Canadian Pacific Kansas City Ltd (CP) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Canadian Pacific's fourth-quarter results conference call.

At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference call is being recorded on Tuesday, January 30 at 11 AM Eastern time and will now turn the conference over to miss Janet Weiss, Assistant Vice President-Investor Relations of Canadian Pacific. Please go ahead, ma'am.

Thank you, Yvonne. Good morning, ladies and gentlemen. Thanks for joining us on our 2006 fourth-quarter teleconference.

The presenters today will be Fred Green, our President and Chief Executive Officer, Brock Winter, our Senior VP of Operations; Marcella Szel, our Senior VP of Marketing and Sales; and Mike Lambert, our Chief Financial Officer. Also with us on the call is Brian Grassby, VP 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 appendices, which can be found in the last section of the presentation material. The risks, uncertainties and other factors that could influence actual results are described on Slide 2 in the press release and in the MD&A filed with Canadian and U.S. 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 Web site, so please follow along.

After the presentation, we will conduct a question-and-answer session. If you have a question, please feel free to queue up now or at any time by pressing the star followed by the one on your touchtone phone.

Here then is our President and CEO, Mr. Fred Green.

Thanks, Janet. Good morning, everyone, and thanks for joining us.

2006 was a good year for CP shareholders and 2007 promises to be even better. Our 2006 results demonstrate that we're transforming this railway into a highly efficient business and we expect that our performance trends have improved efficiency and execution excellence will continue into the year head.

Let me give you a high-level picture of CP's results for the full year and the quarter. Then I will turn it over to the team to give you more details and some color.

Starting with the year, we made some major commitments 12 months ago and we delivered on those commitments. In doing so, we set a number of records that the entire team is proud of. Our year-end operating ratio was 75.4%, our record best, driven by strong yield programs and delivery of $95 million in expense savings. Our operating income was up--it was to $1.13 billion, a new high. Our cash flow was $245 million after dividends, another record. Our improvement in operating metrics was exceptional. We posted major improvements in safety, train speed and car velocity. Finally, we surpassed our original EPS target and grew 20% to C$3.95, compelling year-over-year improvement.

Looking at the quarter, the railway overcame some harsh winter weather in British Columbia that hampered the entire supply chain. Rain, wind and snow prevented shiploading of grain, potash, coal and containers. However, strong cost-containment drove EPS to C$1.15, an 8% improvement over Q4 2005. This put us right at the top end of the guidance which we provided to you back in the fall.

So, you can see why I'm pleased with the efficiencies that we've begun to create this past year. Our efforts are delivering results, and we see more opportunity ahead in 2007.

I will now turn it over to the team. Over to you, Brock.

Thanks, Fred. Please turn to

Slide 7. Twelve months ago, we told you that we planned to create efficiencies in our operating model, and we did that. In 2006, we improved train speed by 13%, we reduced our terminal dwell times by an impressive 19%, we reduced total cars online by 6%, and we improved our car miles per day by 11%, resulting in our equipment rents dropping. The result, we delivered 35 million in operating savings in 2006.

I will now review our Q4 performance and what it means for the year ahead. Despite some challenging weather in our Western corridor in December, we kept all of our promises and we expect to do so again in 2007.

In Q4, we delivered efficiency improvements through the innovative operating plan. We improved train speed by 6%, we reduced dwell time in yards by 4%, and this allowed us to improve car miles per day velocity by 7%. In turn, we reduced our total cars online by 3% and I'm proud to report that we continue to be the industry leader in train operation safety with a safety record that has improved 39% for the year.

Turning to Slide 8, we experienced some fairly adverse weather conditions in our Western corridor in December, and these conditions have persisted throughout January. This has come in the form of wind, rain and snow storms, resulting in port terminal impacts and road and rail line outages. The snowpack in the British Columbia interior is now the deepest it has been in 47 years. The good news is that conditions on the rest of our network have been better than average. We are closely managing this situation in British Columbia with our proactive winter protocols and the execution of our innovative operating plan is providing quick recovery. I am very pleased with how well my team is performing and how quickly and effectively we are recovering from these challenges. We haven't hit our full stride yet, but we well.

Now, let me turn to 2007 on Slide 9. In 2007, we're confident that we can deliver additional savings through improved efficiencies. We expect to see improvements in the AAR reported operating metrics, not as large as the 2006 step-function improvements but in line with our expectation of delivering a further 30 to $35 million in cost reductions in 2007. We're very focused on cost control, and our integrated operating plan is flexible and responsive to changes in carload volumes. We're well positioned to pursue further gains in efficiency. These are the opportunities I laid out for you at our November conference in the areas of velocity improvement, balancing our railroad, enhancing our maintenance efficiency, and continuous improvement of our safety management systems.

