Canadian Pacific Kansas City Ltd (CP) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Canadian Pacific's second 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'd like to remind everyone that this conference call is being recorded on Tuesday, July 24, at 11 AM Eastern Time. I will now turn the conference over to Ms. Janet Weiss, Assistant Vice President Investor Relations of Canadian Pacific. Please go ahead, ma'am.

Thank you, Cerin. Good morning, ladies and gentlemen, thanks for joining us for our 2007 second 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, joining us today are Kathryn McQuade, CP's newly appointed Chief Operating Officer and 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 sensitivity to these assumptions in the appendices, which can be found in last section of the presentation material. The risk, uncertainties and other factors that could influence actual results are describe on slide one in the press release and in the MV&A filed with Canadian and US 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 two. The slide are available on our website so please follow along.

Just so everyone is clear, the purpose of this call is to discuss the latest quarter and the outlook for the year. As you know, there has been speculation in the media about possible transaction involving CP, we responded to that last week in a news release and there has been no change in the situation since then. We don't intend to comment further today on this speculation. Following the presentation, we will conduct a question-and-answer session. Please feel free to queue up for question now or at any time by pressing star followed by the one on your touch phone. Here then is our President and CEO, Fred Green.

Good morning everyone and thank you for joining us. Q2 was a quarter of new records, we experienced some tough weather this quarter, four-weeks straight and in spite of those challenges posted records in work load, revenue and operating ratio. This quarter we grew adjusted EPS by 12%, we moved record gross ton miles. We increased our freight revenues by 8% to 1.2 billion, an all-time high. And we delivered a Q2 best operating ratio of 74.7%. I'm extremely proud and appreciative of our teams efforts through the strike. We worked safely and productively and truly demonstrated what we mean by execution excellence. Last quarter, I told you that CP had become a more resilient railway that are able to manage through and recover from disruptive events. This quarter we proved that again.

This quarter we also strengthened our team with the addition of Kathryn McQuade. Kathryn is our newly appointed Chief Operating Officer and a real veteran, who came to us from Norfolk Southern. I'm extremely pleased that she joins CP and know that she'll contribute to the intellectual leadership of the Company. I'm going to turn it over to the team to walk you through our operations, markets and financial results. What you'll hear from Brock, Marcella and Mike is that we're growing operational momentum. We have strong bulk markets and we're committed to delivering within our EPS guidance range. I'll come back and wrap up before going to Q&A. Brock over to you.

Thanks, Fred. Before I turn to my first slide, I would like to remind you that our goal is to be safest most fluid railroad in North America. We continue to be a leader in train operation safety and our FRA personal injuries have fallen by 39% over the last four years. On our fluidity goals, we can say that this quarter was about continued recovery through good planning and execution. We dealt with the lingering effects of Q1 weather challenges, flooding that the high snow pack brought on and just to test our metal even more a 26-day strike by our tract maintenance forces. Our operations have been strong in the face of these events, as you will see the numbers to follow our commitment to our key principals of train bound velocity and daily saluting of volumes is speeding our recovery on all of our key fluidly metrics. We can say with confidence that despite very challenging operative condition we've delivered solid operating performance with an excellent safety record and will continue to do so for the remainder of 2007.

Turning to slide six, let me tell you why I believe that. We told you last quarter that despite the tough winter, we remain convinced that we would return to 2006 performance levels and better for the remainder of the year. I'm happy to report that we've done that on three of four metrics and where it really counts by running with fewer car assets. To hammer that point home, our car loads were up by 6% while our cars on-line were down 1%. Train speed has remained stubbornly below 2006 levels as a result of a higher mix of slower bulk train and weather related events. However I believe with the work we're doing on scheduled compression and powering up some of our heavier trains in the western corridor this will allow us to improve upon this metric. I'm very pleased that we recovered on our yard dwell time. This is a function of our work to introduce lean management techniques in all of our major processing facilities. Car miles per day were less volatile in Q2, due to reduced frequency of line outages. Most importantly, it's tracking better then last year with a 10% improvement and this is in line with our expectations. This has allowed us to move more business versus 2006, 11% more GTMs in fact with fewer car asset and we did it with only 4% more train miles so we're making better use of our train capacity.

I expect we'll maintain and improve upon on our performance on dwell time, car miles per day, and total cars on-line and my team will be very focussed on recovery of our train speed performance. We said that we could generate savings of 30 to C$35 million in operating expenses in 2007 and we remain on track to deliver on this. We'll do this with the execution of our integrated operating plan, our focus on velocity, a balance railroad, efficient maintenance and improve safety performance.

Now let's turn to slide seven. I just want to share some of the key learnings that came out of the strike. I'm very proud of what we accomplished. We had over 1300 management employees deployed to perform track maintenance activity for 26- days. And we managed to safely deliver record workload of numbers. These employees really came through for us. This gave us an excellent opportunity to experience first hand with a new set of eyes opportunities to improve how we plan and execute our track maintenance activities and we're going to accelerate our efforts in this area.

I'll just touch briefly on some of the key learnings. We have an opportunity to empower our frontline employees to take on more responsibility for maintenance activities and make decisions on the spot. We can improve our active supervision practices which includes planning, scheduling and communication of the tasks to be done. We have opportunities to make better use of natural maintenance windows and provide for 7/24 coverage and finally, we believe that by giving our frontline workers better remote access to key operating systems they can be much more productive. The overall theme is that we'll make our maintenance, planning and execution a whole lot more fluid and efficient. We'll talk to you more in detail about this at our analyst day in the fall.

So to recap for the quarter, we can say with confidence that despite very challenging operating events we delivered solid operating unit costs and employee productivity performance and we'll continue to do so for the remainder of the year. We look forward to reviewing our operations performance with you next quarter and I'll now turn you over to Marcella.

