Canadian Pacific Kansas City Ltd (CP) 2007 Q3 法說會逐字稿

All right, good morning, ladies and gentlemen. Thanks for joining us for our 2007 third quarter teleconference. Today, we are presenting live from the New York Stock Exchange. The presentors today will be Fred Green, our President and Chief Executive Officer, Kathryn McQuade, our Chief Operating Officer, Marcella Szel, our Senior VP of Marketing and Sales and Mike Lambert, our Chief Financial Officer

Before we get started, let me remind you that this presentation contains forward-looking information. Actual results may differ materially. We have 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 one 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-gap measures. Please read slide two. With those joining us via teleconference, the slides are available on our Website, so please follow along. At this point, I'd like to turn the conference over to Mr. Fred Green, our President and CEO.

Well, thank you, Janet and good morning, everyone. Q3 was a busy time for CP. We moved record volumes, we managed a Heavy Track Maintenance Program, announced the acquisition of a significant rail property, the DM& E, and we also reached a tentative agreement with the teamsters who represent our running trades employees. This quarter, we presented and delivered strong financial results, growing EPS by 15%. We did that through our focus on expense control, and like Q2, it was another record of quarters, sorry, another quarter of records. Q3 total revenues were 1.19 billion. RTM's and GTM's were both up over 5% versus last year and our Q3 operating ratio was 72.9%. During the quarter, our efforts to rebuild our operational momentum continued. We still have a ways to go but we're clearly making progress and our leaders are very, very focused. I'm going to ask the team to walk you through the Operations , Markets, and Financial Results and what you'll hear from Kathryn, Marcella and Mike is that we have confidence in our products and our operational capabilities and we are on track to deliver on our 2007 goals. I'll come back and wrap up before going to Q & A so Kathryn, over to

Thank you, Fred, and good morning.

Before I turn to my first slide, I would like to remind you that our goal is to be the safest, most fluid railroad in North America. First, safety. We had a set back in our FRA statistics in the third quarter, both reportable personal injury and train incident frequencies increased over the excellent quarter we posted in 2006. Even with these set backs, we continue to be the industry leader in train operation safety and we are confident that the long term trend of improved performance will continue. I will discuss our safety program in more detail this afternoon at our Analyst Meeting.

Now, turning to Service. While I'm not completely satisfied with our overall performance on our fluidity goals, we can say that this quarter was about continued recovery, through good planning and execution, we dealt with major flooding events in the U.S. Midwest that impacted us for nine days, a major line outage in Northern Ontario and the effects of the condensed track maintenance program as a result of our Second Quarter strike, despite very challenging operating conditions and higher volumes, we delivered lower cost per GTM and improved on many productivity measures.

Train speed has remained stubbornly below 2006 levels, due to more bulk trains that operate at slower speeds on our Western corridor and significant floods we experienced in the U.S. Midwest.

In addition, you will recall that we took a 26 day strike during the Second Quarter. This resulted in our track maintenance programs being squeezed into a shorter work season, reducing corridor capacity. I believe that with the work season behind us and the velocity initiatives that you will hear more about this afternoon, that we will be able to improve upon this metric as we move into the Fourth Quarter and into 2008. In fact, we are very encouraged with the train speeds that are coming up nicely after the end of the quarter. I am pleased that we recovered and maintained our performance in yard dwell time. This is a function of our ongoing introduction of Lien Management Principles in all of our major processing facilities.

Car miles per day were slightly less volatile in the third quarter due to reduced frequency of line outages and it's 4% better than last year through tighter fleet sizing. Our cars on line number was up 2% but I'd like to remind you that our work load in terms of GTM's was up 5% and this was a record Third Quarter for CP. We moved this volume with only 1.5% more train miles, so we were making better use of our train capacity. This is exactly the type of performance that our Integrated Operating Plan is designed to drive. To sum up, our total operating expenses per GTM improved by 3.5% quarter-over-quarter, and we moved record volumes. Even with the foreign exchange impacts, our unit cost performance improved by 1.5%. We delivered strong financial performance despite the headwinds.

So this gives me a great deal of optimism that, when we get our fluidity metrics going back in the right direction as we know we can, that we will continue to deliver on more efficiencies. I expect to maintain our performance on dwell time, car miles per day, and total cars on-line and my team will be very focused on recovery of our train speeds.

We've said that we would generate savings of 30-35 million in operating expenses in 2007 and we are on track to deliver this. We will do this with the execution of our Integrated Operating Plan and with the focus on velocity and balance.

