it to two questions each and with time, we will get back, if there are more questions. Thank you.

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session.

[OPERATOR INSTRUCTIONS]

Our first question comes from James David with Scotia Capital. Please go ahead.

Thank you. Good morning. Just quickly, when I look at the revenue for RTM growth and back out the coal, I think I get 3.1% increase in revenue per RTM. Just back of the envelope, how may I split that out that 3.1 between fuel surcharge and pricing?

James, it's Fred. I don't know if that number makes sense or not. That's your calculation.

But let me give you the broad numbers and see if you can work it in backwards. If you exclude the impact of foreign exchange, our -- we were up about 14%, if I recall correctly, on overall revenues. About three and a half would have been surcharge. About 1% would have been mix. And then between non-Elk valley and Elk Valley combined, about almost 9% of that 14% can be attributed to price improvements, and probably a little heavier weighted to non-Elk Valley revenues -- price increases.

In that nine?

Of the nine a little heavier weighted to non-Elk Valley. So that gives you the scope of things. So overall, we have a good price program going, as I said, our same store sales we had done three, originally we bumped it up to 6% with the impact of Elk Valley and we're running ahead of that and expect to complete the year ahead of that.

So the non-Elk three, is that still very much your target?

Well, we're running ahead of it, and I'm comfortable, James, saying that we will meet at least that three, based on where we're going and the market continues to be strong in our most recent quarters' success, and contracts say that three is a minimum now and we're stretching it wherever the market allows us to.

Okay. This question might be for Mike. Just in terms of the labor expense, it was obviously a very good year over your comp. I certainly could go back through my old notes. Was there anything exceptional in the second quarter of '04 that caused that number to be higher, or is this really just a very clean and efficient number? In terms of the comp?

When you look at the comp, James, I would say that when you take into account the unit rates and increase in volumes you would expect us to be up around C$15 million on the quarter. So there was -- there was nothing wildly unusual in the second quarter. The incentive comp was running in line second quarter last year.

Okay.

Up slightly this year. So we did, as I pointed out this year, get some benefit admittedly from foreign exchange. That was about C$7 million. And then you may recall I talked about the staff reduction programs. That was worth 2 million to C$3 million and the train crew efficiencies were in real numbers about C$4 million.

What we did see last second quarter with a tremendous increase in growth was, we were moving crews around. We were paying premiums to crews for over miles. I think with the good work that has gone on this year, we're much more in balance. We've gotten rid of that expense. That would probably be the single biggest swing on the quarter.

Perfect. Thank you.

Thank you. Our next question comes from James Valentine with Morgan Stanley. Please go ahead.

Thank you. Great quarter.

Thanks.

Fred, can you further expand on why the intermodal volumes here have been weak recently? We look at the AAR numbers. It's been flat for the last four weeks. And just thing, well, they're flat.

We hear that Canadian truckers have been getting a little more aggressive on trying to take some share back from the railroads. Part of that is because the railroads have been successfully taking up pricing. We're wondering, is there more excess capacity up in Canada possibly than in the U.S.? We don't see us at capacity yet in the U.S. but we think we may next year. Is there something going on with the truckload capacity that could be causing intermodal to be relatively flat?

First of all I don't think on the long hall. Remember, (inaudible) detail intermodal business and BR Hall is all the way from the east or west or west to east. The trucks are there on the high end expedited traffic. But to begin, it would be between CN and ourselves. There's no reason to believe the dominance that we have in the market place is changing. There's no factors at work. If anything it's going the other way because of the high fuel price impacting trucks more than us.

However, at the port of Vancouver, obviously with some of the issues that they're facing, there is some amount of less transshipping going on. Because they cant get the containers off the dock to come to us to be trans-shipped. So I think if you're looking for a single factor in the domestic intermodal side in particular, it would be that those cans are not being moved locally within Vancouver to our trans-shipping facilities.

As a result of that, some of our car accounts or domestic container accounts coming off the coast are down. There is some degree of increased marine containers going throughput, offsetting that. But there is a net overall modest loss. I think that's probably the single biggest driver.

Okay. And staying in intermodal for a second, do you have any large contracts in the second half of this year that you think may change hands or have an impact on your overall volumes?

I would suggest if we break that into two pieces, Jim, on the international side we have been through virtually our entire book of business off the west coast and have successfully secured 100% of those contracts with substantial improvements in the terms. So I do not anticipate that.

