Canadian Pacific Kansas City Ltd (CP) 2006 Q1 法說會逐字稿

Welcome to the Canadian Pacific Railway first quarter results conference call.

At this time, all participants are in a listen-only mode.

Following the presentation, we'll conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for question.

[OPERATOR INSTRUCTIONS]

I would like to remind everyone that this conference call is being recorded on Tuesday, April 25, 2006, at 11:00 AM, 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, [Matt], and thank you, ladies and gentlemen, for joining us in our 2006 first quarter teleconference.

The presenters today will be Rob Ritchie, our Chief Executive Officer, Fred Green, our President and Chief Operating Officer, and Brian Grassby, our acting Chief Financial Officer and Controller.

Before we get started, let me remind you that this presentation contains forward-looking information. Actual results may differ materially. We make reference to assumptions used in our guidance, and we provide sensitivities to these assumptions in the appendixes, which can be found in the last section of the presentation material.

The risks, uncertainties, and other factors that can influence actual results are described on slide two in the press release, and in the MD&A filed with Canadian and United States securities regulators. Please read carefully as these assumptions could change throughout the year.

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, and good morning, ladies and gentlemen.

We've just completed the strongest first quarter on record for the Canadian Pacific Railway. We delivered impressive results with EPS up 40%, despite seeing lower volumes from those two key anchor tenants, coal and potash.

The strength in the quarter came from two critical areas -- very strong operations from our scheduled railroad; and a continued strong yield program.

On the top-line, we told you last year we'd focus on quality revenue growth. Revenue per RTM is up almost 12%, adjusted for FX.

We told you we'd continue to re-invest in our business, and the results show the benefit of this strategy. Our new quarter infrastructure is now in place, and our train speeds are up 17%. We told you we'd run our trains more efficiently; unproductive debt heading is down 30%.

We told you we'd complete and install new systems and manage our yards differently; dwell time is down 30%.

We told you we'd run a safe railroad; personal injuries and train accidents are at record-low levels.

And finally, we told you we'd improve our operating leverage through intense management focus with execution excellence. We have a Q1 operating ratio of 79.4, an improvement of 300 basis-points and the best Q1 on record. The team can be justifiably proud of the results that they are delivering.

I'll turn it over to Fred who will give you more detail on the commercial and operations story. Then, Brian will tie up the financials.

So, Fred, over to you.

Thank, Rob.

Let's turn to slide 7 and start with the freight revenues.

On the revenue side, we continue to see solid growth, up 8%, despite a strong Canadian dollar that negatively impacted our revenues by $27 million, or almost 3%. We had strong yield results of 6%. Fuel contributed a further 3%, and mixed, another 2, for a total of 11% top-line growth, pre-foreign exchange impact. Overall, a very solid start to the year.

Turn to slide 8, and I'll walk you through the commodity results by line of business.

On the green side, revenues were up an impressive 28%. Our double-digit volume growth is due to strong export grain shipments in both Canada and the US. We successfully moved this volume due to excellent asset velocity and our capacity enhancements on the Western corridor.

Coal revenues were down 3%, with price improvements offsetting most of the volume decline. Both export and Eastbound volumes were hampered by Elk Valley coal softer volumes.

Sulphur and fertilizer revenue had some historic lows due to the timing delays on export potash. On the domestic side, a late start to the season negatively impacted Q1 revenues. On the upside, we experienced double-digit growth in sulphur, driven by a very strong domestic shipment.

On the merchandise front, forest product revenues for Q1 was up 3%, mainly on price. Volume softness was driven by shutdowns in the paper sector.

Industrial products growth continued to run strong across the board, with revenue up an impressive 13%. The focus on high grading this particular book of business continues to be successful.

Auto revenues were up 12%, led by increased long-haul import volumes in the early launch of some 2007 product.

Intermodal revenues were strong on both the domestic and import/export side. Retail sales were solid for Q1. We saw the planned growth through the Port of Vancouver materialize, and again, we're able to lever the benefits of our west quarter expansion work with a better service offering.

Turning to slide 9 -- I'm very pleased with the results from our scheduled railway and execution excellence focus. The intense focus drove the positive performance of the four key fluidity metrics illustrated on this slide. More importantly, this performance delivered reduced operating expenses, as expected.

In the top-left chart, you can see that our train speed improved 17% in Q1, versus Q1 2005. We are leveraging our new capacity from both our infrastructure and our coal production initiatives, allowing us to be more fluid and to recover more quickly in the event of unplanned outages.

As a quick update, we commenced our Vancouver-area coal production arrangement with the CN in early March, and the implementation is proceeding as planned. In the top right-hand corner, you can see that our terminal dwell improved by 32% in Q1. We're attacking car and locomotive dwell though disciplined execution of our scheduled railway, including better forward-planning in our yards. The comparisons will get tougher as the year moves along, but I'm confident that we'll sustain and improve this performance.

In the bottom two charts you can see the impact this success in having. We have reduced our daily average car on-line by 7%, and have driven our car velocity up by 15% versus the same period last year, allowing us to drive down our equipment rents expenses.

As we told you in November, our plan was to leverage our new capacity in coal production agreements, balance the railroad by corridor, and attack dwell. We committed to reducing our operating expenses by $35 million by the end of 2006, and we will deliver.

I also want to take a moment to note the extraordinary improvement in personal injury rates and train accident rates noted on the fly sheet. We're improving our operations while making huge steps forward in safety, a great combination.

Turning to slide 10 -- I'll you an update on the market for the remainder of the year.