So to recap for the quarter, despite very challenging operating conditions, we delivered solid units operating cost results. We improved train and employee productivity performance and we will continue this trend in the Fourth Quarter and into next year. Brock and I look forward to sharing our operation strategy with you this afternoon and now, I will turn it over to Marcella.

Thanks Kathryn, Starting at a high level, I'd characterize Q3 as another good quarter. Intermodel volume growth, strong bulks and continued yield improvement pushed the top line up almost 5% excluding foreign exchange. FX was a significant headwind reducing our revenues by 26 million or 2.3%. Given this, I'll be referring to our numbers exclusive of foreign exchange in order to give you a clearer picture.

I'll first review the quarter by market area. On the bulk side, we delivered Third Quarter growth of 6% over what was a very impressive Third Quarter in 2006. For the quarter, grain was up 8% reflecting strong demand and excellent product performance in both our Canadian and U.S. segments.

In the U.S, Wheat volumes, a mainstay of our Domestic Program, rebounded sharply with the new crop and our upgraded shuttle program received good market uptick. Next, coal.

Despite the April 1st price adjustment for export coal, revenue was up 8% with West Coast exports the key driver. Year-to-date, we're tracking to our export volume target of an incremental 2 million metric tons over last year. Fertilizer was down by 2%. This was primarily due to the abnormal seasonality we saw last year following the late pot ash price settlement; however, the market fundamentals for both chemical fertilizers and pot ash remain very strong and on a year-to-date basis, were up over 20%. In our merchandise portfolio, forest products continues to remain very soft. This reflects weak Housing Markets and the impact of the strong Canadian Dollar.

Industrial products on the other hand was up 6% despite a somewhat sluggish economic environment. Steel and construction materials were soft, but growth in our Alberta based energy sectors performed well. We saw good performance in our emerging market side which includes ethanol, diluence and dimensional shipments. On the automotive side, revenues were up 6% on growing volumes with the new domestics like Toyota and Honda. Intermodal was up 8%. We generated strong volume growth at all ports. Both import and export flows performed well, and we experienced a modestly earlier start to the Fall peak this year which pulled some volumes into Q3.

Domestically, we made up gain-to-gain on our Cross-boarder Marketing Plan, and we continued our success in our backhaul program using empty marine cubes. So, to sum up on the quarter, I would say we delivered solid growth. Before FX impacts, freight revenues were up close to 5%. I'll break this down as follows: Volume drove a positive impact of 6%. Price in fuel excluding the coal changes was up 3.6%. Coal changes took the net price down to 2%. Mix and one-time impacts negatively affected revenues by 3.6 %, and FX reduced revenues by another 2.3% leading to an all in-reported revenue growth of about 2.5%. Now, because of all of these moving parts I'll give you some color on the average revenue per car load story that you see on the slide sheet which is down 3.7%. This was the result of numerous factors both of the one-time an the short-term variety. Let's start with mix, which is one on the short-term side of the equation. Traffic flows have been changing. Significant intermodal growth including shorter haul lanes, reduced shipments of high revenue long haul lumber, and different grain and pot ash patterns all drove lower average revenue units.

On the one-time side, improvements in our revenue accounting system last year contributed to a variety of timing related adjustments in Q3 2006 that distort the comparison, then the FX hit of 26 million is also embedded in the reported number and finally, the Elk Valley rate change further skewed average revenue per unit. Each of these, mix one-time events, FX, and coal, contributed to a negative average revenue per unit. Absentees, it was up 4.5%.

Looking ahead, I expect FX, coal, and forest products impacts will carry forward for the next quarter or two. So for those of you who monitor average revenue per car, you can see that it's not a good proxy for price. What is a good proxy is our actual contract renewals and same-store price results. Let's turn to those.

Contract renewals for the quarter came in close to 5% consistent with our year-to-date numbers. On the year, same-store price, excluding Elk Valley is tracking at about 3.5%, and we're driving incremental yield through our domestic repositioning program through increasing terminal service charges and our enhanced shuttle program. So let me be clear. Lots of noise masking good price performance in Q3.

I'll now refresh the balance of the year and view, first, grain. We're modeling our Canadian outlook based on 45 million metric ton crop. In the U.S, Production is up strongly over last year. And despite a somewhat smaller Canadian crop size, strong grain prices and strong export demand should result in overall year-end growth at or slightly above our target.