I don't see anything happening in the international side in the east. And on the domestic side, I'm not aware of any substantial contracts that are coming due that would be at risk. The market is always competitive, so we'll have to see what the market place holds. But I'm not aware of any great risk situations at this point.

Great. Last question. On the contract with (Campatech), great to hear you've locked up some business here, but just seems like, you know, nowadays, railways signing long-term contracts, at least ones that were done in the last few years, seem as though in hindsight they've been done in mistake because some of the railways aren't getting the inflation and fuel hedge type of pass through.

The key factor here is that I'm surprised you'd sign that long of a contract because implicit in there is that you and (Campatech) have the same view on price inflation for railroad services over the next seven years and I would hope that you would be a bit more bullish than the customer would be. Is there some floating rate mechanism in there that can -- give us more comfort that we haven't locked ourselves into possibly too low of rates?

The rates -- it's a confidential contract, Jim, so I'll have to be broad in my answer. But, there is indexing involved and there is upside involved in pricing should commodity prices change.

But there is indexing involved and there is upside involved in pricing, should commodity prices change. But there is also a floor involved on the downside. So, we are very satisfied that when you're building an enterprise of this size and putting the expansion in place that we are and that we may have to do in the future, putting those anchor tenants in the old shopping mall becomes pretty important to us. We're satisfied with the margins and we like the growth opportunity, if you will, plus we're protected with indexation of sorts in the contract.

So, you know, it's easy to say, why don't we do a 12 month contract and we'll keep renewing it. How do you go to the board and say I want to spend more money to expand in an environment where you've got hundreds of millions of dollars at risk every 12 months? We're very satisfied we've found the right formula good for both parties, ourselves and the client, and it gives us an anchor tenant that allows us to move big volume in a growth environment with 3 million new tons of capacity coming on in the pot ash business, that we will be the beneficiary of.

Great, great. Thanks, guys. Appreciate it.

Thank you.

Your next question comes from Thomas Wadewitz with JP Morgan. Go ahead.

Yes, good morning. I have two different questions for you. First on the fuel surcharge and fuel issue in general, can you give us a sense -- you may have mentioned this. I don't think I caught what your fuel surcharge coverage was in the quarter and perhaps where you think it might be at the end of the year, and maybe how long it takes to really get up to this 80, 90% area.

Tom, it's Fred. We have -- 91% of our contracts are covered with some form of fuel mechanism today. Represents mid 80s. Mid to high 80s percent of total revenues covered today.

We aspire -- realistically there are still some legacy contracts working our way through, as we said in the past. Probably towards the end of 2006 we will be almost entirely covered. I also point out to you that when we did the coal contract we got a substantial increase and we, I think for all intents and purposes, we consider fuel covered in that, even though it's not explicit. It does kick in in the outer two years as a specific fuel surcharge, as you're aware from past conversations.

Right. Okay. Fair enough.

Why is it, with that 91% coverage and with 35% hedge in place that you provide the caveat of C$55 per barrel oil for your earnings guidance? Is that still a meaningful factor, or perhaps, Mike if we end up at C$60 a barrel for the full second half, can you give us a sense of the potential downside impact that would have to your guidance?

One of the reasons we do it is, of course, we talk about EPS, but we also talk about operating expenses. So you're going to see the operating expenses increase. I think it's helpful to understand what we're using as an expected fuel price just to simply understand the fuel price increase.

But to get back to the main theme of the question, I think the very good question is -- we've been largely successful in mitigating the impact of the higher fuel prices. The next stage in evolution, if you will, of fuel surcharges is the refined products basis. You'll continue to see us refine and evolve the fuel surcharge mechanism.

Getting back to Fred's point, I think we've been successful in mitigating that by and large so it won't be a big swing on EPS if it's C$60 on the second half.

Okay. And then when you get that ratcheting up of, say, moving from a WTI basis to a refined product basis, then you feel like you've got that last step of coverage well in place?

Yeah. Okay. One other question. On the demand side, as you look at kind of a midyear basis, you look at 2006, do you feel quite good about the outlook for '06 demand in terms of sulfur and fertilizers, metal or coal volumes, intermodal?

Are there any thoughts can provide on how that outlook, you know, may be different now midyear versus where it would have been at the beginning of the year?

Tom, it's Fred again. I have no reason to believe that there will be any softness in the coal side from all of the most recent dialogue. There appears to be a continued belief, including the most recent Elk Valley quarterly call. They see a strong demand on price and on demand.