Thanks, Brock. As Fred noted we had a record quarter on several fronts and this was certainly true for revenues. Solid bulk fundamentals, good yield results as well as carry forward volumes from Q1 resulted in topline freight revenue growth of 8%. We're in line with our revenue guidance range for the year. We capitalized on our global strength to offset some domestic weakness, once again demonstrating the benefits of our diversified portfolio.

So turning to slide nine, I'll cover the quarter by market area. And I'll start with grain. It was up 9% on the quarter reflecting strong exports, carry-in inventory and good product performance, particularly on our eastern export program. These are solid results. Coal was up 13% reflecting the recovery from Q1 challenges. Volume gains were offset by some 7,000 units from the Latta sell and this is the last quarter I'll need to flag this.

As expected, sulphur and fertilizer was up 37%, over 2006. The key drivers were the recovery and seasonal normalization in pot ash exports as well as increased domestic fertilizer demand due to higher corn acreage. Turning to the merchandise portfolio, forest products remain soft, dampened by weak lumber and panel sales. Industrial product was up a solid 6%, supported by strong pricing renewals and automotive was slightly lower due to timing. So overall the merchandise group was up 1% on 4% fewer units showing good yield. And rounding out the second quarter results intermodal had continued import/export strength, from organic growth at both the ports of Montreal and Vancouver, this offset some weakness in domestic shipments. Growth from good short haul cross border lanes reduced average revenue per car and the net result was overall intermodal growth of 3%. I'll sum up the quarter on slide ten. Freight revenues were up 8%, this broke down as follows. Volume and mix had a positive impact at 6.4%. Foreign exchange and the coal price change we've discussed previously had a combined negative impact of about 3%., and price was up 4.5%. Of note, fuel was essentially flat despite a lower average WTI reflecting improved coverage and last week we announced that we are extending application of our on highway diesel-based fuel program. This program will further reduce exposure to refining margins.

Turning to contract renewals, the second quarter averaged more than 4% with our year-to-date results tracking at 5%. So once again, a good quarter on yield tracking as expected on renewal increases and same-store. As a final note before leaving price, cents per RTM are down, this metric is highly sensitive to traffic mix change and we've seen a lot this quarter. The change does reflect longer haul mix changes driven most notably by the return to normal, export pot ash, moving in highly efficient unit trains using shipper supplied cars.

Turn over to slide 11 and I'll update you on our market outlook. Overall bulk demand looks solid. For grain, we're modeling a good crop year. Canadian plantings are up about 4%. Moisture is good and grain prices are high, supporting a solid export program.

Turning to coal, our previous model of 2 million metric tons over 2006 holds. As I've said previously, volume gains are tempered on the revenue side by the April 1, out selling price adjustment. Within the sulphur and fertilizer portfolio, pot ash demand remains robust. As a result we do expect this segment to perform alt the higher end of our forecast at 12 to 15% growth. Although , comparison will be much tougher in latter half we're bullish on the long-term prospect here, as you know.. The bulk strength will offset lower growth rates in merchandise. Forest products we're modeling continued weakness for the remainder of the year. Within industrial products chemical and energy strength will be tempered by lower steel shipments which are impacted by the reduced conventional gas drilling. There is no material change to our automotive outlook with import strengths expected to offset any domestic volume softness. Of course there was exciting news this quarter for merchandise and bulk with our announcement of CP's plan to serve Oil Sands production activity in the Industrial Heartland just north of Edmonton. The planned access will position CP for near-term growth in the construction phases as well as the ultimate outbound products. We've launched our marketing program and we've had a very positive reaction from customers and government.

Finally, in intermodal, we expect continued strength the on the import/export side driven by global trade. Overall, then, bulk demand is fundamentally solid, indeed the global outlook is particularly strong in the bulk's and import/export sectors. On the domestic side I'm keeping an eye on manufacturing retail and other domestic indicators. The strengthening Canadian dollar and mixed U.S. economic indicators place these areas on my watch list. We have got up much of the traffic delayed from the tough first quarter and we're tracking well on price and improving fuel recovery.

So in summary, we've had record revenues in the second quarter based on strong global fundamentals, solid yield results and catchup of Q1. With CP's diversified portfolio, I expect to achieve our full-year revenue growth target of 4 to 6%. And Mike, over to

Thanks, Marcella. Let me start by saying that we delivered good results on revenues, volumes and costs per workload but our financials were impacted by a number of events including weather, a 26-day strike, and expanded fuel refining margins. So, our challenge for the balance of the year is to overcome these headwinds. Also in the quarter we were active in restructuring our balance sheet to make it more efficient. We brought on C$450 million in us dollars of new debt and we commenced with our new share buyback program and bought back 2.5 million shares. Today, I'll review our non-GAAP numbers, which are before foreign exchange gains or losses on long-term debt, and other specified items. For your reference, you may review our GAAP earnings in the appendix of the presentation or go to the public filings.

Let's turn to slide 13, and I'll take you through the income statement. As Marcella reported freight revenue was up 8%. Other revenue was down C$3 million as expected and is still tracking at approximately C$140 million for the year. So, total freight and other revenues were up a healthy C$85 million or 8%. Operating expenses were up C$59 million or 7%, mostly driven by fuel price, which limited operating leverage on the quarter. Operating income was C$308 million up 9% and the operating ratio was 74.7%, which is 30 basis points better then last year. As we look below the operating line -- below the operating income line, other charges were flat while interest expense was up marginally which reflects the new debt taken on in the quarter. So our adjusted income was C$175 million or a 9% improvement versus Q2 last year. This is solid performance, given the headwinds we faced.