Turning to coal, our previous model of 2 million metric export tons over 2006 still holds. Pot ash demand within the sulfur and fertilizer portfolio remains strong. I'm now modeling this segment to outperform targets by a couple of points. Overall, bulk demand remains strong with the only dependency being around partners and the Supply Chain Performance.

On the car load side, I expect to see continued weakness in our Forest Product Sector, a fairly flat Automotive Sector and softness in Steel and Construction Markets. This will be partially offset by continued strength in Alberta Chemicals, Emerging Markets and of course our Price Program.

In Intermodal, I'm closely watching the retail side for weakness but expect our international business to remain strong. So in summary, we've had a solid quarter despite some tough compares, a softening economy and a dramatic spike in the Canadian Dollar. Based on the exchange and WTI assumptions built into our original 2007 assumptions, we expect to achieve the targets we set for ourselves last November. That is 4-6% top line, 3-5% on volume with the lower end more likely, 4-5% on contract renewals, and 1-2% on total price that includes the coal headwinds. Now, at today's dollar and WTI, I expect to end the year just below the 4% total growth. So all in, given the current economic landscape compared to our outlook on this a year ago, a pretty solid story. Now, Mike, over to you for the financials.

Thanks, Marcella. I'd summarize our third quarter Performance as solid, with Expense Management Supporting Earnings Improvement and helping offset the negative consequences of a rising Canadian Dollar. On the surface there's lots of noise in the quarterly numbers but when you peel them back, you'll conclude that CP generated a very sound 15% earnings per share growth.

Looking at Slide 14, and the Income Statement, I'll give you an overview of our reported earnings, which excludes the impact of foreign exchange on long term debt and the impact of the provision for the reduction of fair value of some Canadian Third Party Asset-Backed Commercial Paper that I'll discuss later. Starting at the top: Freight revenues were up 2%. Other revenues were up 11 million due in large part to planned land sales. Our year-end target for other revenues of 140-150 million remains on track. Total freight and other revenues were up 37 million or 3%. Excluding the 26 million impact of the strengthened Canadian Dollar, total revenues would have been up 5%. Operating expenses were up 2% due in most part to higher fuel costs. As a result, operating income was up 23 million or an 8% improvement over the same quarter a year ago. Below the operating income line, other charges were up a modest 1 million. Interest expense was down 8% due to the impact of the stronger Canadian Dollar on our U.S. Dollar debt and additional interest income on higher cash balances. So our adjusted income, which is before foreign exchange gains or losses on long term debt and other specified items was 190 million or a 12% improvement versus last year. Turn to Slide 15 and I'll reconcile our Diluted Earnings Per Share Growth. Before I start, however, I'd like to remind you that our Third Quarter 2006 adjusted earnings per share was restated for a change in stock option expense accounting. This restatement increased our Third Quarter 2006 EPS from C$ 1.06 to C$1.07. Now, starting on the left. Wage and Benefit Inflation impacted earnings per share by C$0.02

We saw an C$8 million increase in expenses due to inflation which was partially offset by a positive gain on the pension side. Fuel and Lease expense impacted EPS by C$.08 in the quarter as a result of increased refining margins. Lower off-line car higher-and- higher -car and locomotive lease costs, while foreign exchange cost us C$.03 on earnings per share. On the positive side, volume and mix net of expenses provided us with C$.07 in earnings per share growth while price, including fuel, provided C$.09. And ongoing initiatives such as the Integrated Operating Plan continued to pay benefits and delivered C$.04 versus last year.

Now, as you'll recall, last year our strong financials led to an accrual of additional incentive compensation which when brought back to normal levels will add C$.06 to earnings per share. Next, we have a one-time C$.05 gain in comp and benefits due to a trueup of post-retirement benefit accrual in the U.S. This is directly offset by a one-time gain that we had in Third Quarter 2006 for fuel adjustments.

Finally, all other items brought EPS up by C$.0.03. Adding it all up, we delivered C$1.23 adjusted earnings per share this quarter or a 15% growth, a solid performance. Now, let me give you more detail on our operating expenses on Slide 16. Starting at the top, compensation and benefits expense was down by close to 6% or 19 million due to a reduction in FTE 's versus 2006, the incentive compensation adjustment, and a one-time gain from the accrual trueup I just spoke about. Steel was up 24 million or 15% driven by a C$13 million impact of higher refining margins and a reduced hedge position. Materials were up 3 million or 5% due to higher volume and inflation. Equipment rents came in 5 million higher than last year due to lower off line car higher and volume increases which added locomotives to the fleet. It still fell within the C$50-C$55 million range that I outlined as a quarterly run rate for this year and I'll re-confirm that we're on target to hit this range again in the Fourth Quarter.