I think the pot ash side of things, they're in negotiations as we speak, which is -- the inventories have built up at the ports because the (Campatechs) is selling into the world markets -- is obviously trying to get their prices up. There's a little bit of put and take going on in the market place right now. We're seeing a bit of a blip in the supply chain, which we accept. But, every reason to believe, based on all recent dialogue, that that demand will remain very strong.

I can tell you because we've just completed reviewing our book of business and renegotiating so many contracts off the west coast international that demand continues to be strong. Sulfur, look at the gas production going on in Alberta, which is the origins of most of the sulphur. These kinds of gas prices, people are extracting sulfur like crazy and want to export it. Demand prices are staying high on sulphur.

Sorry for the long answer, Tom, but at the end of the day, we are not feeling at this point in time any softness relative to what I reported in Q1. We'll have to let the market place unfold. At this point we don't see those signals .

All right. So that would probably lead you to feel pretty good about filling up that new capacity you're bringing online in the second half as well?

Absolutely. We're going to do our best to work hard. The other aspect with regard to that comment is that the grain business is looking pretty robust right now.

We're excited about -- if we can get that capacity in place toward the end of the year, we'll be well-positioned to take care of the grain crop as it wants to move in the new year.

Okay, great. Thank you for the time.

Okay.

Your next question comes from David Newman from National Bank Financial.

Good morning, gentlemen, good quarter. I just, on your operating metrics, I notice your train waits and speeds were a bit lower year over year and your head count was higher on average, about 287 bodies, if I'm not mistaken.

Just want to get sort of an attribution analysis on the head count itself in terms of how much might have been running trains versus engineers and looking out, can we expect the waits and speeds will pick up steam as we get past the western quarter expansion and some of the head count might actually come out of the mix?

Mike will deal with the head count breakdown, David, and Fred will go back to the operating metrics, okay?

Excellent.

David, on the head count you saw the numbers obviously in the summary of rail data, the average head count was up a little over 200, if you take a look at the quarter ending number, the quarter number was up a little over 400. In round numbers, we saw an increase of about 210 or so head count. That's relating to capital work activity.

If we take a look at the train operating side of the equation, in running trades employees, we have about 5200, 5500 running trades employees. We're up about 300, 320 in that range there, reflecting the increased GTMS and train miles. Then, of course, you have to offset that with the staff reduction program. This is the 820 that I spoke about. So, 320 plus the 210, less the 140 would get you a number around 400.

So that really ties up the numbers. Obviously, we will continue to watch the head count numbers. We're awfully tight on adding staff other than running trades. I think the other part of that discussion is, you know, let's push to get the efficiencies in the IOP and see how we can improve there as well. So you'll continue to see us focus there. But very tight control on head count. With that, I'll turn it over to Fred to talk about train wins.

David, this is actually part of the plan. What we said at the end of Q1, or when we were doing the call, we said, given that we've announced our capacity expansion, it was absolutely critical for us to run that disciplined scheduled railway. And the team is running the IOP. That has included a handful of new train starts which has dropped the waits a little bit. The benefits of that -- take a look at that slide where we looked at the yard fluidity. We are doing our absolute utmost to get this railway into an absolutely disciplined mindset with those train starts, as this new demand comes on, we see the ability to move that tonnage, obviously, by filling out those trains, so moving at incremental costs.

So, we're quite pleased with that arraignment at this point in time. The second part I want to talk about is from a speeds perspective. Our GTMs were up. I can't remember the exact number. 2-point something percent.

We have this huge work program, bigger than last year, plus the construction programs and train speeds looked like they're down on the quarter. Technically they are. But if you looked at June or you look at July to-date, our train speeds are actually up. So we're satisfied that while we went through a couple months of getting ourselves organized, the last two months or month and a half have shown the right direction, the direction we expect to see for the rest of the year.

Of course as we get through the peak of our construction over the Q3, when we hit Q4, I can tell you the operating team in this company understands that we expect to see even much better fluidity for Q4. So I'm happy with the program. I think it all makes sense when you look at what we're doing and why we're doing it. We expect improvements in Q4 on both those metrics.

Just looking into '06 can we expect some of the capital work activity, the people that are employed I guess on your capital projects, would that decline somewhat next year obviously? They are working on these capital projects? And can you capitalize those expenses at all?

I'll just start that, David. With regard to activity levels, obviously we have not made any projections about what we might or might not do next year with regard to further expansion. At this point on the basis of no further expansion, then obviously those FTs will go away. I'll let Mike address the capitalization issue.