On slide 14, I'll reconcile our Q2 EPS growth. Starting on the left, wage and benefit inflation and pension expense impacted EPS by C$0.03. This is in line with the run rate we expected. Fuel margin and the impact of the strike cost us C$0.13. Despite our reductions in cars on-line, lease rate inflation , fewer subleases and lower offline receipts cost us C$0.04. Now adding to EPS was C$0.15 of volume, net of expense, and C$0.11 due to price. And C$0.07 from the final stages of our head count reduction and IOP. IOP execution continues to be strong for us. All other items reduced EPS by C$0.01. Adding it altogether we delivered C$1.12 in adjusted EPS or a 12% growth in the quarter.

Moving to slide 15, and operating expenses. Compensation and benefits was up C$9 million or 3% on the quarter. While wage and benefits inflation expense of C$9 million was partially offset by lower pension expense. The run up in CP's share price was only partially offset by a total return swap. As I looked to head count, the quarter's numbers were clouded by the impact of the strike. So to normalize things for you, if you remove the impact of the strike, head count would have essentially been flat. For the year, head count is expected to be up 100 to 150 on a normalized basis which is consistent with our past comments. Fuel was up C$34 million or 21%. Despite favorable year-over-year crude prices, upward pressures on refining margins cost us C$25 million in the quarter.

For the full year, we expect the impact of refining margins to be almost double what we originally anticipated. Materials expense was up C$1 million or 2%. Equipment rents was up C$13 million or 29%. As in the first quarter, lease rate inflation and lower offline receipts were moving the number up but given the volume cushion in the second quarter we had some additional locomotive leases which ran the quarter above our expectation and limited the improvement in cars on line. I still expect a run rate of near C$55 million per quarter for the remainder of the year. Depreciation expense came in as expected and finally purchased services and other was up a marginal C$2 million or 1%.

Foreign exchanged moved expenses down on the quarter by C$5 million. So all in, operating expenses were up C$59 million or 7%. If I remove fuel price expenses would have been up only 5%. This is a good result given the 11% increase in workload.

As we look to 2007 as a whole, on slide 16, we expect revenues and expenses to meet our original guidance and we are now modeling WTI at C$65 per barrel and a average foreign exchange rate of C$1.10 per U.S. dollars or C$0.90 for Canadian dollar. Our capital project spend remains between 885 and C$895 million. Free cash flow remains in excess of C$300 million, and in April, we announced an expanded share buyback program where our intention is to repurchase up to 10% of our share float through March 2008. In Q2, we purchased 2.5 million shares at an average price of C$72.63. To close, Q2 had mixed results. Financially, it was good but we continued to face some headwind and as I said last quarter the railway is running well, the demand is there and our confidence in our ability to manage controllable costs remain. There's no change in our 2007 EPS guidance of C$4.30 to C$4.45 or a 9 to 13% increase respectively versus 2006. Now, back to

Thanks, Mike. Before I wrap up, I would like to give you a labor update. Six days ago our maintenance of way employees ratified a new three year agreement. I'm pleased that the new contract has been approved by the membership and that our people are back on the property. The settlement was within our pattern as we committed to. At the present time, we're actively negotiating with the teamsters who represent our locomotive engineers and conductors in Canada. We have entered into conciliation with a federate appointed mediator and we are optimistic that a negotiated settlement will be reached. Some of you may have seen late last week that the arbitrator in CN's Conductors and Engineer Arbitration selected CN's offer of 3% per year consistent with our pattern so we believe there's good reason for my optimism.

So let me return to my key message and wrap up, this quarter, CP once again demonstrated its resilience. There were a lot of disruptive events but in spite of them we moved record volumes and achieved sequential improvements in our key operating metrics. Metrics are headed in the right direction and expect the improvement to continue. The global nature of our traffic base is driving some strong volumes and as Marcella said, the outlook for the balance of 2007 is for continued strong bulk demand.

Finally, rising fuel refining margins and the strengthening Canadian dollar represents significant challenges but our plans remain unchanged, we expect to deliver within our EPS growth rate range of 9 to 13%. Now before I turn it over to questions, let me remind of you what Janet said at the beginning the call. The purpose of to today is to discuss the latest quarter and outlook for the year. A press release was issued responding to media speculation about a possible transaction involving CP, I don't intend to make any further comment on that speculation today. With that, I'll open it up to questions.

Thank you, one moment please. (OPERATOR INSTRUCTIONS) . We will take questions from analysts until five minutes before the hour and then we will go to media. Your first question comes from James David of Scotia Capital. Please go

Good morning all. Marcella you mentioned your expectation for a good crop in the '07/'08 period. Had the same question yesterday for CN but given '06/'07 high quality, good carryover you had tremendous period with some offset from weather. Base on the idea of a good crop, you probably still face a tough volume comp in '07/'08 versus '06/'07. Due have opportunities to offset that with some exposure to U.S. agriculture?

I'm sorry, with some exposure to what?

To the U.S. Ag business. Do you have enough exposure there to corner anything that would provide volume offset to what could be a tough comp?

I think you're right, James, we are going to have a tough comp in the grain business. We're modeling a good crop year for the year. The increase, according to the Ag Canada's latest report is a 2% increase in volumes. We expect to be able to move those increased volumes on the export side, particularly through the balance this year and into next year. On the U.S. side we do move export grain as well, James. The export grain on the U.S. side breaks down a bit differently. It's about 40% export and 60% domestic but we've seen some strong movement to the export side, PNW particularly because of the vessel spreads.

Okay. Thank you. Just quickly on your intermodal. It looks like you had a drop off in freight rates in the is second quarter. I didn't quite catch the explanation and was curious is the issue related to the quarter? How she we think about rate for the second half of your intermodal?