Depreciation was up 2 million which is slightly better than our expectations, and then finally, purchase services and other were down 2 million. Foreign exchange moved expenses down by 15 million in the quarter, so to bring it all together, operating expenses were up 14 million or 2%. Without the increase in fuel price, expenses would have been flat, a good cost control quarter.

Before I close, I'd like to discuss the Canadian Third Party Asset Back Commercial Paper, or as I'll refer to it, the ABCP that I mentioned earlier. Since earlier this Summer, we've been accumulating cash in anticipation of the acquisition of the DM& E.

As we gather this cash we were investing in numerous, highly-rated short-term Markets including 144 million in the Canadian Third Party Asset Backed Commercial Paper Market, which began running into some liquidity issues in August. The Market is still working through a restructuring of these investments but I'd like to address a couple of key points.

The Pan Canadian restructuring committee which was created to propose a solution to the liquidity problem affecting the ABCP, has advised us that the assets backing our investments are largely Canadian assets that have limited exposure to the U.S. Sub-prime market. We've also been advised that the assets are performing as they should and though there are no issues with the underlying assets, they are not presently liquid. The fact that this money is not currently available to CP is inconvenient, but in no way impacts our ability to meet our liquidity requirements for either our normal operations or the acquisition of the DM& E. And although we currently feel that we have the ability to be patient and will eventually be able to recover most of the face value of these instruments, there clearly has been an impairment of the liquidity of the ABCP.

Also, in order to be prudent, we felt that we should provide for a possible valuation impairment that may occur, including any restructuring costs. As a result, we've booked a provision of 21 million pre-tax which represents 15% of the face value of these investments. You'll also notice on our Balance Sheet that we reclassified the 144 million from Cash to Long Term Investments. Moving forward, based on what we're hearing from the restructuring committee, we don't anticipate that any future liquidity of valuation impairment provisions will be necessary, but as more information becomes available, we'll share it with you.

Now, turning to my final slide, let's walk through the remainder of 2007. CP has delivered growth of 12% year-to-date on our adjusted diluted earnings per share through Execution Excellence and Focused Expense Control. We see ongoing challenges with the strengthening Canadian Dollar and fuel price pressures and as a result, our expectations for Adjusted Diluted Earnings Per Share for the full year 2007 are at the lower end of our gross target range of C$4.30-C$4.45 or 9-13%. The stronger Canadian Dollar will also impact revenues and we expect to be just below our target of 4-6% revenue growth for 2007.

Free cash is expected to exceed 300 million in 2007. Now, this outlook assumes all prices in 2000 averaging U.S. C$ 69 per barrel or C$84 per barrel in the Fourth Quarter. And an average currency exchange rate of C$1.08 per U.S. Dollar for the full year 2007 or C$0.98 per U.S. Dollar in the Fourth Quarter. This is a revision to our previous assumptions which will have oil prices averaging C$65 a barrel and an average exchange rate of C$1.10 per U.S. Dollar in 2007. And with that, I'll turn it over to Fred for his final comments.

Thank you, Mike, and I think as you've heard from the Team, Q3 was a period in which we were refocused and focused on rebuilding the momentum of our Company.

Directionally as the quarter unfolded, most metrics showed improvement but our fluidity and safety are still lagging our own expectations. You can expect continued attention on those metrics and action. The global nature of our traffic base provides and allows us to drive strong volumes and we expect that the complete Supply Chain, including terminals, ports, shippers will be tested in Q4 as the bulk and intermodal volumes continue to move at an elevated pace.

And finally, the lag impact of the quickly rising fuel prices and the strengthening Canadian Dollar continue to represent significant challenges which temper this years results to the bottom end of our committed range. The railroad is busy. We are focused on preparing to deliver our 2008 plan and ensuring that we bring home Q4 with intensity.

We'll now take questions from the floor, and for those asking questions, please state your Name & Company before you pose the questions and wait for a microphone so that those on the phone can hear those questions.

(inaudible) from Merrill Lynch. A couple of questions. First the cost per employee was down about 4.5%. It sounded like there was a pension settlement gain. Can you quantify the size of that gain, I'd presume that's a one-time gain that impacted that cost line for the quarter?

Mike will take that.