We had an exceptional start to 2006 in grain, and we also expect to have a strong second quarter. Looking forward, we're modeling a normal '06, '07 crop for Canadian. On the US side, our expanded shuttle product gives us a good platform to continue to grow.

For coal, our outlook is entirely dependent on Elk Valley coals production and sales. There's still some uncertainty in this account, however, the 2006 volumes appear to be on the soft side of our expectations. While the situation remains cloudy, we're shedding coal-related costs as appropriate. We'll pull [carsets], and locomotives are being subleased and in clarity of Elk Valley coal's demand requirements. Additionally, we laid off over 320 running trades employees in the quarter.

On the sulphur and fertilizer side, our customers' outlook for the next three quarters remains bullish. Their view is that we're facing a timing situation, and that the volumes will roll forward to the remainder of the year once the Chinese negotiation is completed. To put this in context, combined domestic and export potash is up over 150 trains year-to-date. Catching up will entail some operational challenges, but we can meet that challenge, and we're working closely with our potash clients to be ready.

On the the merchandise side, I see mixed, but good, revenue growth through the end of the year. In forest products, we're still cautious given the softness in the pulp and paper market and the strength of the Canadian dollar.

Industrial products look strong, but we have some tougher comps in the second half. On the auto side, we're still looking to come in flat to slightly above last year. There is modest 2006 impact of the plant slowdowns and shutdowns announced by the big three.

Operationally, we continue to have great asset turns on merchandise cars, driven by our yard improvements, and I expect this will drive more to the bottom line, and we're modeling continued strength in intermodal revenues through the end of the year with some stronger second-half volumes as expansion work at the Port of Vancouver is completed.

Let's move to slide 11 and wrap-up.

The bulk soft year-to-date still have very solid medium to long-term fundamentals. Both coal company and potash companies have expansion of production underway. For those of you who count cars, please don't forget that the Latta subdivision sale in June and the exit of [Inco] short-haul switching in industrial products will reduce almost 30,000 car loads over the balance of the year. Both decisions are improvements to the bottom line.

On the yield front, same-store pricing will be in the high-threes to 4%. Our scheduled railway is being leveraged in the marketplace to support our yield efforts and is also driving the expense improvement we promised.

Most importantly, the medium-term fundamentals remain very good. Asian trade remains a great fit for our bulk exports and our Vancouver gateway for import/export containers.

Overall, we'll hit the expense reduction targets through execution excellence, and our revenue guidance remains in the 5% to 8% range, but I caution that the coal and potash, despite their strong medium-term outlooks, are still short-term wild cards, which we'll continue to monitor.

With that, I'll turn it over to Brian for some details on the financials.

Thank you, Fred.

Please turn to slide 13 -- as Rob mentioned, this was our best first quarter on record. To summarize, we successfully leveraged the continuing strong yield program and our scheduled railway discipline into $0.18 of EPS growth.

We also had two offsetting timing variances. The first was caused by the significant increase in our share price, up almost 20% in the first quarter. I think you all agree that this is a nice problem to have. This cost us 15 million, or $0.06 of incentive comps, because we mark-to-market our share appreciation rights and deferred share unit.

We're in the midst of a program to mitigate the cost of these benefits, and you shouldn't see this much of a variance going forward. In addition, we concluded a land sale in the quarter, which contributed to an overall $0.09 gain for other revenue. This was always in our 2006 plan, and our annual run-rate for other revenues remains unchanged in the 130 to 140 million range.

Let's now turn to slide 14, and I'll breakout the $0.18 of operating leverage in more detail.

Starting on the left, wage and benefit inflation is running in the 3% to 4% range, in-line with expectation. Once you add in the impact of 11 million of increased pension expense, the total EPS impact is $0.09. A combination of depreciation, one-time credit, and higher utility costs dropped the EPS another $0.10.

Fuel price costs up $0.15, with WTI averaging just over US $62 per barrel, up $16 over last year. You'll note that our fuel program was able to recover about $0.13 of that, and as Fred indicated, our strong yield program, along with volume and traffic mix changes, contributed a further $0.30.

Operations saved about $15 million, or $0.06 EPS, from the scheduled railway and coal production initiative. Our head count reduction programs are also right on-track, delivering $0.03 of EPS. That gets you to a $0.7 quarter, and finally, the $0.03 of timing impact, which I referred to on the previous slide, rounds out to $0.74.

Clearly, an excellent improvement in operating leverage from a disciplined scheduled railroading, focused cost management, and a continuing strong yield program.

Now, let's take a quick look at the income statement on slide 15.

Fred spoke to the freight revenue increase. Other revenues, including the land sale, were up 22 million, and total revenues were up 96 million, or almost 10%. Operating income was up 50 million, an impressive 28% improvement.

Below the operating income line, other charges are tracking more like the run-rate we expect at 7 million per quarter, and interest expenses are down because of our US debt position.

There was a small increase in foreign exchange losses on long-term debt, so our reported diluted earnings per share came in at $0.69, only $0.05 different than our adjusted EPS. All in, a very rewarding 40% improvement, with adjusted EPS increasing from $0.53 to $0.74.

Now, turning to slide 16 -- let me say up-front that the stronger Canadian dollar benefited us by about 20 million on total operating expenses. Compensation and benefits expense increased by 19 million, or 6% -- I'll explain this line item in a moment. Fuel was up 23 million, or 17%, a combination of higher WTI prices and refining margins and a reduced hedge position.