Our pricing and rates on the intermodal side remain solid and on plan. What we had going on in intermodal was a couple of thing. It was really driven by our import/export business. On the domestic side we had a bunch of shifts in mix. For instance we had a strong growth on short haul movement, particularly U.S. moving into Canada and particularly into the Alberta region. So our strong short haul movements tended to offset the long haul and that's why you're seeing some of the play in what a looks like average revenue for car but the pricing does remain solid.

Would you characterize it as a bit a transience thing for Q2? In terms of export it is mix issue that's going to persist.?

No, I think it's a mix issue that will persist and it's lively driven by Alberta. We saw it growing in Q1 and Q2 we saw the growth strengthen.

Okay. Many thanks.

Next question from Ken Hoexter of Merrill Lynch.

Good mid-day. On the sulphur and fertilizer as well pricing was a bit weak. Is there something similar to what you just explained on the intermodal side affecting pricing there? And I guess my question really derives, Marcella , I don't you dealt into peer pricing, I know your revenue target was 4 to 6%? Can you comment on what peer pricing on same-store sales basis would have looked like for the

Yes, in fact I did refer to that, Ken. The pure pricing on a same-store basis was 4.5% on a contract renewal basis it was 4% this quarter and if you look at year-to-date we're tracking at 5% on contract renewals so right in line with the target range that I identified back in November. Now if I can turn to the sulphur side, the issue that's going on the sulphur side is the return to normal of these export volumes that we saw through the first -- particularly, the second half of quarter two and what we've got is the highly efficient unit train moving in shipper supplied cars. So that impacted the way the pricing looks to externally.

Just for clarity, that's the combination of pot ash and sulphur?

Yes, pot ash and sulphur all move in shipper supply cars.

And if we look at your outlook, Fred noted you're looking for C$55 fuel as we look today we're at 73 today. We've been at 75 the last couple of days, is that -- can that impact you significantly still or we still are still about 85% covered. I'm trying to wonder how quickly you can adapt those surcharges based on where refining spreads are going and what you have build in and what is going on with WTI as well.

I would happy to speak to the coverage. We've got good and improving coverage. We've got coverage of almost 100% of our traffic, over 95% of our traffic is covered in some form of fuel. Of that, we have a portion of our business, about 30% that's directly covered by a margin and we've got another portion of our business, which is about 30% of our business, which is covered by an indexed margin so you'll see that lagging. So we've got good coverage across our contracts. We are going to be moving as I mentioned. We're expanding our on highway diesel fuel program. So we'll be seeing that program expanding to capture some of the refining margin growth over the year.

Ken, it's Mike, I'll jump in in terms of the impact for the year. You will recall at the analyst say we said the refining margins were going to impact us by about -- call it C$35 million for the year. The refining margins have moved on us and we're estimating it will be nearly double that. Now eventually, the coverage will catch up to us but the impact on the year, because of the refining margin is part because the coverage that's half WTI and the other impact is the lag on the indexes that cover the refining margin. That's a big headwind for us to face this year.

Great, thanks.

Your next question comes from Bill MacKenzie of TD Newcrest. Please go ahead..

Thank you, Marcella just wanted to start on the sulphur and fertilizer side. You're guiding to the higher end of your previous expectations, I guess is now 15% revenue growth for that segment, is that right?

Yes, that's right, 15 to 17%. 13 to 15, sorry, thank you.

I guess year-to-date you're up around over 30%, obviously very, very robust demand in that segment. But I guess 15% implies roughly flat year-over-year is that the way we should be looking at the revenue outlook in that category given now that you're starting to face that much more difficult comps.

I think you've identified the key issue, Bill, on the sulphur and fertilizer portfolio. Going into the second half the year we're going to have tough comps. If you remember last year because of the price negotiation on the pot ash side. The export pot ash side, found ourselves moving almost a full year's volume in of half a year. The second half of the year so the comps will be tough going into the second half so you will be seeing that play throughout the rest of the year and we will come in still at the highest end of the guidance in this portfolio.

Just to follow-up on that. If revenues are flat for the second half, we should assume volume's down a little bit with some continued price gains in that category?

You'll see the volumes flattening out over the balance of the year. Price remaining the same.

Great, thanks. And Mike just a question on the cash tax situation. Can you just remind me. I guess this year you'll be cash tax payable. Want to confirm you're still expecting that with that cash tax payment due in '08 and I guess in '08 you'll have the double cash tax issue. Can you give me a sense as to what your total cash tax expectations are for '08 on a double accounted basis and on a go forward basis once we get through '08 what would be a more normalized cash tax rate to expect for years beyond that.

Thanks, Bill. Actually I think it's showing that you're listening to me. We projected this year, initially we had projected we would be cash taxable this year. Because of mix and tax planning we deferred that to 2008. We haven't actually publicly disclosed what 2008 would be. Let me say this on an on going basis I think you can model 20 to 25% of our pretax income will eventually be cash taxable. Next year we'll be impacted by a balloon payment and on going payment. If I was modeling I would put in something like C$75 million balloon payment and another 75 on going. So 150-ish would be something you would model but we haven't made anything publicly available yet.

So the C$150 million includes the balloon payment plus the '08 on a more normalized cash that's the double cash.

That's what I would model next year. We'll firm that up at our analyst day in November.

Okay. Thank you.

Your next question comes from Ed Wolfe of Bear Stearns Investment. Pleas go ahead.

Good morning, guys. The analyst meeting you're referring to, do you have a date.

Do you have it already?

The 30th of October.

October 30th, Ed.

Thank you and a city.

New York, Ed.