I can say with confidence that our IOP allowed us to deliver on our 2006 commitments, and we will continue to do so in 2007. We will continue to extract costs and improve service, and I look forward to reviewing our progress next quarter.

I will now turn you over to Marcella.

Thanks, Brock.

Let's start with freight revenues on Slide 11. In the next few minutes, I will summarize 2006, then Q4, and finally our 2007 outlook, in that order.

I'd like to start by noting that the strength of CP's yield program and the diversity of our portfolio served us well in 2006. Twelve months ago, we told you that we would deliver revenue growth of 5 to 8% and create operating leverage through our price, fuel and product offering. This past year, on an exchange-adjusted basis, we delivered 6% increase in revenues, average price increases on contract renewals of over 5%, average revenue per car and average revenue per ton-mile improvements of about 8%, and 274 million in revenue growth, all in spite of the headwinds in coal and potash.

So, let's look at the fourth-quarter commodity results on Slide 12. On the grain side, we delivered 37 million or 16% topline growth. This was on 9% increased carloads, a nice yield play. Coal remained soft with revenues off 29 million or 16% on the quarter. The variance is largely due to a combination of lower Elk Valley shipments and the sale of the Latta subdivision.

Turning to sulfur and fertilizer, Q4 revenues were up 19% on 6% higher carloads due to last year's late start on export potash shipments. As expected, forest products continued to experience a tough ride as diminishing housing starts and low lumber and panel prices affected the sector.

In the industrial products portfolio, revenues were up modestly on the strength of chemicals and the Alberta market. As you know, in 2005, we had a tremendous fourth quarter in industrial products, largely due to one-time Hurricane Katrina-related sourcing shifts. Auto revenues, as anticipated, were down but only marginally in spite of generally soft domestic markets.

On the intermodal side, revenues were up 11 million or 4%, driven primarily by our yield programs and the strength of the import/export segments. Volumes were flat, mainly due to a weaker fall peak.

So, despite some difficult West Coast weather in December, it was a decent quarter. All-in, revenues improved by 27 million or 2.5%. Fuel was flat quarter-over-quarter. Average revenue per car was up 6.9%, offset by negative foreign exchange. It was a good close to an excellent year.

Now, turning over to Slide 13, I will give you an update on our outlook for 2007. Fundamentally, there's been no significant change since our November meeting. For grain, our model is still based on strong exports continuing for the balance of this crop year, followed by an average crop and more traditional carry in stocks in Q3 and Q4. We are also still modeling some price erosion here due to regulatory impacts.

On the coal front, we've nothing new to report with respect to Elk Valley sales and production targets for full year 2007. The price changes we discussed in November will take effect April 1. As usual, I remind you that, in the carload comps, there's a negative impact of 40,000 annualized carloads dating back to June, 2006 from the sale of the Latta subdivision. Similarly, our assumptions for sulfur and fertilizers are also unchanged, and we still expect growth to be double digit.

Now, looking at our bulk seasonality for the year, I do expect some different patterns to emerge. The adverse weather Brock spoke about has delayed some of our traffic in the Western corridor, and we expect to catch it up later in the first half. Grain, due to the strength and quality of the current crop, should be strong on a comparative basis through the first half of the year. I expect potash to return to more normal seasonality with its traditional peaks in Q2 and Q4.

Turning to forest products, housing start declines and low commodity prices remain an issue. We expect to see more softening before this sector rebounds but this is the smallest segment of our book of business.

Within our industrial product portfolio, I am watching some of the economically sensitive sectors, but still expect growth to be solid overall. Alberta markets are still being modeled to lead the growth. Automotive remains a tough call, given the economic uncertainty in the markets. However, our transplant volumes look good.

Finally, in intermodal, we expect some early softnesses on the retail side and continued strength in the import/export segment. Additionally, we continue to focus on improving margins through velocity and productivity by leveraging our MaxStax program.

The pricing environment remains positive. We do have the two headwinds, coal price changes and the grain changes. However, we will be repricing around 60% of our book of business this year, we see no major changes in the price environment, and we are targeting renewals in the 4 to 6% range. As you all know, the STV issued a ruling last week on U.S. fuel surcharges. While we are still studying the order, on the surface, it doesn't appear to be material at this early stage.

So in summary then, our product is excellent and is creating value for our customers. We have a plan to deliver 4 to 6% in revenue growth. While there are some softer areas, segments like international and the bulks that are largely driven by global markets are in good shape.