Lower volumes and increased fuel efficiencies offset part of the pricing pressure. To schedule railway improvements, clearly show up on the equipment rents line with expenses down 4 million, or 8%, overcoming favorable adjustments in Q1 2005, and higher lease car rate.

Depreciation expense came in as expected, and it will be about 7% higher than 2005, on a full-year basis, and improvements from coal production partly offset inflation in purchased services.

So, overall, once you strip out the impact of fuel price, operating expenses rose only 1%, and you'll see that our expenses would have been even lower had it not been for the stock price appreciation.

Go to slide 17, and I'll take you through compensation and benefits.

Wage and benefit inflation came in as expected and cost us $10 million. The 11 million increase in pension expense, quarter-over-quarter, reflects the current annual service cost of approximately 70 to 80 million. Our scheduled railway efficiencies and lower volumes allowed us to reduce unproductive crew costs by almost 7 million.

Our program to reduce management and administrator positions contributed a further 8 million. We had approximately 130 fewer staff on the property in Q1 '06, due to the completion of our 820 headcount reduction program, and a further 300 people left the property in Q1 as part of our recently announced 400 reduction program. Most of these saving will show up in Q2 through Q4, at a run-rate of approximately $10 million per quarter.

2 million of foreign exchange benefits, another, brought compensation and benefits line back to a normalized run-rate. So, before adding in the 15 million of the mark-to-market share price expense, comp and benefits were basically flat year-over-year.

This leads to our shareholder frame on slide 18.

We have revised two key assumptions -- WTI will now average US $66 per barrel on the year, up from US $58, and on currency, the Canadian dollar will average $0.88 over the year, up from $0.85.

Despite these higher assumptions, revenue expense outlooks remain unchanged, as does our 2006 EPS guidance of $3.60 to $3.85, a 9% to 17% improvement over last year.

On the cash flow front, the capital program remains at 810 to 825 million. Cash pension funding will be approximately 225 million, and dividends, which were recently increased by 25%, will cost approximately 120 million annually. Free cash flow will exceed 200 million, up from 92 million in 2005.

As you note, we announced the share buy-back of up to 5.5 million shares in 2006, and we have repurchased approximately 900,000 shares in the first quarter.

To wrap up, Q1 2006 has been a strong start to the year, and I'm please with our progress to-date.

Now, I will turn it back to Rob.

Thanks, Brian.

So, the team has given you a good sense on how the year is going to unfold. First off, the medium-term market demand remains strong with some obvious short-term head winds. Secondly, we'll continue to leverage our new infrastructure and operating systems, improving customer service and asset velocity. Thirdly, as always, we'll be entirely focused on trimming expenses and driving the operating ratio towards 75% and generating over $200 million of free cash flow.

This team is committed to streamlining operations as volumes dictate, and to improving service and to drive down expenses from a variety of initiatives.

So, operator, I'm going to turn it back to you, and we can answer questions until five minutes to the hour.

So, please state your name and please limit your questions to two, and we'll get back to you if time permits, and we'll go to the media at 10:55.

So, Matt, I'll turn it over -- back to you for the Q&A.

Thank you.

One moment please.

Ladies and gentlemen, we will now conduct an question-and-answer session.

[OPERATOR INSTRUCTIONS]

Your first question comes from Mr. James David of Scotia Capital.

Please go ahead.

Thank you.

Good morning.

First, a bit of a mechanical question -- you mentioned that the land sale, EPS basis, was worth about $0.09. I guess I'm asking Brian -- is that $0.09 -- is that really the $22 million, if you will, year-over-year increase that that's related to, or is that related to the other income category as a whole, or is it really just the incremental amount that you had this year?

The $0.09 is really the incremental $22 million over -- over last year. That land sale I mentioned was -- there were multiple land sales, but there was one large land sale that was roughly $0.06 out of the $0.09.

Okay.

I guess, Fred or Rob, you've increased your WTI assumption. You have got a more conservative FX ,and, Fred, you did point to your caution with respect to potash and coal, in terms of customer uncertainty, but despite all those, if you will, head winds, you haven't changed guidance. So, I guess the question is, if there's bad stuff being thrown there, but the number isn't changing, there's obviously something good that's happening on the other side. Is it grain? Is it network fluidity, or is it a combination of things?

I'll let Fred answer the details, James, but, obviously, a good team tries to overcome the head winds. That's what your shareholders pay us to do. And so, when with you gave you the guidance in November, we expected some good news. We expected some bad news as the year unfolds, and this team is balancing them out but, Fred, do you want to address some of the things that you're doing?

James, I think you actually answered the question by it's a combination of things.

Obviously, if you look at the operating metrics, the fluidity of the railway, it's been a remarkable quarter. I attribute to the team, and obviously, we're optimistic that this is the beginning of a good long ride, and there's more for us to deliver in that regard.

And, also, as the December information arrives, that the coal industry wasn't going to be quite as dynamic as we hoped and thought it might be. We put our team to work in the marketplace to determine if we could put a great product out there and earn some incremental volumes in different marketplaces, and I think if you look at our success in growing the grain business, intermodal business, international, it is a result of having a very good product offering in the marketplace.

The answer is we're working both sides of the equation, and as Rob says, our challenge is to deliver the results as we estimated, despite the difficult things we face.

Okay.

Thank you, Fred.

Rob, seeing as this is probably your last conference call, obviously, we'd like to wish you all the best.

Thank you, James.

It's been fun working with you.

Okay.

Your next question comes from Mr. James Valentine of Morgan Stanley.

Please go ahead.

Great. Thanks.