Now you are talking my language. Hey, Fred just kind of a bigger picture question. With your volumes coming back and up so strong, particularly in pot ash and coal, I would have thought you would have seen more margin leverage then you saw. You've got 40 basis points but you take away the 8 or C$10 million of cost savings and your margin is down year-over-year. Should we think you're not seeing that leverage because of the change in the coal pricing from the contract and maybe that's not your most profitable business right now. Is that a way to think about it or am I missing something there.

You put on a couple chunks Ed. Big questions. Let me give you a broad overview. There's no question that we deliver the 12% EPS growth despite pretty substantial pricing reductions on the coal franchise which is a big chunk of revenue as everybody was made aware of back last fall. So, while we're delighted to have delivered 12%, we are disappointed in the sense that the straight cost and the lost revenue, during that period not substantial but enough to hit the bottom line and the fuel refining margins as Marcella described it. We're unoccurring the expenses but a lot of recovery has lagged it is in fact disappoint, we look at 12% and think it feels good but could have been better. The opportunity to leverage this franchise and incremental volume is obviously still in front of us. We would have liked to have done even better then the 12% EPS growth but we'll have to take that in the future as the margin improvement on the recovery from the fuel surcharge starts to kick in.

Okay but outside of those couple of one off thing that's worked against you. When I look at '05 and '06 when your volumes were negative you were improving your margin 200 basis points, give or take each year and now we're doing less then that. Is there something beyond the coal. It's almost like less volumes are better because you're turning the assets better.

I think Ed you really have to take a good look at the operating metrics and clearly the second quarter, the first month of the second quarter was a recovery from the first quarter's very difficult operating circumstances and the fourth -- sorry, the third month of the quarter was the floods and strike activity and everything under the sun. So if you -- I'll give you an example. The last seven days, if you look at train speeds. You would see that the train speeds are back up to what we were doing last year. Our data for the quarter that we are talking about doesn't reflect the productivity recoveries and improvements but as we move into the rest of the year, the team's expectation is we'll get not only back on track to what we did last year in those things but also that we'll improve upon them as we are committed to. There's no question we're a little disappointed that it's not even better then the 12% EPS growth but I think you have to be realistic when you face a number of thing we've faced this quarter it's a performance we're not disappointed in. Just wish it could have been better.

Ed, I'm going to jump in,its Mike, financially at least. I think the way we see it is we had some big challenges in the quarter. Call it the Elk Valley pricing that's one headwind, call fuel another headwind and the impact of the strike. Despite that we moved volumes that were record volumes and we did it all with essentially the same head count on the property. So some very good messages, I think for the Company going forward efficiency and execution is something that we think of everyday and I think once with get 100% coverage on the refining margins going forward I think it it bodes well for us.

Okay, and Mike, at these prices where the stock is, are you going to actively buy back stock up here?

That is a good question I don't want to signal anything in terms of the current pricing or whether or not we think it is going to remain but I will say this, we've got a share buyback program in place. It's our intention to fulfill that objective of 10% and even at these values it's accretive.

So, I take from that you're going to buy some back but you're going to try to be opportunistic.

We will always try to be opportunistic buy low, sell high is something that we think of all the time, but our primary objective is to buy back 10% of our float.

Okay. Fred I'm going to dancing around your outline if you just don't want to answer, don't answer this but you as an operator and manager of the company. Have you looked at and would you consider dividing the real estate from the operating company does it add anything and I asked Canadian National the same question yesterday.

You know, Ed. It's a model that's been around for at least a couple of years if not longer. I think every investment banker and their brother has walked it around to the different companies. We've looked at it in the past but we've never found any form of compelling economic business case to proceed down it. I guess you never say never, maybe somebody can develop or create a new angle that we haven't thought about. It's never been a convincing argument. When everyone is looking at those types of things it's important to understand. We're the safest railway in North America when it comes to train accidents. One of the filters that I demand that our team looks at when people consider scenarios like you are describing here, is that we really have to be sure that whatever model is being contemplated consider safety and it considers the infrastructure and the ability to run trains as safe or more safely then we do today. So, it's a model that's been around we haven't found a way to make it work and if there ever is one because of some new introduction to an aspect we haven't been presented or thought about ourselves the safety is the key thing for us making sure that model works going forward.

I appreciate your candidness with that. Longer-term when you look at improved cash flows be the share buyback. If you complete the share buyback moving from two to three times debt EBITDA. What are you thoughts in terms of what your credit rating should be. Investment grade versus not as you look at your need to tap those debt markets longer term.

Mike, jump in for this.

I know I've been asked this over time. I've talked about this issue with many and I'm not sure if I can add a lot of color but essentially I said the rail industry as a whole has room to take on more debt so I'm not only talking about CP I'm talking about the industry as a whole. Today's business reality for the railway is very different then a decade ago. The industry has never been in better shape and CP has never been in better shape. We have real pricing power created by supply and demand being in balance. We have mega-trends that support increased demand for Canada's resources and increased imports from Asia to North America. We operational performance that continues to improve and it's driving lower costs and improving customer service. So, you put that altogether, things have never been better, but, as you said, the governing factor is keeping our investment grade so we're a capital intensive industry and the railway's access to reasonably priced financing on an on going basis is a must. I've said this over and over again and so I believe the coverage ratio but not debt to equity are an appropriate measure for considering the amount of debt. I believe the industry has room on the balance sheet for more debt and so do we but our challenge is not only convincing ourselves, it's convincing our our partners, which are the debt rating agencies.So we are mid investment grade and we believe that's the most that provides for the most efficient pricing in today's capital market. We'll want to keep it that way.

Appreciate your candor again, thank you.

Thanks, Ed.

Your next question comes from Walter Spracklin of RBC Capital Markets. Please go ahead.