So, thank you and over to you, Mike.

Thanks, Marcella. I will bring you through the financial results for the full year of 2006, then Q4 and then I will give an update to our 2007 outlook.

I'd like to begin by highlighting our 2006 accomplishments on Slide 15--revenues up 4%. Strength in grain, industrial products and intermodal more than offset weakness in coal. Operating expenses up 2%. This is a good result, given approximately 110 million in fuel price increase, 40 million in additional pension expense, and other inflationary pressures. Cost-containment was led by our corporate initiatives, namely our workforce reduction, the IOP and co-production, which brought in 95 million in expense savings for the year. Our operating ratio was a record 75.4%, an improvement of 180 basis points. This was in line with our expectations for the year.

Diluted earnings per share was C$3.95, or a 20% improvement over 2005. This is at the top end of our guidance range that we increased this past fall. We increased our dividend by 25% in early 2006, and our C$245 million in free cash flow was used largely to buy back approximately 5 million shares.

The balance sheet continues to strengthen with net debt to net debt-plus equity at 37% and return on capital employed at 10%, which exceeds our cost of capital. We are creating shareholder value and our team can be proud of these accomplishments.

Now, I will focus on the quarter on Slide 16. Total freight and other revenues were up 24 million or 2%. Excluding the 14 million impact of the strengthened Canadian dollar, total revenues would have been up 3%.

Operating expenses were up 8 million or 1%. Continued focus on cost management and the stronger Canadian dollar offset inflation. This translates into operating income of 320 million and an operating ratio of 73.1%, an 80 basis point improvement versus Q4 '05. Below the operating income line, other charges and interest expense were flat, as expected.

So, our adjusted income, which is before foreign exchange gains and losses on long-term debt and other specified items, was a record 181 million or a 6% improvement versus Q4 last year.

Tying out adjusted income to reported income, we generated a foreign exchange loss on long-term debt of 35 million in the quarter, net of tax. This compares to an after-tax 5 million foreign exchange loss in 2005. As well, you'll recall we reported a special charge for labor restructuring of 28 million after-tax in Q4 2005. Adding it all together, our reported net income came in at 146 million or a 6% improvement versus Q4, 2005.

Onto Slide 17, I will reconcile our Q4 EPS growth. Starting on the left, our strong yield program added C$0.14. Traffic mix and net fuel had minimum impact. Our initiatives, namely the headcount reduction and the IOP initiative, added 20 million or C$0.09 EPS. We began to lap our coproduction initiatives, but overall our targeted savings came in as expected. This strong performance was despite the following items. Wage and benefit inflation and pension expense impacted EPS by C$0.09. Purchased services, mainly increased locomotive servicing and information technology spend, cost us C$0.03. And lower land sales versus Q4 2005 and a number of smaller items impacted EPS by C$0.03. Overall, our team performed well, delivering C$1.15 in adjusted EPS or 8% growth in the quarter.

To Slide 18, operating expenses--starting at the top, compensation in benefits was flat on the quarter. Wage and benefits inflation and pension expense of 21 million was offset by 20 million in initiative savings from the IOP and headcount reductions. We can declare the our headcount reduction initiative of management and administrative employees has achieved its targeted 400 reduction and report that, at year-end, we had close to 6% or 1000 fewer employees on the property, which includes the stated management/employee reduction, running trade FTEs savings from the IOP and approximately 500 fewer capital employees.

Fuel was up a modest 5 million, driven by a reduced hedge position. WTI and refining margins were down slightly year-over-year. Materials expense was flat.

Equipment rents was down 5 million or 10%. The strength in the IOP contributed to this reduction. Depreciation expense came in as expected. Finally, purchased services and other was up 5 million, or 3%.

Foreign exchange helped out expense in the quarter by 12 million. So, all-in operating expenses were up 8 million or 1%.

So, as we look into 2007, on Slide 19, we are projecting a 4 to 6% increase in revenues, and Marcella gave you some color around that. Operating expenses are expected to rise 3 to 5%. This is driven by an anticipated 5 to 7% increase in workload, which would be offset by a further reduction in spend of 50 to 60 million. Brock's IOP team accounts for 30 to 35 million of this.

Given the trends in oil prices and foreign exchange, we now expect WTI to average $58 per barrel for the year at an average foreign exchange rate of C$1.15 per US$1, or US$0.87 per C$1. We expect to spend between 885 and 895 million on capital projects. Based on final 2006 results, we are unlikely to be in a cash taxable position in Canada for 2006, as initially anticipated. The planned 30 million balloon payment otherwise payable in Q1 '07 will not be required. This is due to a change in revenue mix and some tax-planning initiatives. Given this, we have upped our free cash flow to be in excess of 250 million for 2007. This free cash number includes pension funding of 150 million. Please note, we don't have the 70 million in cash proceeds from the sale of the Latta subdivision this past year.