The other issue I think is important to understand is Mike talked a little bit about on the fluidity side is, as we are in an environment where you have tight track capacity, the most critical thing you can do is utilize every one of those slots efficiently. To do that you have sufficiently trained crews so you never a window. As the capacity comes on we will be able to slowly dial back a little bit on the crew sizing so that we're not in a position -- you know, if we miss a slot, it's not the end of the world because we'll have built sufficient capacity so you can accommodate something like that.

So, at this point, we are protecting every single slot by having a lot of running trains people in place. As we go forward, we'll be able to play with that (dial) a little bit and that could lead to another set of efficiencies, but we'll have to see how that will unfold next year.

Last question, if I might, just your effective tax rate going out, is it 34?

Yes, David, we gave guidance earlier at 32 to 34. We are a tad at the high end of the range at 34 on adjusted basis this quarter. I still think that's a good number to use going forward.

Great. Great quarter, guys.

Thanks, David.

Your next question comes from Ken (Hoexter) with Merrill Lynch. Please go ahead.

Good morning. It's Ken Hoexter. Just on your 12 to 15% revenue growth -- obviously, the back half of last year, you're starting to come up against some tougher comps.

If I recall right, you had 10 and 12.5% growth in the first two quarters. So are we looking at accelerating growth or is that target on an adjusted basis?

Ken, if I were to do quarter over quarter for the last two quarters of the year, you will see the growth rate in the second half of 2005 to be faster than the growth rate in the first half of 2005. We think the volumes you've seen -- the volume's been quite low in the first half. Flat to minor reductions.

But, across the board on grain, coal, pot ash and intermodal, I anticipate that you'll see volume growth plus the price increases that you've seen us benefit from in the first half of the year. So, we're comfortable with that 12 to 14% range and I think you'll see a stronger growth rate in the second half than you saw in the first half because of the volume increases.

That's helpful. Thanks, Fred. While you're there, though, on the revenue side, on the volumes, actually, I guess we're looking at -4% volumes quarter to date in July so far. The industrial actually is down about 10.5%. I know you said there were some spotty things. I think you mentioned plastics.

Is there something else in that 10.5% that's going to turn around, like you mentioned, with the, kind of, self-earned fertilizer. You had a couple contracts that you anticipated coming out. Is there something in the industrial side that we should look for?

The only thing that's just a little bit soft in the last couple of weeks has been the steel. I think it's pretty much on where we were last year, but it's not quite the growth rate that we anticipated. That market's been moving around all over the place. I'm not worried about it at this point in time. The lumber market obviously goes with prices and it's been a little soft the last week or two.

But in the industrial -- overall in the industrial forced products area -- a little bit softer than we thought in the month of July. But it's holiday shutdown season, so we're not too excited about it at this point.

So we could see part of that rebound, is what you're -- ?

I anticipate that, yes.

Let me just jump over to the fuel surcharges. Obviously, you kind of ran through a lot of details on your coverage ratios before.

Let me understand the philosophy on the hedging side. So as you start to ramp up the surcharges and you said you're going to likely -- I think it was by the end of the next year have pretty solid coverage, maybe even get 100%. Does that mean you stop the hedging or do you keep it at these levels? I think you've got, what, mid teens for this year, I'm sorry -- for '06 and single digits for '07. Is that the kind of levels you have for extra coverage or do you continue to add that as we go over the next couple of months and get that back to the 30, 40, 50% level?

Ken, it's Mike. You know, the logic around fuel hedging, of course, is that we hedge to manage volatility.

The only way, realistically we can deal with the rising fuel prices is through the fuel surcharge mechanism. And I think you'll see us going forward using that philosophy. In terms of the hedge position next year, 13% of C$30.50. So obviously the hedge position steps down pretty well. We have not been active in the forward market since the beginning of the year.

I would not rule out further activity, but I wouldn't expect any near term. So I would expect to see the hedge step down, to answer your question. Whether it stays at 13 and 8% in the following year '07 or not, you may see it come up a little. But that would be the way I'd answer that question.

Helpful. My last question, I think, Fred, you mentioned before that the west coast expansion was 50% of the work -- projects had been completed, or -- of the work has been completed. How do you feel on the 25 to 40-cent of annual EPS accretion potential, how do you feel looking at the fourth quarter?

Ken, at this point in time, 50% is a lot but there's still 50% to go. The markets appear to be strong, the grain market in particular.

So I guess the best answer I can give you is, if we are successful in bringing this home early, then my belief is that we'll get some incremental volume in the fourth quarter. But, I don't want to predict when we're only halfway through the construction exactly when it's going to come due or how much it is.