Thanks, Ken. Can you hear me? Okay, thanks, Ken. It was actually post-retirement benefit accrual trueup, and some of our unions in the states joined a U.S. Railroad Industry, Multi-Employer Post-Retirement Plan and when you do that, essentially what you do is you transfer the liability to the Multi-Union or Multi-Employer Post- Retirement Plan, and as a result, you trueup the accrual and that gain was approximately 11 million.

Okay, and then just on the Canadian Asset Back Paper, do you have to increase your debt levels because this money is no longer accessible to you to close the DM& E or how did you go ahead and finance that without that access to the cash?

In terms of the asset back commercial paper -- Pardon me a second think, Tim. We're just making sure that the microphone is working. Are you picking me up? Yes, okay, so on the asset back commercial paper, we have no issues in terms of access to that and we can afford to be patient so our Balance Sheet is pretty solid. In terms of the acquisition of the DM& E, by year-end our debt to equity should be approximately 40-45% so our debt to total capital was 40-45% so we still have access to debt and a solid Balance Sheet like that so we have no issues in terms of liquidity or assets to debt.

Just one last question, I guess probably for Marcella. What's going on in the Fourth Quarter that all of a sudden, grain and coal volumes have turned from a sizeable increase running in the Second Quarter to sizably down in the third, I'm sorry, from the third quarter to the Fourth Quarter? Thanks.

Ken you're talking about down in the deceleration in the third quarter?

No, Fourth Quarter.

Actually it turned negative in the Fourth Quarter for both those commodities.

I just want to confirm you're talking about what you've seen in the Third Quarter?

Fourth Quarter. In the last three weeks.

What we're going to be seeing we're going to be seeing that the coal volume should be picking up. We had some deceleration in the Third Quarter on our volumes and the volumes on the coal side the deceleration was due to some Supply Chain Impact, West Shore Terminals which is where Elk Valley coal delivers most of their coal were down for some period of time due to a stacker reclaimer being down, that was a planned maintenance and then there was an unplanned maintenance with dumpers and then we had an outage on the line so there was a deceleration on a in the months of October specifically. We expect to catch that up going forward through the balance for two months.

On the grain side, the issue is really the tough compares that we had against last year, so last year, for us on the grain side is one of our absolute strongest quarters. Our intent is to match that over the balance for the next two months so that the Fourth Quarter should come in about level with the Q4 of last year.

Maybe, Ken, there's a bit more color. But we set a record this week or last week, last week we set a record on U.S. Grain movement so you're correct in your observation as Marcella points out for the reason she did that the first couple of weeks of October were a little softer relative to the pace we've been going at but I think as the numbers become more evident of what's happening as we speak today, you'll realize the volumes are very very busy. Tom.

Yes, I got a couple questions on yield here. Can you, Marcella, can you comment on how long the mix impact in the third quarter is going to persist, and you talked about fuel and price together, I think the 3.6%. I wonder If of you could break that out and say what was actually price and then specific to intermodal, I know there's some customer behaviors that can change the mix in terms of length of haul, and I think some Halifax Montreal maybe shift would be effective but how much is the intermodal yield weakness is customer behavior versus a change in your approach in the market? Thank you.

That was a good few questions, Tom, thanks. I'm going to go at them backwards because I think I'll remember your question backwards and I might have to ask to you make sure I've got the question right. First on the Intermodal Volume you asked whether how much of it is due to customer behavior from different ports and the answer is none of it. Our Intermodal Volume growth is due to cross border strength that we've been achieving and you may recall about this time last year, I think Tom you were asking why my Intermodal Volumes were down and we had a strike at the port of Philadelphia. That strike has resolved itself and we are seeing return of the volumes on to our railroad so the impact is just with respect to how our business is showing up and it doesn't have anything to do with the switch from one side of the country to the other in terms of ports. We've got very strong growth at the Port of Vancouver as we planned and the Port of Montreal. Your middle question, if I have it right, was around the 3.6 %, how much of that is fuel and how much of it is price. On the fuel side, if I can say that first, you know what the number is on the fuel in terms of it went down from Q3 over Q2, notwithstanding that we had greater coverage on our fuel, so the fuel didn't actually deteriorate. It was essentially flat and so the 3.6% is mostly price. And your first question was around average revenue per unit?

Yes, it was in terms of mix, the 3.7% decline, a lot of that sounded like it was mix and I'm just wondering how long does that mix affect persist so we can think about forecasting revenue per car.

As I mentioned the mix in a few elements I expect to persist for another couple of quarters. One would be on the lumber side where we've seen the loss of the long haul high revenue volumes off the system. There will be continued mix changes on the intemodal side as we continue to grow on the cross border short haul moves so we'll continue to see that and of course FX will continue to hit the average cost per unit.