There are still many moving parts to our business plan, but we remain confident that our diverse commodity mix and strong yield program will bring in good results and we will always manage our cost base. With that, we are reconfirming our 2007 EPS guidance of C$4.30 to C$4.35, or a 9 to 13% increase, respectively, versus 2006.

With that, back to Fred.

Thanks, Mike. So let me return to my key message. In 2006, we delivered the efficiencies we had committed to. I am confident that our yield program, integrated operating plan, and the focus on cost management will deliver further improvements in 2007. The market fundamentals for our industry remain solid, and our CP momentum gives us confidence to tackle improvement opportunities with enthusiasm. We remain firmly committed to our EPS target growth of 9 to 13%, and as Mike outlined, we're raising our cash flow expectations.

2006 was a good year but it's just the base to build upon. As promised, continued improvement in operating ratio will be our focus in 2007 as we continue the transformation of CPR into a highly efficient business.

With that, I will turn it back over to Yvonne and open the call to questions.

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. (OPERATOR INSTRUCTIONS). James David. Please go ahead.

Thank you. Good morning. When you looked at your fourth quarter back in November during the conference, you obviously weren't aware that the weather was going to turn like this. It would seem to me the coal kind of underperformed what you thought may be coming in the fourth quarter. Is it fair to say that the coal underperformed? Do you have any idea what weather might have cost you, what you might have left on the table?

James, it's Fred. I think your assessment is correct. Obviously, in mid-November, we had no way to predict the severity of the weather, which really started about the beginning of December and ran pretty close right up to Christmas and calmed down throughout Christmas and picked up again, unfortunately, in January.

On the coal side, demand is strong. Demand exists for our services and we were running very well and we ran into a situation when you get snow out at Westshore and they can't run the conveyor belts, they can't load the ships, that stops the supply chain. So between our own problems with some avalanches and deep snow and all of the wind that occurred on the West Coast--we saw that with the Stanley Park getting blown over--there were an awful lot of stops/starts. So the demand is strong for coal. It was a combination of the Westshore facility, the high winds, the ice in the coast and our own inability, because of the avalanches, etc., to get the coal to market. No demand problems on the coal side.

From an operating perspective, clearly we incurred some extra expenses on snow clearing and on the inefficiencies of our operations in an environment like that where you are stopping and starting. I think I will let Mike jump in here for a second on quantification of that.

Yes, James, it's always difficult to quantify something like this. You know, what were the revenues had weather not happened? But on a topline, we would estimate approximately 10 million, increased expenses, a couple of million. All in all, we think the quarter could have been better by a few cents or better had we not had weather.

Okay, thank you for that. The second question, Marcella, you mentioned, if I understood correctly, 60% of your book of business will be renegotiated in 2007. I'm sorry, I missed what you--you said the pricing environment obviously remains favorable but I missed what you talked about in terms of what you expect in terms of average increase. I'm curious as well. Do you expect that surcharges will be declining and if you sort of put a number about around that.

Thanks, James. Yes, it is 60% of our book business that is going to be turning over in 2007. What I said was that we were expecting a 4 to 6 price renewal target for the book of business that is turning over for that period of time. If you take into account--and I think I referred to this in November. If you take into account the escalations and other indices as well as the price renewals, it comes into about the 4% range.

In terms of the fuel surcharge, there's two factors at play right now. One is the lower WTI and the second is obviously the U.S. fuel surcharge ruling that we just received. On the general decline on the WTI, we had balanced that off in our book of business. We had taken that into account because we're looking for more coverage with our fuel surcharge, so between a greater coverage and a slightly lower WTI, right now, it looks like we're going to be coming out about flat.

With respect to the U.S. fuel surcharge impact, although we haven't completed our analysis of it, it certainly doesn't look material at this time, James.

Randy Cousins, BMO Capital Markets.

Coming back to the fuel surcharge issue, basically, the obviously only implies to your U.S. book of business. What would happen to, or what impact would it have on the railroad if Transport [Canada] took a similar approach?

Randy, it's Fred. As you point out, it only affects the U.S.-originated business. We don't know exactly but it's probably back at 10% or something that's fairly modest. I'm not going to speculate on what would happen, because I have no idea, A, whether they are interested or B, how they might address that issue, but I would make the overall statement that, for years, we've been appropriately telling everybody it's not a cost--it's not a profit center. So the difference is, if they cause us to change the vehicle with which we apply a charge, fine, we will do it. It's just the mechanics and the headache of having to figure out what that is. But the net result will be 0. I do not anticipate there would be any back to us whatsoever if any other regulatory body was to say to us they would prefer that we present the fuel surcharge in a different format or a different technique.