Rob, all the best. We appreciate all that you did for CP.

Can I ask one question along these lines, on your transition, in that, what type of attention are either you, or maybe even the board, giving to this management transition? Fred, very capable, but he's one person, and now it looks like you'll have two of your three senior members of management not there in the near future compared to who was there six month ago, and I'm trying to think through the risks that there'll be. You'll hit a bump in the road as a company because you are having a fairly large transition taking place in a short period of time.

Right.

Well, thank you very much, James, for the good wishes.

I can tell you that the board has been seized for three years when we became -- they got their feet on the ground when we became independent, and then, got their mind around talent management, and I'll say our HR department has done a superb job of analyzing what the strengths and weaknesses in some depth into our management field -- what those strengths and weaknesses were; where we needed to improve; and who should be in a position to replace, not only me, but down to a number of levels within the organization.

We've been working with PDI out of Minneapolis, and their excellent HR firm to help us in the improvement and the training of our employees.

Fred, I can tell you, I've had my eye on since he joined the Company, and if you take a look at in depth of where we've sent him and the experience that he's had, I have the greatest confidence that he is going to lead this team.

You've been seeing us transition from myself to Fred, now, over the last year or so, and the troops are rallying around him significantly. Fred's got a different style than I have, and I think it's the right leadership style going forward. So, I'm very, very confident, as is the board, that we've got the right team in place. I keep reminding Fred, I still have a lot of skin in the game, so I could not be handing something off that I wasn't confident to.

Okay. Great.

Thanks, Rob.

If I could ask Fred a question and maybe a little more detailed, specifically, on potash, in that, I think last summer, when the expectations were within CP, that potash was going to remain fairly strong, and that, obviously, hadn't played out, but a lot of things change in the marketplace. What I'm trying to understand right now is what gives you confidence that we're going to actually see a change here in what appears to be the next quarter based on your slides, things getting better, that will -- as opposed to just your customers telling you that they'd like to see things get better?

Well, Jim, I think there's a reality, as the Asian market continues to grow and the lifestyle expectations and the quality of the needs, if you will, of the people, from an agricultural perspective, they need to continue to improve the outputs of their agricultural community.

So, potash is a critical input, and the Canadian potash producers are the only people who can bring the kinds of volume that are necessary in the marketplace on in a quick fashion, and they are investing hundreds of millions of dollars to bring to life, which comes on, by the way, in Q4 -- in Q1-- Q4 this year and Q1 next year.

So, Jim, I'm pretty comfortable that the demand for potash, based on our own assessment and certainly, the assessment of our clients, to put in perspective, these three major potash companies are spending hundreds of millions of dollars and put tax the exporting arm are also spending a large sum of money -- have spent it -- just to buy 1,500 new export cars. So, in addition to that, [Campitex] has spent about $100 million at Portland, about $80 million at Vancouver. The combination of all of those factors, it's not customers just saying we think we'll grow, it's customers putting their money where their mouth is, and so, we're matching our investments to theirs.

We could all be wrong -- that's possible -- but if you look at the fundamentals of the need to grow agricultural product in Asia to feed the mouths of a fast-growing population, I'd say we're in pretty well-positioned, and I like the story.

Great.

Thank you very much.

Your welcome.

Your next question comes from Randy Cousins of BMO Nesbitt Burns.

Please go ahead.

A couple of questions -- I guess Fording put out their results this morning, and one of the things they talk about in their release is pricing, and their suggesting that coal rates could be down about -- I think the quote is, "transportation costs are expected to be $37 to $39 per ton, and for calendar 2006."

I know that's a confidential contract, but I wonder if you guys could give us some granularity in terms of what -- how this pricing mechanism is working? My understanding was that the rate was essentially fixed for 2006 coal year. And can you give us some sense as to looking to 2007, how the pricing mechanism is going to work?

Randy, it's Fred.

There's no new news. The contract is established. I was very explicit when we announced it over a year ago that we have fixed rates for the '05 year and the '06 year. We've just moved into the '06 coal year as of April the first. The rates are slightly -- and I repeat slightly -- different in '06, than they were in the '05 coal year. They're fixed, so they're not variable tied to anything.

There's been some shift, as you can appreciate, watching the volumes move all over the place. There's been a shift of mixed between traffic moving to the East versus not as much that moved previous year, or more, as the case may be, East and West, and there's also the combination of other mines that we don't serve, granted they're small volumes at maybe 2 million ,which could have different price attached to them.

To come up with the -- their statement -- their overall statement -- that our -- their rail transportation costs are changing somewhat, is a combination of a lot of different factors. What we can tell you is that our prices are fixed. Our prices are very similar to last year, slightly under -- I think that's not new news, but very modestly under -- in that, looking forward to 2007, we're not about to give guidance, or incite, into the details of a confidential contract, but I have previously stated, when we first introduced it, that we believe, that even though it's variable in '07, and beyond, that based on what we know today, and even in the probably lowest world coal price scenario, that the rates will probably be -- very likely be -- at least equal to 2004 or better.

Okay.

Those are the kind -- that's the kind of guidance I have provided in the past, and it holds firm. I would say their news this morning, is no news -- no new news.

Okay.

With reference to the coal volumes, coal is down 10% in the fourth quarter. It's down again -- close to double-digits -- this quarter. When you think about your coal volumes for '07 -- because I want to spend time understanding the gaps here -- when you look at your '07 forward, do you see a situation where potash in '07, coal in '07, are actually better than they were the prior year? In other words, it's not just getting back to where we were, we're actually going to get net growth off of an '05 basis, as opposed to where we've been seeing the last couple of quarters?