Thanks very much, good morning. Just on the compensation and benefit side, Fred you mentioned you do have that settlement and you're in the process of going through negotiations again with your teamsters. You've generally guided us in the past to a 5% overall benefit, comp and benefit growth. Is there any reason why we should change that net of any of your head count adjustments.

No, Walter this it's Mike, again. Let me jump in. First of all let's talk about the quarter because I think the quarter's a good indication of how we're doing. Essentially we moved more product and we increased the workload with essentially the same head count. If you look at our compensation and benefit line, it's up about 3% and what that is essentially inflation of 3.5% offset by pension expense going down. So I think in terms of unit price modeling you should model something around 3.5% inflationary increase.

Okay That's great, thank you. Next question for Marcella. You mentioned on the industry consumer products side, you said you were seeing lower steel shipments as an off set. Your general feel on where that sector is going this year. If you can update on that given we are half way through the year now. What is your sense?

Walter, the overall industrial products side from a market outlook. As I mentioned I've got it on my watch list. There's part of the portfolio that is showing strength. One of the areas of strength which I'll mention again is the pricing side. We've got good solid pricing in the whole IP portfolio but there are the domestic economic indicators that's are putting pressure on the markets from the Canadian dollar in that sector in this case because of conventional gas drilling so you got the smaller diameter pipes that are not moving. We do have significant increases on our large diameter pipe movement but overall it will, in my view temper the portfolio.

Okay. Okay. And perhaps, if you could -- you gave us a great step graph there on terms of quantifying the impact of those separate items. I'm trying to isolated; however, the impacts that you had that are not going to continue past the quarter and by that I'm focus okay the weather and the strike. (Inaudible) Fuel and so on will continue, but if you were to put an EPS estimate if that's possible around the weather impact and the impact of the strike where would you put the peg in that. Mike you could probably address that.

Yes, Walter I like to look at it from an EPS prospective. Let me remind you that the impact that we said that was related to fuel margin and strike was around C$0.13. In round numbers I categorize two thirds related to fuel and one-third of that related to the strike. In round numbers. In terms of the impact of weather on the second quarter, you recall the first quarter had big impact. I think we said something like a dime in the first quarter. It's nowhere near that level for weather impact in the second quarter. Difficult to access. Did we lose any revenues. It was more cost for preparedness and the cost of fighting through the weather. I would call it a penny or two, in round numbers.

That's it for me. Thanks very much, guys.

Your next question comes from Tom Wadewitz of JPMorgan. Please go ahead.

Yes good morning. Wanted to follow up. There's an earlier question on call about operating leverage and I understand you explained some of the things in the quarter that are working against you. I guess maybe if you can comment on timing to address the fuel issue where you're getting hurt by the refining spread widening. Is that something which gets addressed in second half '07 or is that more '08 or '09 event and what do you think about in terms of operating leverage improving and seeing stronger margin expansion as you get beyond some of the headwinds from second quarter.

Tom, it's Mike. I'll jump in in terms of the fuel coverage and maybe comment also on the operate leverage. On the fuel coverage, it's the lag that's going to impact us more then anything on the refining margin. So we think we've got good coverage, call it half of our coverages is on fuel margin. We'll move eventually to get most of that. Meaning most of the fuel margin or the refining margin covered. I would call that two to three year program to get the majority of our book of business eventually covered-- or refining margin covered. In terms of this year I wouldn't look for us being able to impact that significantly. We've worked that into our outlook. In terms of operating leverage, once that's behind us and we continue to focus on other costs we believe there's operating leverage in the business.

So, you're say we should look for stronger margin expansion in the second half or we shouldn't?

I think you just need to do the math we've given you 9 to 13% EPS growth. You know what we've done year-to-date.

Sure. Okay Fair enough. I guess I was just trying -- we can look at is and it seems like you take a little conservatism in the forecast and okay. Let's see. On the yield growth automotive in intermodal you talked a little bit about them. Do those effects continue in second half or does some of that -- I guess the short haul traffic in intermodal is that more of a one time thing and then you have more normal yields third quarter, fourth quarter?

Tom, you're right it's a short-term thing, just mostly around time when the vehicles flow onto our system and we've got some switch and mix as well as we typically do in any quarter. We should go back to a more normal view that you would see through the balance of the year.

Okay. Great. Thanks for time.

Thank you.

Your next question comes from Randy Cousins of BMO Capital Markets. Please go ahead.

In your waterfall chart you indicate that savings, I think it was C$0.07 from the initiatives including the head count so based on 150 some odd million shares outstanding that implies about to C$10 million worth of savings in the quarter for an annualized basis that's north of C$40 million. What I'm wondering is coming back to Brock's original slide is there anything incremental left to come in terms of IOP savings or are we basically looking at the run rate already in the the numbers.?

Randy, it's Brock. I think there is more to come and we've delivered in the last two years as we talked about last year, C$55 million in the past two years. We're still confident, 30 to 35 and we still think there's more to come the next couple of years over and above that.

In terms of this year Brock, it sounds like you've already got the win at least in terms in the IOP benefits now in terms of the Q2 numbers.

No, in fact we fell behind as Fred mentioned our difficult operating circumstances in Q1 and Q2 was a challenge but we think that in Q2 we made good headway and we believe the run rate, obviously, is going to get us to that 30 to C$35 million by year-end.

You guys have a new Chief Operating Officer with an experience base that's in another organization I assume she's had a chance to sort of take a look at your operations. I wonder if Kathryn would comment on opportunity to take some of the best practice that maybe Norfolk had and put them into CP or opportunities that she see to improve costs and make the Company run better.

Randy I'm going to make this easy for you I don't think it's fair with four weeks under Katherine's belt to make those statements but I can assure you she will be a very featured speaker in the fall presentation to the investors.