Marcella, you mentioned that you are expecting grain rates to be down in '07. The Wheat Board just came out and updated the guidance in terms of what they did in terms of export volumes. Is this a good news story for you or was that already embedded in your guidance?

It is largely embedded in our guidance, Randy. The price decrease we talked about, it's a combination of two things. One that we've built into our modeling is an expectation around the regulated grain VR CPI. The second piece that I included in the headwind is a potential, so a potential for some form of regulatory change, which we talked about in November around possible hopper car maintenance adjustments.

In terms of the volumes, we've pretty much built in strong volumes into our plan for 2007 (multiple speakers).

So the increased from 17 to 19 million tons, that's already in your numbers, in terms of export flow?

Most of the export flow is built into our numbers. Just to give you a context about how we plan to manage that, we were looking to increase our unloads, particularly in Vancouver.

Okay, great. Thank you.

Ed Wolfe, Bear Stearns.

Good morning. If you look at the 16% down coal revenue, what percentage of that, give or take, would you say is Elk Valley and how much of that is the sale of Latta?

On the coal revenue side, most of the deterioration is on the Elk Valley side. As you know, they are the largest part of our coal book business, so it's the volumes that were down that affected the revenue.

I mean, is it a couple of points of Latta? I know obviously there are a lot more in terms of carloads than they are revenue. but I'm just trying to understand when that laps itself since it's hard to know what's going to happen with Elk Valley, how much of this -16 goes away.

It's, I think, you know, a pretty detailed question, so Ed, if it's all right, I think I will have Janet and the team do some analysis and we can share that information. We're just not at our fingertips.

Okay, fair enough. Just as a second question, in terms of your cost guidance, you've maintained your cost guidance but you've lowered your fuel assumption from 65 to 58 WTI. The assumption is some other costs went up, I'm assuming. Can you talk about that?

Well, I think the basic approach is quite simply that we are very early in the year and as we've learned over the last years, everything doesn't unfold as one wants it to. I'm going to ask Mike maybe to just provide a little insight into that.

Yes, thanks, Fred. Ed, obviously, it is early in the year and there are many moving parts. Right now, we are tested by tough winter conditions, and we see a softening of some sectors in the North American economy. Earlier, I gave a sense of what the EPS impact was on the fourth quarter. You may recall that, last winter, so the first quarter last year, we actually had a better-than-average, favorable winter, and so we are up against some tough comparisons. If I had to give you an estimate just on the quarter for weather conditions, I would put it at in excess of about C$0.05, just the compares versus last year. So now, the tailwinds of course are WTI and FX as you just mentioned, but again it's early in the year. So we have a lot of work to do to deliver on the targets, and we're pretty confident that we are within our range.

That's very helpful. One last one, Fred--can you just talk about the direction of headcount, how we should think about that through '07?

Yes, Ed, I'm really delighted. The team has done a great job. Headcount has been a bit of a troublesome area and the work last year to really address it on both the supervisory side and the running trade side and finally on the engineering side all kind of came together, leaving us at the end of the year with, as Mike said, nearly 1000 down.

On a go-forward basis, if we are able and we anticipate, although the seasonality might be a little different than we originally anticipated, if we are able to move the kinds of volumes that we would like to with strong coal and potash and grain demands in addition to intermodal, then Brock will obviously require a modest number of incremental employees to get that done. I'm going to call it 100, 150 max. Remember, we've hired and trained an awful lot of people. Brock currently has over 300 people on layoff as we speak, so he will be able to mobilize some of those people to address any incremental volume that's going to materialize.

From an engineering perspective, we do have a larger engineering program or capital program this year, somewhat larger. You should anticipate, obviously, that we will bring on engineering forces in those construction period in the summer and the early fall months. But all-in, I would like to think that there might be really just a couple of hundred, at the max, more people. To the extent we can find efficiencies and use attrition by working our way through the balance of the business, it will be a wonderful objective if we can find a way to move substantially more business with exactly the same headcount. So I'm kind of giving you an aspiration to be at about the same level of numbers, but I think it would be quite reasonable if we were 100 or 150 higher.

Thanks a lot. That's great. Thanks for the time.

Tom Wadewitz, JPMorgan.