So should we think about revenue per car being down year-over-year for the next couple quarters?

Coming into Q4, you should see an uptick because some of those one-time events that I mentioned will go away. Those were literally one-time events and going into next year you should see it normalize so that it will look more like our five year average.

Okay, thank you.

Scott?

Yes, this is Scott Flower, Banc of America Securities. Actually some questions also for Marcella and I'll just ask them one at a time. Could you give us some sense about how I think about exchange rate impacts? Obviously you see it immediately in the numbers and I understand that but I'm thinking about the lag effect in other words sometimes trade tends to have a lag effect from currency impact and the answers to paper enforce for the particular paper where it's well known that will have an impact, are there other commodities we should see a tail that will impact from your cross-boarder traffic? What should we think about on the tail of the Canadian Dollar strengthening, the impact on competitiveness of products going cross-boarder and how you think about that in revenues into 08?

So, the largest area of impact is the FX on our customer commodity or the customer base side tends to be in the forest products side. That's where we're seeing the largest impact and that impact as the Canadian Dollar strengthens I would expect to see that impact continue to occur, but with the diversity in our book of business across all of our other commodities, I think they will be balancing impact and not a significant impact overall, so for instance, there may be some areas where FX will impact the production side, but then we've got an energy sector where some of these effects may be positive, so I think overall, it would come out to a balance with the largest impact being specific on a customer base in the forest product side, a little bit on the manufacturing side.

I think, Scott, because we're trying to focus on the quarter if you want to get at that question again this afternoon we can probably be a bit more specific on the sectors.

And then just two other quick ones. You mentioned fuel surcharge coverage. Where actually are you on fuel surcharge coverage in your book of business and how much was that actually up year-over-year?

Our fuel surcharge coverage is almost 100% and you'll hear later this afternoon there will be 100% by the end of 2008, so we're pretty close to being where we want to be on the coverage. One of our key focuses this year and going into next year is migrating our coverage on to the on highway diesel program, so that we get more of a margin coverage in our total book of business.

And then last question, I'll let someone else have at it. And this is on housekeeping. How much was the revenue accounting adjustment last year and where does that actually show up in the financials?

Well, it's not easy to track on the financials which is why that I that I mentioned of the 3.6%, I mentioned that some of it was mix, about mix and the one-time impact, the one-time impact was less than half, and so again, going forward on a modeling that will not show up in any other quarter.

Great. Thank you.

Thank you very much. This question I guess is for Marcella and Kathryn. And it's on the coal side. West shore obviously being down because of the four stack rig claimer, we're going into a coal environment that looks like it's going to see some nice growth year-over-year on April 1st. Are you expecting to see now a concentration of your coal shipments in the fourth quarter and First Quarter in advance of that run up and for Kathryn, is the capacity there right now? I know you said there was some tightness due to some of the carryovers. Do you have that capacity in place right now in your western corridor to deal with those volumes as they come through?

So, Marcella, at this, we should address the Q4 question, legitimate question and we'll talk extensively about coal for next year in the second half of the discussion this afternoon.

On the quarter , our plan is to move through to it will be the balance to be removed the additional 2 million metric tons and so our plan is to deliver that growth on an annual basis by the end of the year. So what we're doing is remodeling for the balance of the year what we've got in the plan we told you about a year

Okay, just and then for Kathryn I guess on the Fourth Quarter capacity issues you had mentioned there was some strike and from weather, do you see any carryover of any of those capacity issues into the Fourth Quarter as you see them right now?

Well, as you'll hear this afternoon, as well, you know we concentrate a lot on the West corridor. It's very important corridor for us, and we are working on a lot of fluidity initiatives and you'll hear about these this afternoon which will help us through the western corridor as well as some Longer Term Capital Programs, so we are prepared and we are getting the crews in place and the locomotives, etc, To handle the volumes that we expect in the Fourth Quarter.

Thank you very much.

Sorry, I'll just wrap that up if I may because it is important to understand, Marcella mentioned and I mentioned it, when you deal with the kinds of commodities you deal with, it's very important for your partners in the Supply Chain to also do their department so should we have a major outage with a West Shore terminals, and I'm not advocating weather or not suggesting we would, but what we're saying is as long as everybody is in the pipeline doing their job as they say and plan but committed that they would, then we can move it. We've got the resources, we organized around that, historically whenever there has been an issue it's not that frequent but when it does it's usually because sometimes ourselves or sometimes one of our business partners in the Supply Chain goes a bust and when they go bust of course it backs up into ours so we've got a busy quarter ahead of us but right now it's humming.