But I would argue that the opportunity to use at least some of that capacity should have come on early -- is pretty good, particularly with the grain crop looking so good as it is.

Just to clarify. But none of that is in the three-fifteen to three-twenty-five target number, right?

That is correct.

Okay. Helpful. Thanks, guys.

Thank you.

Thanks. Your next question comes from Scott Flower with Smith Barney Citigroup. Please go ahead.

Yes, good morning, all. Just a couple quick questions. I think you alluded to this but I just wanted to clarify, at least conceptually. I think Fred mentioned and I think Mike also made commentary about this.

When you talk about the evolution of the fuel surcharge and working with the customers and et cetera, , I mean, is this going toward the refined products and trying to fine-tune exactly what the basis of that surcharge is? Do you have any thoughts about mileage-based surcharge? Could you perhaps conceptually give me some sense of what direction you'd like to take the fuel surcharge?

Scott, it's Fred. I think you hit on both issues that are kind of in front of us. Different shipper groups and different clients have different perspectives.

So we've recognized that the crack margin issue leaves us a little bit susceptible and, as a result of that, from the railway's perspective, we're interested in migrating from arguably what's kind of, a wholesale or per barrel WTI level to getting down to a row diesel price of some mechanism. We have yet to find the perfect mechanism and we are exploring it. It doesn't seem to exist in Canada although there are some reference points in the U.S. -- it's just not as applicable in our territory. So we will explore that though, in the coming periods and find a solution. So that's -- the railroad driver is to address the crack margin risk.

The customer is interested in what their perception is, different industry groups feel that there's some level of inequity based on the thing being driven off of revenue prices, as opposed to expenses. And I think that's what led the (BN) to explore mileage . Mileage is a very complex system. I can tell you at this point that we do not have a solution with regard to mileage.

And we are turning our minds to seeing if there is something that is -- something that addresses the concerns about equity amongst the shipper groups that is not so complex as to cause us to have to rewrite every program in the company. We are not going to have a custom built surcharge for every individual client. It's a crazy administrative effort and I'd need 100 people to administer it. So those are the two issues, Scott. I do not have a resolution at this point. But we are exploring both issues looking for solutions.

And then the other question, this is maybe more tactical or just focused on a comment that you made, Mike, was -- when you talked about -- I forget the exact expense category, whether it was purchased services and others -- demured settlements. If you could perhaps put a little flesh on that.

Is that an on going process where you're actually in terms of getting fluidity, being more aggressive on collection of surcharge, was that a one off of a long past due demured issue? Perhaps give us some quantification on , was it sizable or was it pretty meaningless in terms of the overall scope?

Scott, that event was part of the equipment (rent) discussion. It is a result of some of the work, some of the significant work we've completed in terms of putting in place our service excellent suite of information technology. We obviously have great information around where the trains are, where the cars are. We feel strongly that, if those are being the way that we should charge for that, the amount on the quarter, the second quarter, was in the 2 million to C$3 million range. I think it is an indicator of what might happen going forward. Although, I shouldn't say we're going deliver year on yer, 3 million every quarter.

That, as you know, for a number of reasons, can vary in timing. But I think directionally, we would expect to see improved performance there and like I say, 2 to 3 million on the quarter net impact.

Okay. Thank you.

Your next question comes from Edward Wolfe with Bear Stearns. Please go ahead.

Thanks, guys. Couple of things. First of all, if I look at fuel and I look at what you recovered with 80% plus on the surcharge, looks like you lost money on your hedge. Am I missing that?

Something doesn't sound right there, Ed.

I'll go over that with you online. But for instance, Union Pacific without a hedge seems to have had less impact from fuel in the quarter than you did. They said they were recovering about 72%. I want to work on that.

I think the other part of -- well, let's deal with it offline.

Okay. But I'm guessing that some of the hedge has to do with hedging at what level of hedge you have versus the refined margin. Is that fair?

Yes. If we take a look at the net increase in crude prices, we saw about 30 or so million dollars on the crude front, plus another 10 plus million on the refining margin. So that would explain part of it.

But certainly, we're recovering, as we'd indicated that, on the EPS slide. When you net out the fuel surcharge, and the hedge, net net it was very small on the EPS number. It is C$0.02.

Okay. Again, I'm not getting that but I'll get back to you when I talk to you on that. On the western expanse side, are there some startup costs right now? You talked a couple times about some training and some locomotives that are coming on, and so forth.