Good morning. Let's see. I wanted ask you a little bit about some of the volume trends. I know a lot of your business doesn't have direct sensitivity to the North American economy. But are you assuming that there's any areas that are sensitive? Are you assuming there's a pickup in the second half or is that the type of thing where you would perhaps see some upside to the volume expectations and guidance if we see the broader economy pick up?

I think, John, it's fair to assume that we are a little back-end loaded. I think everybody in the business is anticipating a little bit softer first half of the year and picking up second half.

Of particular interest I would suggest to you that the forest products you're starting to see, which I don't know if it's going to be good news or bad news. You're starting to see more and more merger talk or merger discussion now. Recently, the big merger this week, which will conceivably lead to more rationalization, which may trim back some of those activities, those volumes in the forest product side, the paper side in particular in this case.

I think on the industrial products side, we are experiencing, if you look at carloadings across the industry from what we can tell, certainly a little softer than we anticipated in the first quarter. So, we've got the benefit of having the oil sands, which beefs those up with lots of activity, but all that said and done, we've still find that sector to be probably the one that's not materializing quite as we hoped it would. So that's kind of a snapshot.

The balance of the business, as I said, on the bulk side, tremendous demand. There is, as everybody is aware, we have a modest backlog on the West Coast. There's a bigger backlog overall, but there's clearly strong demand for our services, both import and export, that those sectors look like they're going to remain robust for the balance of the year. We've actually had some encouraging news lately on the potash side. It appears as though they've sold some good volumes into South America. That should increase our demand as we go forward.

Okay, so it sounds like you maybe have a modest improvement baked in for second half but not relying on it all lot.

Any thoughts on intermodal specifically? That segment has remained somewhat weak. Is that just economic sensitivity? Is it domestic segment or there anything else going on there?

I mentioned to you, in November, Tom, that some of the sensitivity that we were experiencing on intermodal side was loss of some volumes around the Port of Philadelphia, the operator of the there had had a strike. So that took us out and by the time we replaced the facility and started to get the volumes back, we saw some volumes disappear there.

The other place we saw some volumes disappear was on our shorthaul business, particularly related to the backhaul lumber business that moves in containers. So we saw some weakness in those two particular segments.

So, going into the next year, we are looking to see stronger volumes on our import/export side. The domestic is going to be a little bit week. For instance, you may know that the retail side in Canada, they've got a lot of full inventories because the winter that they had hoped for hadn't materialized for them. It's too bad Quebec and Ontario aren't in B.C., because they would have gotten the winter that they wanted. They've got some inventory issues they have to deal with in the short-term.

Just for a perspective, you know we are pretty well at the end of January. We're certainly on plan on our intermodal business, and we are ahead of last year, and we've got a backlog at the ports. So there's no evidence to us that there's a dramatic softening of that business. I think Marcella described it well. It's stronger on the international side as people source from offshore, and I think there's a little bit of adjustment going on in inventories based on some slower sales than expected in the East.

So you think we will see some growth in intermodal but perhaps maybe a little modest in the near-term?

I think that would be right, Tom.

Okay, thanks for the time.

Walter Spracklin, RBC Capital Markets.

Just on the other revenue line, you had, I believe, previously guided 130 to 140. You came in quite a bit higher at 156. I'm just wondering. Was there something--what was in there for the fourth quarter that drove that line item?

It's Mike. In terms of guiding in the fourth quarter, I'm going to actually turn it over to Brian to give you the specifics of the quarter. Brian, do you remember what was in the quarter that caused it to be higher?

No, there were just various land sales and leasing transactions, nothing there to note. We were trending higher towards the end of the year and finished at 156. We expect that number to come down without a similar Latta sale in 2007, so we should be in the 140 range next year.

Okay. the second question is on ethanol. Obviously, that's becoming a hot topic with Bush's State of the Union. The Journal is saying that, to hit his targets, it would require the entire U.S. crop. So your closest link I guess would be on the potash side. Campotex obviously has invested in railcars; you have the excess capacity. You know, the magnitude of the increase that they're talking about, however, are you poised for that? Are you ready for that? How soon could that come in your estimate?

Walter, we are reading all the same information and getting the same information from our customers, so I think we are aligned on the need for the U.S. to grow and convert a lot of land into corn crops. We have got a very strong partnership with a domestic supplier. You know, Campotex, as you know, is the export supplier of potash but the mines and the members of Campotex all have domestic business. So we are very well-aligned, particularly with Mosaic, to serve the U.S. market and with a few other customers, Agrium. So we are well-poorest to serve the U.S. markets with potash and other fertilizer nutrients that are required. We've built a lot of those into our plan for 2007. We have the car supply, the equipment ready to go.