Thanks. Ed Wolfe, Bear Stearns. Just a couple questions. First, Kathryn, you talked a little bit about disappointment with the severity and the claims of some accidents. Is there any ongoing impact from that? How should we think about that?

Well I'd like to qualify. I'm, we were disappointed in the fact that we had an uptick in our safety statistics as reported by the FRA, but in fact the severity is down, and our overall non-reportable and reportables are trending down, so we are actually seeing improvements in our casualty claim expenses as well, so we're disappointed. Any incident is a bad incident, but in fact the severity year-over-year is actually down.

Okay, so no impact from expense from the number of claims ?

No.

And you're basically on track just holding the high standard?

Yes, absolutely.

It's not only no impact, but we're actually better by a couple million bucks on casualty costs which are related to it.

Marcella, you talked about an early peak in Intermodal possibly robbing some freight forward. Can you talk about what you meant by that and the visibility you have in terms of the peak season and intermodal of what's happened already and what's left to happen?

With the there was a more moderate peak season because a lot of the volumes which I've mentioned that we would have expected more let's say in September- October potentially moved earlier into Q3 so it's smooth, smooth the peak out as of now, on our property, the peak is pretty much over. We've gone through the international peak. It's arrived and it's been moved and it kind of ended with the golden week and the domestic is pretty much over as well so we're back to more normalized operation.

So is that just the timing of Third Quarter Volumes or it was third a little stronger and Fourth Quarter a little weak because of that timing?

Going into the Fourth Quarter we should be seeing our normalized volumes, so we saw higher and higher uptick in Q3 because that peak was pushed a bit into Q3. Q4 should be normalized.

Okay and in terms of the yields and pricing, you had said that there was about 3.5% same-store but that excluded Elk Valley. What was Elk Valley year-over-year?

Elk Valley we've mentioned several times, the hit of Elk Valley was potentially 7-9% price impact which drew us down about C$45 million that's the impact.

That's the year-over-year impact?

Year-over-year impact. That's it.

When we get to and maybe this is for later but when we get to next March, what is that impact going to look like in 08 versus '07?

It's for this afternoon, Ed. We'll definitely go into great detail on that.

In the quarter on the incentives that you talked about being down year-over-year, was there any reversal of an accrual or anything like that or you're just not growing your targets as well as a year ago so there's less in the comp?

Last years Third Quarter was a pretty strong quarter and so we increased the accrual for our short-term incentive. This year is not as strong as last year, and so we haven't had to match that accrual this year. And that was approximately around 10 million.

Ok,but there's no reversal from earlier periods taken or anything like that?

No.

Ok, and last thing, Michael, interest expense, could you give us a little guidance for Fourth Quarter given the increased debt for DM& E and the weaker dollar? It's hard to figure out.

Yes, sure. You're right. There are a couple moving parts here but used to be you could model about 50 million a quarter in interest expense for CP, with the acquisition of the DM& E, the incremental debt offset by some foreign exchange, the translation of the U.S. and Canadian Dollar, about 65 million per quarter, so 65 million per quarter translates to about a seven times coverage on EBITDA, five times coverage on EBIT, so some pretty solid metrics.

Thank you very much.

Ah for Market Dave Newman, National Life Financial. Just what is the actual LIBOR spread that you have on the DM & E debt?

You're talking about the bridge financing that we have in place?

Correct.

We don't disclose the financing but what you could do for modeling on that debt is about 6%.

Okay, very good.

And we think, we think we'll actually be able to fix it at that rate too depending on what your outlook is for long term.

Very good and then tax rate seems to be moving around quarter to quarter quite a bit, below the line what do you expect in Q4 for modeling purposes?

We're estimating for the year approximately 30-31% and we're about that rate right now.

That's a little bit lower than your initial guidance, your initial guidance was around 32. Is there any reason why that's a little bit lower?

We had guided as you recall, we had guided 30-32% mix plays an important factor there. U.S. Dollar being what it is, we have less income in the U.S. Where there are higher rates.

Very good and last if I may, just on the coal, in the near term, I guess just basically for Q4, are the higher ocean shipping rates having any impact in terms of coal movements off West Shore?

My understanding is that the higher shipping rates aren't having any impact on the overall Supply Chain and production and delivery of the coal. The volume deceleration is really due to the Supply Chain issues that I mentioned.