Okay, great, thank you.

Your next question comes from David Newman of National Bank Financial. Please go ahead.

Good morning.

Good morning,.

Another question on your share price appreciation. Assuming it is up for Q3 over Q2, can you true up your swap at all to immunize your cost and benefits line or might we see a modest hit in Q3?

It's not a hit that you're seeing. Actually we've already had some impact in Q2. We haven't quantified it because you may recall a year ago we also had a hit. I think trueing up a return swap to free it up 100%. The analogy that comes to mind is closing the barn door after the horse is bolted. So I'm not sure this is the time to make it 100%. We're going to continue to look at opportunities and consider our share price going forward but one of the filter that's we're looking at is we expect on going to that our share price will increase and so we'll want to put in had a total return swap that covers the majority of any share price increase.

Very good. Just strategically if you look out, Fred, how can you push the envelope on coal production. Do you think you can extend that beyond just physical network to perhaps include down the road hump yard, intermodal terminals. Is there anything you can do to push the level of corporation that you have with the other railroads.

I think the concept is appropriate. I think what we've learned over the course of the last several years is that as we gain respect for each other. As we gain confidence in each other, this is our various partners, it opens up the dialog about the scope of things one might be prepared to enter into it. Now, obviously there will always be the family jewels as people protect as they should but there's (Inaudible) a broad scope of things beyond what we've accomplished so far that I believe should well be in the preview of the teams looking at co-production opportunity and I can tell you that we are exploring wide variety of things and so I'm excited about the opportunities in this regard.

Anything on the front burner we can sink our teeth into it.

I'll let you know when we get deal. All right and last one, obviously a little strikeout in the BC Coastal Forest. Do you expect any impact, obviously, this is a region that has been less defamation by pine beetle situation. Any flows that you're seeing there early on? I think David, we have to put in prospective that our total Forest products franchise is I think 7% of our business. Lumber is down to 2%. And as you look at the data you can see it's taking a beating at 15 to 20%. Car load and reductions so our assessment is that it's going to be reasonably modest relative to what we've all experienced over the last couple of quarters.

Very good. Thank you.

Thank you.

Your next question comes from Scott Flower from Banc of America Securities.

Good morning, all.

Good morning,.

Just wanted and I know we've talked about a lot of different things but obviously the crack spread and refining spreads are a greater impact then you thought, but obviously you're holding onto your cost guidance and i guess, I'm going to figure out where are you -- if you are waking up that delta have you shoot into some of the buffer in your guidance. Butt maybe you had a little bit more room there and is that tighter or so you have found other thing that's are helping you in different ways to mitigate obviously, what is something you didn't necessarily anticipate as you went in this year on the crack spread.

Scott, when we put toward our guidance we try to make it as real as we possible can. It got some tough stretch but a bunch people have a been initiatives to deliver. There was no float in there, what happened is time evolved and circumstances changed and it became apparent to us that this spread would be more aggressive then we thought it was. It caused our team to go back to the operating committing level and figure out what could we do differently that we hadn't previously planned upon. and I can assure you that the team has work those files very hard and will continue to do so through the course of the year. They've had to be creative to figure out how to make up that 10, 20, C$30 million that of things that we didn't anticipate. The effort that we have underway, I believe, will in fact still deliver in our range that we'v said that we could do and do that with confidence and absent any new extraordinary events, we've plan to do that.

No, I just wanted to get some sense of what are those things that you were able to come ups with as you tried to manage the business. A couple of examples maybe.

To make it simple, Brock and his team have reconfigured and reconsidered our IOP for yet another generation. Things that we didn't think we would be able to get to this fast and they've found ways reconfigure the train operation. If look at our operating metrics (Inaudible) you'll see train rates continuing to improve and you'll see our train speeds continue to escalate. You'll see our yard processing activities are better then last year. Despite a pretty rough beginning to the quarter in Q1. There's a whole series of initiatives in that regard, we're going to look at improving the train speeds on our coal trains which we think will help us crank more stuff through that busy western corridor and do that by powering up those trains. I could spend a long time giving you specific.

That's good. The other question and maybe there again moving parts and pieces but I know Marcella talked about price and firmness and talked about contract renewals and not to nitpick because there are mix all over different quarters and when business comes up et cetera, talk about contract renewals in the 4% range in Q2 the year-to-date being higher is that then telling me that the marginal rate of increase is slowing. Is that somewhat to do with domestic. Is that this quarter includes some of the Elk Valley reductions when you're talking about 4% and therefore it weighs down the average. I'm just trying to understand the difference between Q2 renewals versus year to date, which obviously would precede those earlier renewals a higher rate of change..

Our pricing program is firm and sustainable. If you recall the guidance and what I indicated today is that our price renewals were going to be in the 4% range and we're actually tracking bit over that year-to-date. On a same-store basis we're right on target in the 4.5% range. Those numbers exclude the impact of the Elk Valley price change. If you recall, overall for the organization if you take into account the Elk Valley price change and the FX impact I said that would be a headwind against the same-store pricing so overall on price we would come in at about 1 to 2%. This the first quarter we've seen the impact of the price change on the coal because that commenced on April 1, so we were front end loaded on the price side. You're going to see the coal price impacting through the balance of the year and the target overall is 1 to 2%.

Very good. Thanks all.

Your next question comes from Cameron Jeffreys of Credit Suisse. Please go ahead.

Thanks very much. Just have one followup on the foreign exchange rate in terms of your assumption for the balance of the year. We saw your main competitor go to C$0.95 for the balance of the year yesterday an C$70 oil assumption. Can you just go through the rational in terms of stick kind of below where the market is in a couple of those cases and what the risk might be. I know on the FX side I think the FX rate would have to average 91 or C$0.92 for the balance of the year in order to come in where you guys are expecting or what your guidance is based on.