Okay, well, that's my questions. Thanks very much.

Scott Flower, Banc of America Securities.

Yes, good morning, all. I just wanted to get maybe a little color. I know you all talked about the overall target for savings and obviously the IOP you delineated out. Of the other 20 to 25 million, could you give us some color on where the bits and pieces are of where you pick up those savings?

Scott, we are scrambling, figuring who is going to answer this question. We haven't provided a lot of specific detail because (multiple speakers).

Just color.

(multiple speakers) of initiatives.

--the types of areas that those expense saves will come from. It doesn't have to be granular detail, 5 million here, 5 million there, but just what types of things will contribute to those saves.

Well, let me just give you just a couple of broad ones and Brian can jump in and provide a little bit. We have the IOP, which is a big chunk of what we're doing. It's the third year of a program and we think there's more beyond that. You will recall, in November, I suggested to you that we were going to introduce the first year of what we phrase a program called AORI. It's simply accelerated operating ratio initiatives. We are pursuing across the breadth of our $2.2 billion spend an evaluation of what could be spent differently or how we could spend obviously less using some third parties who have worked elsewhere in the industry and had great success.

So we have embedded in 2007 a number between 5 and $10 million as the first year of what will become a multi-year program with benefits out into '08, '09 and '10. Obviously, our belief, although subject to validation, is that those numbers will grow substantially in the future.

There's probably a handful of others such as coal production hitting its stride in a few other areas. I am really reluctant to get into too much more specific than that unless there's a big item, Brian, that I am missing.

No, Fred, I think the only other item is that the workforce reduction really took place part in Q1/Q2, so we will have a bit of a lap in the first part.

Yes, that's full year run-rate, Scott, on the workforce reduction on 400 people. I'm going to guess about another 10 million probably in there somewhere.

Okay. Then the other question is just to clarify between Marcella and Mike's statement. Of the 6.9% average revenue per car, did mix or fuel surcharge contribute any of that, or is it basically all predominantly price?

Scott, it's a mix of items in the average revenue per car. It certainly is price and yield. We've got some different hauls, different changes in terms of where we are moving our traffic. So it's a combination of all those factors, Scott.

Well, if you were to break it, how would you break it to give me some order of magnitude between the mix versus price bucket?

The greatest proportion of it would be more on the price side. Probably two-thirds would be on the price side, Scott.

I'm sorry, two-thirds?

Yes (indiscernible).

Is fuel surcharge basically negligible?

I'm sorry, did fuel surcharge--?

Was negligible in its impact?

Yes.

Very good.

In Q4, it was negligible.

Very good. Thank you very much.

David Newman, National Bank Financial.

Just on your plans for--obviously your free cash flow was up a little bit. What are your plans with respect to dividends, dividend payout rates and buybacks for '07?

Well, firstly, the good news is that our free cash flow is higher than our initial models for '07 and higher than '06 despite it coming up against the proceeds on the sale of the Latta sub. Also, as we improve our OR, our free cash flow, we think we will increase, it will continue to increase. As you recall, we do have a share buyback program in place. We expect to fill that by the end of the first quarter. So, we are currently contemplating our investment options for our free cash flow and we will review our plans with the Board in the first quarter.

But directionally, though, it could be--could we look at around 3 to 5% being sort of the order of metric?

On what? (multiple speakers)

Just in terms of the shares that we bought back, would you buy up to about 5% again this year or what would you (multiple speakers) last year?

(multiple speakers) get ahead of the Board on that, David. I think the simple version is that if we have opportunities to invest this cash in a business that is, in some way, shape for form, going to feed the mothership or is part of pure rail, then obviously that's the highest and best use of it as long as it is accretive. Failing that, we've been pretty consistent over the last number of years ensuring competitive dividends, ensuring cash is used for buying back shares. But all of those issues are really Board matters and the sequencing is such that our call is prior to any Board meetings. That subject matter will be discussed at that time. I don't think it would be appropriate for me to get ahead of the Board.

Okay. Just switching cares, in terms of your intermodal, I mean, obviously, you see Hapag-Lloyd selling their terminal or terminals; I'm not sure which they're selling yet. How long is that contract? Would there be any impact on you guys in terms of volumes or is there a minimal threshold in that contract? If I recall, it's about a 15-year contract in total.

It is a very long term contract, David. It would be inappropriate to get into the specifics of the contract because it's confidential, but I can say with a pretty high degree of confidence that our relationship with Hapag-Lloyd is very, very strong. I think their parent company, TUI looked to the multiples being generated by similar facilities across the world, including in Canada (indiscernible) and Delta Port, and with their own kind of debt issues decided to monetize an asset.