Randy, again, I don't -- I can't control what the coal company can produce and/or sell.

So, what we've chosen to do is, say, on a relative basis -- remember there's Eastbound coal, a little bit of Southbound coal, and also export -- but looking at at the export side, because that's the big dominant piece -- clearly, as Elk Valley come out in, first, in December and again, in March, with revisions to their sales and production numbers -- this morning, I believe, they validated their 22 to 25 million ton range, I may be wrong, but I think that's the order of magnitude they validated this morning -- They're going to produce somewhere in the 3-million ton range, and we're going to move somewhere in a 3-million ton range.

So, our expectation going forward, is that, with coal at, literally, all-time historic pricing -- I think it's at $109 this year versus maybe $115 last year -- we would expect that anybody who's created the capacity, would want to sell and move as much as possibility at those kinds of price, which is are with two and a half to three times what they were in the past. They've moved up to the low-20s, 22, 23, 22.5 million tons of coal in the past. I would expect when they get their production capabilities in place, with the tire situation, that they would want to move in that order of magnitude.

Okay. Great.

Thank you.

Your welcome.

Your next question comes from Tom Wadewitz of JPMorgan.

Please go ahead.

Good morning. It's Tom Wadewitz.

Wanted to see if you could give us further color on the cost line items. You gave us pretty good detail on the slides, but it sounds like some of the cost you took out in first quarter wasn't at a full run-rate. I'm wondering if you look to second quarter and third quarter, would we see a further significance ratcheting down in some of the expense line items that could give you a nice boost on the cost side?

Tom, it's Fred.

I would suggest -- we don't give quarterly guidance, but directionally, obviously, we have only have a partial run-rate on, for instance, the 400FTE's that we were addressing with our management reduction. We have got some lay-off rates that if the business was not to materialize, that would continue at a full run-rate as opposed to the 200 that were gone in January and there's over 400 laid off today as a result of the efficiencies of the railway and some reduction in demand on the coal and potash side.

Its fair to say, directionally, we're not enjoying a full run-rate level of benefit in Q1, and therefore, that should improve as time goes on.

Okay.

So were those reductions -- and I guess I'm taking some capacity out of coal with the headcount and with leasing, I guess, some of the car sets -- was that more in March or was that earlier in the quarter?

From a people perspective, we dealt with about 200 right at the end of the year. After the December information from Elk Valley, we gave advice in late-December to take effect very early in January for about 200, and that number has ramped up about 100 a month -- another 100 in February, another 100 in March.

On the leasing side of things, we've only effectively executed on -- I believe -- one full car set is already leased and gone. The others are just being finalized, so you're, again, just seeing parts of that.

On the locomotive side, we have executed one deal where they're off the property. We have got some off on the US properties earning horsepower hours, and I would say we're 50 to 75% mobilized in that regard, but there's still more to come because, as it became clearer and clearer their volumes were materializing, we've ramped it up.

Okay.

And the, another question for you, from a high level, you certainly have seen some good cost execution in the quarter. You're running the railroad very well. That's good news. Then, you've got a lot of uncertainty about potash and coal. If the potash and coal don't come back through the year, does it make it pretty tough to be towards the upper-half of your guidance range, or do you think that there's enough on the cost side coming through that it's still possible for you to really be in the upper-half of that guidance range?

Tom, it's Rob.

We really don't want to get into that type of discussion. Obviously, we a range so that you can see what our challenges are.

As I said right at the answer to James David's question, we've been working pretty hard to overcome the head winds, so I think the range is there for a legitimate reason. Obviously, as Fred mentioned in his opening comments, the headwinds make it more difficult.

You can -- you're going to have to -- going to have to use your own models to figure out where it will put us.

We'll do the rest ourself.

Rob, I wanted, also, to wish you well in what comes next for you also.

Thanks, Tom.

Your next question comes from Bill MacKenzie of TD Newcrest.

Please go ahead.

Thank you.

I wanted to touch on the revenue guidance, which, as you said, is unchanged at 5 to 8%, but you have brought up your oil assumption fairly significantly for the year, which I guess, would have a positive impact on your surcharge. I'm just wondering if, in the past, you've given us a breakdown on that 5 to 8% between volume yield mix and surcharge, and surcharge presumably, having a higher impact now, I'm wondering if you can give us some revised components to that 5 to 8% in terms of where's the offsets -- presumably, some on the volumes, given what we're seeing with volumes -- but, just wondering if you can give us more detail on the 5 to 8?

Bill, there are a lot of parts moving here -- it's Fred -- I would suggest that you are correct that if WTI assumption is up, then obviously, there would be a little bit more on the FCA side of things -- the fuel surcharge revenues. On the other hand, there remains so much uncertainty on the bulk side, it's really hard to quantify exactly where the volume is going to come in.

So, I think -- you look at the impact of foreign exchange offsetting, largely, the WTI. You have a foreign exchange moving 3 or 4 points in our assumption as well -- I can't remember the exact number, I think it was $27 million, or 3%, in the first quarter -- so there's a lot of pieces to the puzzle, Bill, and I think what you'll see is the foreign exchange impacting us on the negative side, the fuel surcharge as a result of WTI being higher, increasing the top line, and pricing assumptions have been pretty consistent, and I don't see it changing dramatically at same-store sales in the threes and fours range, and the volume is the wild card.

I just can't tell you where it's going to be until I can get clarity from the coal company in particular.

That's great.