All we can say is that what we've modeled it. We expect it to come off between now and the balance of the year. We're declaring what our model is so you can understand the impact. If for stance it doesn't happen as we have models, I think we put out there that every time change is sent on average for at year. So it has to change significant for the balance of the year. If it changes a penny it's worth about a penny EPS.

And on the oil side as well? What's the-- is it still C$8 million. Is that the delta on the operating cost side.

On the operating cost side. The WTI, I think as Marcella has alluded to us, doesn't impact us very much because we have pretty good coverage on the WTI. It is the refining margin that impacts us.

A question for Marcella. I apologize if you answered this but just on the sulphur fertilizer side in terms of pricing for the balance of the year or revenue per car load where you expected that to come you saw a bit of a drop here with some of the pot ash exports on a year-over-year basis improving obviously. With the second half the year you should be more apples to apples as that ramped up would you expect pricing to be continue to be or average of revenue per car load continuing to be fairly weak or bounce back here in the back half of 2007?

Our sulphur and fertilizer portfolio is a very good portfolio and I remind you that the pot ash all of our export pot ash and our sulphur are moving in shipper supply cars and they always have moves in shipper supply cars. This is a really good business. You will probably see through the balance of the year that the pricing that you're seeing today go through the balance of the year. It's not going to change much. We've got the return of that pot ash on the long haul basis.

Right, but you had that in the second half of '06 as well, correct. Wouldn't you be flat with 2006 if that was the case. If I looked at average range per car load in the C$2,400 range. Wouldn't it be reasonable to assume that would be the similar level this year because you had some of the pot ash coming back in the second half of '06; correct or is there something else here that I'm---

There's one other factor that's playing off in the portfolio which is the sulphur side, so so on the sulphur side there's some business that we had planned to come in and it has not come in yet. On the sulphur there's an issue around the availability of the sour gas for the production of the sulphur side. We're seeing a mix change between the pot ash and sulphur that affects those numbers which is why you're not seeing them track exactly the same.

Okay. Great, Thank you very much for the color. That's helpful.

Your next question comes from Jacob Bout with CIBC World Markets.

Had a question on the intermodal volume side. When you take a look at the ARR data, clearly you've been outperforming your peers both for the second quarter and year-to-date. Maybe you can speculate what you attribute that too and do expect this performance to continue.

Well, intermodal has been a strong -- I can't comment as to whether or not I'm going to outperform my peers but I can tell you that we've particular strength on the import/export side on both of our ports. Port of Vancouver being stronger then the Port of Montreal which is what we expect to see and I do expect that strong growth in those ports to continue. We've also had our improvement in the New York port if you recall last year. We had spoken about a strike issue that affected our ports in the northeast U.S.. Those ports are back on and our volumes are back on from those ports as well. So overall, I expect that we'll be holding volumes on the import/export side and on our intermodal portfolio overall.

Okay. I'll ask this a little differently then. Do you think that you're doing anything differently then your competitor, basically to account for why your intermodal volumes would be significantly higher.

I can tell you this that we're lined up with customers that we're very happy with and a lot of it is based on the organic growth with our customers. We've also significantly improved our service to all of the ports and they're encouraging our customers. The customers we're working with to increasing our loadings at the ports. We've increased allocations to our key customers and we're seeing them use up those allocations as they come in.

Okay and then just a question on operating leverage. There's been a few questions on this but maybe you can talk about what your targets might be in 2008.

Jacob, it's Fred. In the fall when we get together with everybody we'll do what we normally do is it to provide a good, clear decisive plan with regard to 2008 but we're not going to get into that on the quarterly call at this point, thanks.

Thank you.

If there are any questions from the media at this time, please press star followed by one. As a reminder, if you use the speaker phone please lift the hand set before pressing the key. Your next question comes from Alan Dowd of Royters. Please go ahead. There was a bit of speculation earlier in the quarter and they listed you among the possible partners with the Dakota, Minnesota and eastern folks in terms of their Powder River expansion. Any interest, is that a project that interests you at all?

Alan it is Fred. I think the only answer that makes any sense is that we're an organization that desires to do a great job with the franchise we have. We are an organization that is always on the lookout for an opportunity to grow in a business that we're familiar with but it would be inappropriate to have any comment with regard to a specific piece of property until there's a time for a public comment, whatever that maybe be. At this point in time all's I can say is that our interest is to grow this business as well as we possibly can and as efficiently as we can and I can't and won't comment with regard to any specific property.

Thanks.

Thank you.

Your next question comes from Brent Janz from the Global Mail. Please go ahead.

A question for Fred. The earnings per share that you've maintained for 2007, and for 2008 I was wondering if you could just reiterate or highlight a few growth opportunities because obviously if your earnings per share grows in 2008 and catch up with your current stock price and justified the current evaluations.

Brent, again, the way we prefer to do this and we're going to do this is provide a very comprehensive overview of our opportunities for 2008 and beyond but we do that in the fall. We do it webcast and with do it with everybody aware of our intent to do. So I don't think it would be appropriate for me on a call like this to be talking about one off possibilities. Anything that we stated in the past with regard to as an example the Toyota Facility that comes on in the fourth quarter. The opportunity for the Industrial Heartland on the inbound products. These are all publicly available pieces of information. So as long as it's that stuff, that's all available, but I won't introduce anything new on a call this.

Those two examples are good. Thanks.

Thank you. Mr. Green, there are no further questions at this time please continue. Thank you everybody and we look forward to updating you on our progress next quarter. Good Bye.

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