There is nothing in that set of deliberations between parent company and Hapag that would give us any concern that they are, in any way, shape or form, going to have an impact on us. Our discussions with Hapag is they are delighted with the service levels we've provided; they went through a year of consolidation last year trying to sort out and merge the two companies. We think there are poised to be a very strong player and the terminal sale is almost collateral to the issue.

Okay. This final one if I could? On the coal volume, I mean, obviously it's still fairly--I don't know if there's any final terms as to what the tonnage might be. But are you still fairly confident that you're going to see a 2 million-ton incremental delta in terms of the coal volumes that would be shipped from Elk Valley?

Well, I think the situation, David, is that, as Marcella said in November, we don't know what we don't know. We can only work when we have specific data. So Marcella and her team are working very closely with Elk Valley, but Elk Valley obviously has to be given the discretion to negotiate both volume and price on a global basis with multiple contacts. Until they can get that done and until they announce--and they would have to do that obviously publicly--substantial conclusions, then it leaves Marcella's team basically as a taker of information. In addition to the information that we provided--or not in addition but as consistent with the information we provided back in November, our game plan is a 2 million ton increase at a set price that we think about C$92. But we gave you all of that transparency only because we don't know. We will really have to wait for them to give us more information.

Yes. Do you think the (indiscernible) give resolved earlier than last year, or--?

It's a little hard to judge. It's not uncommon, if you look back over ten years, for the negotiations to progress well into the first quarter.

Very good. Thanks a lot.

Ken Hoexter, Merrill Lynch.

Good morning. Just a lot of things you've already hit but I just wanted to follow-up on the savings from the IOP. You kind of looked at 35 million of savings kind of flat year-over-year. I just wanted to see if you kind of thought you were being conservative, particularly with the increases that Brock talked about on the velocity and decreasing terminal dwell, or kind of if you felt that was a good number. Then talk a little bit about the Western expansion, where are you in adding trains and opportunities to fill it up?

Ken, it's Brock. I'm comfortable with the 30 to 35 million. Now, that's--again that's additive to what we've done previously, 55 in the previous two years, so this is 35 on top of that, which we've achieved. So I'm comfortable with that, Ken, in terms of an estimate going forward, in terms of '07 in terms of IOP benefit.

In terms of the Western corridor, we are consuming about 80% of the capacity, 50% of the additional capacity that we built. So again, you might recall, we said four trains in total. We've consumed about two of those four trains, so that's where we stand currently.

Right. Nice job on keeping the costs down. Thank you.

Bill MacKenzie, TD Securities. Mr. MacKenzie, please go ahead.

[Sal Vitale], Calyon Securities.

Good morning. Most of my questions have been answered. Marcella, can you just provide a little bit of color on the intermodal volume side, maybe a breakdown by international and domestic, please?

Well, I think I gave some good direction in the sense of we are going to have a softer domestic side. It's going to grow, but it's going to grow in the low single digits. On the international side, we should see a much stronger growth going into the year.

Okay, thank you very much.

Bill MacKenzie, TD Securities.

I will try that again. Just a couple of questions, first on the cash flow statement. I was just curious. On the operating activity segment, there's a $73 million number in there. I'm just wondering what that line relates to.

That would be--that line relates to the pension funding in excess of our--of the expense taken. So that's where it shows up in that line.

Okay, great. That's what I thought. And then second just on the fuel surcharge, could you just give me a sense as to what percentage of your business, I guess as measured as a percentage of revenues, is now covered by your fuel surcharge program, excluding any of the sort of annual indices and adjustments?

Yes, Bill, a couple of things in terms of overall coverage in terms of the documents--we are up into the high 90s. In terms of coverage on revenues, we are over 90%.

Bill, if I may, just for clarity, though, because this is a subject that we've covered for a lot of years, not everybody is consistent with it, it's important to be able to understand we have a vehicle for fuel recovery on the numbers Marcella referred to, but it's not all fuel surcharge. Some of it is indexed and some of it is other arrangements. So I just don't want anybody to think we have a fuel surcharge on 90-plus%.

Right. I guess that actually was the detail that I was trying to drill down onto. I was wondering how much of that 90% is covered on kind of your monthly surcharge program, as opposed to some of the annual indices or your hedge program.

Yes, I don't recall off the top of my head. It's probably certainly less than 50%.

Okay, great. All right, that's it for me; thank you.

(OPERATOR INSTRUCTIONS). Mr. Green, there are no further questions at this time. Please continue.

Well, very good. Thanks, everybody, for joining us. We look forward to seeing you in the next call. Bye now.

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