Is there a way to look at some of that as kind of sunken costs that you're going to have to leverage later on, as this ramps up?

Ed, it's Fred. I would suggest that -- I mean, clearly, when you're going to grow the business, we are bringing -- our training rates have not declined as much as one would have anticipated, if we weren't going to grow the business.

I don't remember the exact run rates last quarter but -- or last year, same quarter -- but we're still training people, anticipating the opportunity to grow in the future. So there's probably a little bit of that front in -- in there. Maybe a couple million bucks. And then I think I described in detail, so I won't repeat it.

The concept of when you're tight on capacity, you must keep sufficient crews in place so you never miss a slot. I would sense, Ed, that there's also some crew inefficiency despite the fact that we made some efficiency improvements, substantial efficiency improvements. There's probably a further opportunity to refine our crew balancing and limited dead heading.

Things that we have to do today to seize the moment, we will not have to do going forward. They are inefficiencies. Orders of magnitude would be in the single digit millions. Twos and threes as opposed to any huge amount of money.

When you look out on the other side -- on the revenue side, and you look at expansion and you talk about a grain story, a pot ash story, an (NMO) and coal off of easy comp kind of story, what kind of -- assuming the economy stays relatively even keeled -- what type of volume growth are you seeing? What's the range for '06 as you go out? And what's the capacity going to allow you to grow?

Well, we haven't done any 2006 guidance yet at this point, so I don't think I'll jump ahead of myself in that regard. The capacity is the 12 trains.

Or, sorry, the 12% for trains incremental to the 34 that we have today, per day. So, that's the upside. If the market was strong, we could sell it all. If the market is reasonably strong, obviously, we'll sell some of it.

But we'll give that guidance later in the year.

Okay. And is it your sense that that ramps up throughout the year or does it come on pretty much flicking a switch?

Well, again, I don't want to get ahead of myself, Ed, but I think it's unrealistic to think that you would flip a switch and you fill the thing up on day one.

So, it will ramp up, but we'll have -- to complete our dialogue, we are literally in dialogue with all of those big industries that we spoke about right now. And we'd have to depend on their interpretations of how fast they can get there before we can share with you how fast we'll move what they're going to produce.

Okay. And then on labor costs --

Ed, we're going to have to move on, okay? We've had more than two. Okay. Operator. Do the next.

Next question comes from Ted Larkin with Orion Securities. Please go ahead.

Yes, thank you, operator. Good morning, gentlemen. Just want to ask, first of all, a follow-up on the question about CapEx for the year 2006. Mike, specifically, if you were not to include any potential capital expansion work next year, would 800 million still be a reasonable number for 2006?

Yes, I'd say 750 to 800 range.

Did you get that, Ted?

I did indeed, Rob. Thank you very much. And for Fred Green, there's been a lot of chat, Fred, about Vancouver of late, and some of its challenges.

But could you brief us on the Port of Montreal, how that's performing for you and what growth prospects you anticipate out of that port?

Port of Montreal, Ted's been surprisingly strong. I think their volumes are up 2 to 3% and then with price increases, overall revenues off that side are mid single digits. So Port of Montreal is just one of those great pieces of business, that just keeps on coming.

Despite all the hoopla off the west coast, the east coast, or Port of Montreal, in particular, has been very good for us. And no reason to believe from any of the dialogue that we're having that that's going to soften in the foreseeable future.

Fred, just with -- in terms of discussions with your auto manufacturer customers, are you getting any sense of how that traffic is going to flow over the next year and a half?

Well, again, remembering the nature of our franchise, which is heavily weighted to the Hondas and Toyotas who are having great success in the market places, or in the market place, they continue to see growth on the horizon. We are also, of course, doing business with the big three and obviously they don't have quite the same growth prospects.

But surprisingly, the volumes have held in there. They are not last year's numbers, but they're not as bad as people anticipated. For instance, in Chrysler, a lot of the product lines that have been successful for them happen to be lines that we're involved in. So, I'd say at this point in time, I don't know how I can predict what's going to happen to domestic car sales.

We feel pretty good about the transplants and their success in the North American target, which happens to be a big part of our franchise.

All right. Thanks much.

Thanks, Ted.

Your next question comes from Bill Mackenzie with TD Newcrest. Please go ahead.

Thanks. Good morning. Mike, just a housekeeping question. On the other expense line of the Income statement -- it is a little tough to forecast. Can you just give us some color in terms of what you're expecting there for the balance of the year and just directionally in '06, if you can give any color on where that number might be moving.