The second question -- I just want to talk about with the weather -- in the past, in Q1s, you guys have faced some pretty challenging Q1's with some of the outlines of a few year ago, and you've managed to try to put some numbers around the negative impacts in the past. I know it's difficult to quantify that, but I was wondering if there's any way to quantify or just talk qualitatively about what impact weather had positively on you in Q1?

Bill, again, it's Fred.

It's not something that one measures with any great precision because it's not something that we monitor, however, having said that, I want to stress for you that, for anybody who spent time in Northern Ontario as I did or Winnepeg as I did this year, we had winter. We didn't have the sustained 30 days of minus-40, legitimately, but we did have winter with lots of snow and lots of cold weather, even though it wasn't minus-40.

So, our assessment -- and it really is back of the envelope, I not going to pretend this is science -- our assessment looking at snow removal and other like-items, is that there's probably around $5 million of benefit that we think we might be able to identify, attribute it to a somewhat milder winter, but that's a range, plus or minus a couple million bucks.

That's perfect. Great.

Thank you very much.

Your welcome.

Your next question comes from Edward Wolfe of Bear, Stearns.

Please go ahead.

Hi. Good morning. Good afternoon -- I'm not sure what it is.

A couple quickies, first, for Brian, do you have the average with the hedge fuel price for the quarter?

The average WTI on the quarter was -- and I'm looking for that number here--

And if not, we can get that offline.

While you're doing that, maybe, Fred, it looks like in ramping down the coal, you ramped up the grain a bit. You talked about taking some of the coal assets down. Is that a fair way to look at it that maybe some of those assets were focused on the grain growth?

It is fair to say that the nature of the opportunity that materialized with the large carryover last -- from last year, plus a good grain crop, Ed, really provided us an opportunity, and we've seized that opportunity very well.

Our return cycle, frankly, on the cars to and from the coast are really, really good relative to the past, and as a result of that, the same number of assets are largely doing more work, and that's a good news story.

There is a -- obviously, to the extent that your growing this by the orders of magnitude we've grown by, it's inevitable that there are a few more people left that wouldn't have been there if we hadn't grown the grain business, or that there's a few more locomotives in the cycles, but the cars, in particular, are really moving well to the West coast.

I would just add, Fred -- to what Ed is asking -- we could have moved to coal and potash as well as that grain. We have the line capacity. We've laid off employees in the running trades up to 400, and we have the locomotives.

The cars are different. They are grain cars, and their spinning well, but we could have done the other tonnage as well.

Thanks, Rob.

That's helpful because that was my follow-up question was that if the coal comes back, do you give up a little grain, but I guess the answer is you don't need to.

We're not giving anything up if either the potash or the coal, or both come back.

Can you talk a little bit about the status of filling up the Western corridor, where the four trains are, what's on them, and how utilized they are in both directions right now?

I said, Ed, in the -- I think it was November or maybe the first quarter call -- I said that we expected to go from really 5 to 10% in the first quarter utilization, ramping up to maybe 50 over the course of the year. The reality is, in my opinion, we haven't used one bit of the new capacity that we've created. I'm not happy about that, but that's the circumstance.

Other than by having the capacity, you're seeing the fluidity of the railway as anticipated improved. So, we can continue to move several more trains, in my opinion, just to get back to where we were on volume in that corridor, and then, we have still have got all of that incremental capacity, plus we've created the capacity through fluidity. So, the way things are unfolding, if grain and potash -- sorry -- coal keeps coming back as we hope it will, and if the potash gets snow plowed out and pushes heavier volumes into the last half of the year, even with that, I think we'll really just be nibbling at maybe 25% utilization of that new capacity.

Okay.

How should we think about pricing at coal? At Elk Valley, the contract largely lapped itself in March. Yields reported were up 5.6. Should we think about that -- I'm guessing -- 1, 2% year-over-year going forward?

Again, with regard to the coal year starting April 1, what I was trying in one of my questions -- might have been with James -- simply to say to you that it's a fixed rate and it's slightly under the 2005 coal year.

So, you will see a modest -- modest decline in the per-unit rate, and it's fixed for the balance of the year through April -- or March 31, 2007.

Okay. That's helpful.

Thank you on that.

Thank you, Ed.

If I could just -- we've got a pretty good inventory of questions still remaining, so operator, if we could ask everyone to keep them tight and--.

Okay.

Thanks, guys, for your time.

Thanks, Ed.

Your next question comes from John Barnes of BB&T Capital Markets.

Please go ahead.

Good morning, guys.

Could you talk a little bit about -- I was trying to write down the numbers as fast as I could, but on the head count reduction during the quarter and what you have left under your existing plan, could you just give us those details again?

John, the -- we had indicated that we had finished the 820 and year-over-year -- that was about 130 reduction from the first quarter last year. Of the 400 that we announced and took a charge in the fourth quarter, 300 have left the property by the end of the first quarter, and we expect the vast majority will be -- will leave the property by the end of the second quarter.

Okay.

And then on the -- on your train crews, how many do you currently have laid off?

It's Fred, John.

It's just over 400 at this point in time.

Okay.

And those people -- are they furlowed? Can you bring them back readily if these volumes do come through?

Yes.

I think, in fairness to the employee team that we have out there, what we've tried to do is keep them fully informed as to the volatility, if you will, of both coal and potash because these are valued employees that we've spent some time and energy to recruit and train, and we would very much like to see them have a career with the railway.