Bill, that's a really tough one to give forecast on because there's a lot of things that end up in there that are currency related and so on. But I think what you're looking at this quarter is something more characteristic of what I'd expect to see going forward.

You may recall that in the second quarter of last year, we booked a loss on a -- an interest rate swap contract that we had to flow the loss through, on the PNL. We couldn't amortize that loss. So, last year is high. This year is probably representative. So, I'd say in the five to ten range going forward.

Great. And then, second question, just going back to grain and the potential for a strong harvest this year.

If -- you've eluded to the potential of western expansion finishing up a little bit early -- but if these all go as planned and we have a good grain harvest and the western expansion is completed sort of at the end of the year, as opposed to coming on (inaudible), is there any risk that you miss out on your share of those grain volumes or are you confident that (inaudible) is in place, you will be able to manage that growth?

Pacific Railway will participate as much as the market allows us in the grain business and do a great job at it.

Okay. All right. Thanks.

Our next question comes from Randy Cousins with BMO Nesbitt Burns. Please go ahead.

Morning. Fred, I wonder if you would come back to the new pot ash contract. I recognize that there's a confidentiality issue here. But I wonder if you could give us some sense of the sensitivities that we should be looking at.

First off, is it U.S. versus Canadian dollar pricing? Secondly, can you give us a sense as to sort of -- sounds like you've got a caller on the pot ash contract, but is the caller well below where pot ash prices currently are?

And then thirdly, (inaudible) is how much of the incremental volume you're moving is going to go out through Vancouver versus heading out through -- switching and heading out ultimately through the states?

There's a lot of detail in there that I probably can't get into, Randy. But first of all, let me talk on a couple of issues I can speak to. I don't think there's any confidentiality in the fact that it's a Canadian dollar contract. There is your description of a caller -- a very, very modest downside and lots of upside on the caller, so we're very happy with that. We were able to leverage our franchise which has the access to the U.S. roads for alternate gateways, which is very appealing to the client. And there's no way at this point in time that we can know, with certainty, what volumes will go to which port.

Obviously, they have protected the ability to go either way, and we are satisfied that we've got the capacity in place to meet their needs, or we'll have it in place to meet their needs. So, we have to leave that to the discretion of the client, but we're well protected in either case.

Presumably you do better if it exits out through Vancouver than if it exits out through a U.S. port? Well, again, there's a lot of different aspects, Randy, of the piece of business, so short haul sometimes can be more attractive than long haul, depending on circumstances.

I think I'll refrain from commenting on the relative value of the business, other than to say we like it in both cases. Final point on this particular topic.

Your guidance with reference to the incremental lift on the incremental capacity, how much is this pot ash contract a part of that sort of guidance in terms of incremental lift on incremental capacity? Or how much is there extra in this pot ash contract that's not part of that guidance, potential extra that's in this pot ash contract that's not part of that guidance?

Randy, that's a pretty detailed question and I think to get into it would be not doing the company any service. I think you're going to end up broaching the confidentiality we have with (Campatech). I think we're going to have to leave that one.

I guess the issue I'm wondering with, Rob, is, I don't want to double count.

I understand. I understand. But, you know, Fred mentioned that there's 3 million tons more pot ash coming along, so obviously that's going be pot ash, tonnage that's going to be going into the expanded capacity.

Okay. Thank you.

Okay.

Your next question comes from Horst Hueniken with Westwind Partners. Please go ahead.

Good morning and congrats on a great quarter. I just have one question as it relates to your coal business. I'm just wondering, is there any unusual or nonrecurring volumes or pricing or revenues, for that matter, in your reported number carryover from last year, like we saw in Q1, or is the result you've reported indicative of what we can expect going forward?

Horst, it's Mike. There is C$6 million of revenue in round numbers in the second quarter pertaining to prior periods on the call revenue and on the coal contract. And we have detailed that, as well, in the MDNA when you get a chance to look at it.

Okay great. Thank you. That's all I had.

Thank you. Next question comes from Joseph Leinwand with RBC Capital Markets. Please go ahead.

Thanks. I was going to ask Horst's question but I'll ask it a different way then. And then, another one after that. The coal yield was up close to 60%, so if I take that C$6 million and work backwards, I can model exactly what the coal rate is.

I guess I'm getting at is, the pickup in the coal rate of 60% -- most of the way, that sort of matches what you've predicted in January when you signed a contract of 20% plus 33 totaling 60 -- 60%. So going forward, we can sort of project forward the same unit yield going forward? Especially for the 6 million, of course.