So I would anticipate that when the volumes come back, particularly potash, which we think is imminent, we hoe it will materialize, then you'll see a number of those people come back, but the other thing we spend time on, John, with the folks, is that every year, on the running-trade side, we'll probably have attrition somewhere between 2.25 and maybe 300 people. Even if it takes another couple of months or quarters, as those people attrite and head into retirement, the people we have laid off will have a chance to come back and work.

So, they are laid off. They are available to us. Obviously, if we can't give them a future, they'll migrate to go work elsewhere. We'd like very much like to see them come back and work with us when the volumes materialize and when attrition occurs.

Good deal.

When you complete the 400 that you recently announced and took the charge in the fourth quarter, should we expect another round? Is this going to be a continuing process?

We're going to evaluate as we go forward, the needs of the railway.

At this point in time, there's no further plan. I think, though, that it's our responsibility to continue to monitor the benefits being generated by a very fluid and efficient railway. The classic example is when you look at the number of phone calls and the number of problem logs, they have just diminished dramatically, and as a result of that, that allowed us, in the last round, to basically shrink the size of the responding customer service department because there's nothing to respond to.

We'll continue to monitor throughout the Company, any opportunities to run our railway more efficiently, but until such time as we have a specific incite into where that is and what it might look like, there's no plan on the books.

Very good.

Thanks for your time.

Rob, congratulations, and enjoy your retirement.

Thanks, John.

Your next question comes from Ken Hoexter of Merrill Lynch.

Please go ahead.

Great. Thanks.

Good afternoon.

Rob, best of luck as well.

On the industrial price -- can you talk a bit about that? Are we going to see that lapping? Obviously, very, very strong growth year-on-year, is that something we should see -- are there a lot of contracts to come up for renewal, or are we seeing a normalized growth rate going forward now?

Ken, I think the market has proven to be very, very resilient in the industrial product size. It may be because the nature of our franchise is Alberta-based and the oil stands are very strong and just the whole economy in Western Canada is very strong, but our experience has been that we are successful in continuing to grow in that space. If you look at car loadings, remember that we exit a bunch of almost short-haul five-mile inner-switching type business, which -- on the [Inco] account -- other than that, the demands have been very strong. The pricing is good, and I would suggest to you -- we're using same-store pricing of high-threes to four. There's obviously a distribution in certain circumstances that allows to us come in more than that on a portion of that, and arguably, in very competitive circumstances, less then that.

I feel very good about the pricing industrial products. I don't see anything on the horizon to believe that we should temper our expectations in that regard.

Great.

On your velocity, I just want to talk about this a little more. Is this because of the West coast expansion that you're seeing most of this 17% boost on your velocity? Is this -- can you breakdown what is due to the expansion versus what is due to just overall network improvement?

Ken, I don't think I can brake it down scientifically with precision. What I can tell you is that the scheduled railway, the discipline our operating team has adopted as a way of doing business, has contributed a huge amount to the velocity of the railway.

Now, in addition to that, the investment that we made in putting those 25 strategically located facilities, or siding extensions, in place, clearly has benefited us tremendously as well.

I don't have the science. I don't know how I could give you the exact make-up, but I would argue -- my intuition is that more of it has to do with the adoption of the disciplined scheduled railway. The physical plant is fantastic because it's allowing to us recover if you get into a bit of a situation, which materialize, obviously, on occasion. I would weight it, intuitively, maybe two-thirds to the team's commitment to how we're going to run this railway and one-third to the physical plant.

Very helpful.

Thanks a lot.

Thanks, Ken.

Your next question is from Walter Spracklin of RBC Capital Markets.

Please go ahead.

Thanks very much.

Just to focus on this question on the service levels, and you talked about some of the infrastructure you've put on, and how that's increasing fluidity -- we have heard other -- [Wes Fraiser] mentioning that they couldn't get enough rail cars, would have moved more on the lumber side if they could have -- where is the bottleneck? Given the strong context of very strong demand for rail services in general, outside of the Western corridor expansion, where would you focus -- or where do you see the most -- the next key area in terms of bottleneck on your system?

Walter, well, for clarity, [Wes Fraiser] is not an account of ours in any substantive way.

With regard to the potential opportunity to de-bottleneck, I would suggest that this year, we're going to make an investment -- fairly modest -- in three or four sidings between a place called Dunmar and down towards our Kings gate gateway. That's going to open up our whole corridor for both export potash to Portland and US grain that comes up through from Canada and heads over to Portland on our UP-joint service. So, that's the only, quote, de-bottlenecking that I think we'll be doing this year.

Other than that, I think our franchise is in particularly good shape, and I think the fluidity that we're generating through the scheduled railway approach, the execution excellence approach, is deferring and pushing into the future the need for major capital investments.

Okay.

And just the last question on co-production -- you mentioned the CN co-production agreement. I think that's probably going to impact you more towards the -- in the balance of the year, but is there any -- if you were to look on your system, is there any obvious or interesting areas that you would see for future co-production arrangements with any of your competitors?

Walter, it is a very good question. Unfortunately, the circumstances are such that the most effective dialogue on those types of initiatives happen in private, and for me to advertise them, probably wouldn't be really wise, so I appreciate the question, but I think what we're going to do is pursue that dialogue. Obviously, we continue to pursue every co-production arrangement -- a couple in the hopper as we speak -- but until we have got them done, my preference, is not to get out ahead of ourselves.

Okay.

Thank you very much for your answers.

Your welcome.

Your next question comes from Dave Newman of National Bank Financial.

Please go ahead.

Morning, gentlemen.

Morning, David.

All the best, Rob, and enjoy your golfing this summer.

I hate golf.

There you go.

Conceptually, with volumes flat-lining to a certain degree, some pushed back on pricing in the fuel surcharge. Obviously, you've got the service transportation board review and on rates -- you hear some shippers complaining about the rates right now -- once we move past these contract renewal rates, and obviously, given the CapEx, that not only yourself, but other rails have invested, can we see some weakness on the yield story as we move into '07 in your view?

David, it's Fred.

I just don't see the forces. I think the forces are contrary to what you described. There's a secular change that has occurred. There's a tremendous demand for the rail services. There is a increasing pressure on the truck industry because the price of fuel is favorable to railways relative to them, and the driver available, given the quality of life and the regulatory rules, are such that -- everything seems to point opposite way from my perspective. That the secular change is favorable to the rail industry -- I don't see the model that you're asking about.

I think you mentioned in the past, it's 15% -- one, five percent -- that you can bang out at easy to your go-rates -- that you should be able to comp well on those this year?

Well, I did say, you're right, on one of the last calls, there was remaining, untapped, if you will, about 15. Obviously, as every quarter goes by that number diminishes. It's probably down to under 10 now, and yes, there is a mix of where there's a handful of accounts that have not been repriced. More importantly, I would say, David, that some of our expectations on that which we repriced 24 or 18 months ago, we may have been a little too conservative. There may be more opportunities, so while its not going to be a major step function increase, but it might be another point or two points on top of our regular expectations.

We think there continues to be some pretty strong pricing opportunity in the marketplace.

Okay.

And just specifically, on sulphur and fertilizer, we noticed that your yield is up fairly dramatically. Is there some sort of floor, or fixed price, that you have a guarantee with potash at all?

The reasons for that situation is really a math of mix change.

There's -- remember, we lump a bunch of stuff into sulfur and fertilizers. Obviously, there's sulphur, and there's fertilizer, and there's multiple types of fertilizer. So, I think the reason you're seeing number going, is your seeing some dry fertilizers not move. You're seeing an increase in some of the gases and liquid fertilizers that obviously, are dangerous goods and have higher commodity prices, or higher freight prices attached to them, so it's really more of a mixed issue than anything else, David?

Okay.

Last question -- just on the hedging on your stock-based comp -- do you guys -- do you want to add any color on what you plan to do there, and then, I'll let someone else take over?

We expect to have -- it's a total return swap with a financial institution in Canada, and we expect to have it totally in place by mid-next quarter.

Excellent.

Thanks, gentlemen.

All the best, Rob.

To keep with our execution excellence theme and fluidity, we'll go to the media now, and if there's not any media questions, Matt, we'll come back if there's any more questions from the financial community.

So, media now.

Ladies and gentlemen, if there any questions from the media at this time, please press the star, followed by the one.

As a reminder, if you're using a speakerphone, please lift the handset before pressing any keys.

One moment, please, for your first question.

There are currently no questions from the media.

Your next question comes from Bill MacKenzie of TD Newcrest.

Please go ahead.

Sorry. I just had one follow-up question on the land sales.

I was just wondering if you had any visibility on what the expectations are for the full-year for land sales? Given there was a big number in Q1, I'm just wondering -- is this something that would be recurring through the year, or is it just a one-time blitz in Q1?

Bill, this is Brian.

In total, as I mentioned at the start, is we expect other revenues, which include a component -- or, which land sales are a part of, to be in the 130 to 140 range, and that's in-line with previous periods.

Great.

Thank you.

This is really just timing between quarters.

Okay.

Your next question comes from Allan Dowd of Reuters.

Please go ahead.

Just following up on one thing earlier, you commented on the use of the capacity you added on the Western Canadian line. You said it, obviously, did improved train speeds, but it hadn't -- you hadn't gotten the extra usage you had expected.

Had you overestimated the amount of capacity you would need on that outside of coal? I'm just wondering because you delayed so long in making that -- coming to that decision to make those expansion plans.

Well, Alan, it's actually a combination of two things -- one is i did underestimate the massive size of the improvement in the fluidity based on how this new capacity is allowing to us to run the railway, that's a good-news story; second, though, is that both coal and potash traversed this particular piece of line, and as a result of the volatility in the potash side, according to the potash companies -- they believe it's just being deferred until after the Chinese-Russia negotiation is complete -- we'll see those volumes, but we'll see them concentrated into the last two-thirds of the year.

With regard to coal, if you follow the Elk Valley coal story, they've modified down dramatically. Their expectations on sales all the way down from 28 million tons to -- I think the range they're talking about now is 22 to 25.

When you look at what we built for versus what our two major customers are able to do -- one is pure timing in the sense of this year; the other is timing in the sense of Elk Valley still wants to ship those volumes, but they have to get their rubber tires, et cetera, in place that will enable them to ship it, which may now push them to late this year or next year.

I don't think we underestimated. I think two of our major clients -- one had short-term seasonality, and one had medium-term seasonality issues.

Thank you.

You're welcome.

Well, operator, it sounds like we're finishing right on time, so, I want to thank everyone for their attention.

The -- I'm sure Fred and the team look forward to speaking to you on the second quarter, and like you, I'll be interested in hearing what they have to say.

And I do want to thank all my colleagues in the financial community, particularly, when we became an independent company, for all the help all of you gave the team here at CP. So, it's been a good run, and I'm looking forward to the team having an equally good run going forward.

Thank you, all, and good luck.

Bye-bye.

Ladies and gentlemen, this concludes the conference call for today.

Thank you for participating.