Yes, adjusted for the 6 million. You're way smarter than I am. You were doing all those numbers so fast. I don't want to say yes or no.

I do want to remind you that we've also been very successful on price increases to the east. So as long as you take that into account, obviously the math will come forward, as you suggest.

Okay, and one other question to Mike, I guess. You counted a minor point, earlier, that the quota contained a C$0.02 adjustment for a tax recovery. Again, just to rephrase somebody else's question, was that number included in other income or was it included in the 34% tax rate?

The point I'm getting at is -- the numbers seem to be about 0.03 or C$0.04 higher than one would have believed two weeks ago. Was there any other sort of unusual items that helped the quarter at the end of the quarter?

Yeah. Joe, it's a good question. We saw it late in the quarter. I did elude to this. These tax adjustments -- one was a property tax adjustment in the range of 2 million to C$3 million. The other was a U.S. state business tax refund. We had reported expense for these in earlier periods. We had anticipated getting recovery on these two fronts. As you know, these things ebb and flow as you go through the year. You get various recoveries. We thought we'd get those in the second half of the year. They came in at the end of the second quarter.

But they appear in the purchase services and other line item, and that was the C$0.02. So if you adjust for that I guess the 87 would have been a number more like C$0.85 and we just didn't see those coming in. It probably gets back, Joe, to the broader discussion -- we feel good about the full year guidance.

When we get into the quarters, it's tough. You have timing differences. Puts and takes. Shipments may move, may not. And that's what happened to us this quarter.

As part of that same question then, is there some pot ash and coal that was delayed from quarter two to quarter three?

Joe, I think I made reference earlier -- it's Fred -- that the Elk Valley guys were having a little bit of trouble, I think, at the port on the fluidity of the facilities, and then good work, I think, by all parties in the supply chain, really allowed us to ramp up in the last three weeks of June, in a way that we maybe had not anticipated being able to do earlier in June.

So we ended up running pretty hard on coal in the last three or four weeks, harder than we thought we were going to be able to go. That was another contributing factor.

Thank you very much, guys.

Thank you. Your next question comes from Rip Watson with Bloomberg. Please go ahead.

Good morning. Could you give us a snapshot of the effect of the Vancouver truckers' action on Canadian Pacific in terms of percentage decline in business, if any, especially with relation to what Fred mentioned on boxes that aren't moving from the port to trend shipment.

Rip, it is Fred again. It's tough to quantify it because stuff moves all around. I would suggest at this point in time, you know, there's -- I don't know, a couple hundred loads a week that you would expect would be transferred into -- from (ring) containers into domestic containers on the west coast which, because of the strike, cannot occur. So, part of that business is foregone. Part of that business is going to move marine impact containers instead of transship.

And so, we're only a couple weeks into it and we haven't got a deep analysis on it because there's just too many pieces that are uncertain. I don't see it as a major impact on the Canadian Pacific Railway. Obviously whenever your patterns change there's a little bit of inefficiency and a little bit of missed opportunity we'll probably experience.

But in orders of magnitude, in the big scope of things, it's fairly modest. The bigger issue, Rip, I think, is to have the integrity of the Vancouver gateway impacted on a global basis -- is the bigger issue that we should all be worried about and hopefully we can get past this rather minor incident and get on to positioning the Vancouver gateway as a tremendous gateway for all of us, both the U.S., midwest and to the east.

Just to follow up on that then, is there any other impact on the railway, other than shipments to -- that you would normally be getting through your trend shipment locations? Is there any effect on domestic shipments into Vancouver?

Well, there will be just, again, a minor amount of things. I'll give you an example.

Let's say that pulp used to move in box cars and then would be transhipped at the port, or some sea grains used to move in hopper cars and then be transhipped at the port. If the transshippers at the port can't get empty marine containers, then obviously there's going to be a back log of this product staying in the countryside waiting for that to be resolved, at which time, I think, the vast majority of it will in fact still move. I don't think it's lost. I think it's deferred Rip.

Okay. Thank you.

You're welcome.

Thank you. Our last question comes from Chris Sorensen with the National Post. Please go ahead.

My question has been answered.

Okay, Chris.

Thank you very much.

Okay. Operator, you said that's it? And we're a little over time, but we decided to let it run. That's it. We had a good quarter. We look forward to talking to this audience again in three month's time. So, thank you and have a good day. Bye-bye.

Ladies and gentlemen, that concludes today's teleconference. Thank you for your participation.