Very good, thank you.

(inaudible) AG Edwards. Just one quick question. On the reclassification of the commercial paper, do you have any expectation on when it will be liquid or do you have some expectation on when you'll have some visibility on liquidity?

No to both answers, but no, what's happening is theres a Pan Canadian restructuring committee which was formed to actually deal with the liquidity issues around these investments. Our best guess right now is mid December they will come up with a solution. We think that it will be some sort of restructuring that makes the paper more longer term than shorter term, so we think that we'll eventually realize most of the value of the commercial paper, but it will be at some point in the future. The good thing is we can be patient. We have plenty of access to debt. There are other companies who are not in that favorable a position but we have no liquidity issues around it.

And it is in one traunch that the liquidity is tied. It's not as if there's several different traunches.

The commercial paper actually there's about 22 trusts that are involved in this, there are 22 different entities that are involved in this and we're in nine of those trusts so there's no more than 20 million in any one trust that we have invested in and as you can imagine, each trust is different. There are two extremes. One is the absolute trust that many of you have heard about and the athlete trust is the only trust that's essentially linked to the U.S. Prime, subprime market. We're not in that trust. The other end of the spectrum, there's the Skena Trust which is currently being structured as we speak. We're not in that trust either so we have a mix of investments that we think will be restructured by mid December. At least that's what the objective of the committee restructuring it is.

Thank you.

Bill MacKenzie from TD. Marcella, just a clarification on the coal volumes, 2 million ton increase for the year is your target. Where are you at on a year-over-year basis for Q3?

Well, we're pretty close and our plan that we will be on the target by the end of Q4.

But can you say how much you're up year-to-date through the first nine months?

Not sure that, all I can tell you is that we are up exactly where we plan to be on the volumes, sure there's a slight deceleration we felt in October and then our plan for the next two months is to catch that up so you can model it quarter on quarter.

Okay, and then just on the pricing for that contract with Elk Valley, is there any sensitivity to changes in foreign exchange rates?

Sorry changes sensitivity to changes in---

In Canadian U.S. dollar exchange rate. Is that contract price, I mean, there's always sensitivity to coal prices and I'm just wondering if that's on a Canadian Dollar or U.S. Dollar basis.

I think what we've done is given you real visibility as much as we can in the circumstances to the factors that influence any change and how it looks for us in terms of revenues and I think you can just look to those statements in terms of what impacts is around for instance the coal price, the coal year changes, etc.

Thanks.

Good morning, (inaudible) Goldman Sachs. Two questions. With regard to the concurrent quarter you're able to reduce your FTE count despite record volumes. As we look forward, given your outlook for your strong outlook for volume, the question is how much further room is there with regard to further FTE declines?

I think again the nature of doing a Q3 in the morning and a 2008 in the afternoon is it's a great question and I'm fully prepared to discuss it but it's more of an afternoon question because it's going to affect 2008. You will see for the period, the Fourth Quarter, you will see some continued hiring both to prepare ourselves for next year and also to deal with a handful of vacancies and specialty positions, so we will continue to hire through the next eight weeks, but not at a huge number obviously in that period of time and then if you'd like to reintroduce that question this afternoon to talk about 08 we would be delighted to give you our best assessment.

Great and second question might be better suited to this afternoon, so I'll keep it in the bounds of Q4. Given what's occurred with FX and the impact it's had on volumes as you look at your CapEx budget that hasn't changed but have you shifted the projects that you're spending on relative to the volumes and impacts for FX, for 08 but more specifically Fourth Quarter.

Certainly, it doesn't affect Fourth Quarter because we're pretty well at the end of our programs, Kathryn has a handful of residual programs out there that we said got pushed out because of the strike. We could address that issue in the afternoon. Let's just leave it at that. I will preempt that and tell you it's not a big impact.

Fair enough.

Another one back to Ken.

Just a real quick numbers confirmation. I guess you closed the DM& E on the fourth but now you're waiting for the STB approval before putting in the numbers and I guess you're doing the equity method until the next one I just want to clarify as we look to the Fourth Quarter do you expect that to close so we see the volumes come into the car load counts or will that just the timing of that, that's it.

The way we're accounting for the DM& E, you're right. We're right in the middle of the STB process. While we're in the middle of that process, where equity account for it so in other words on the P & L, you'll see one line that says the impact of the DM& E and on the Balance Sheet you'll see the investment held in an equity investment account so we won't do a line -by- line consolidation until after the STB has approved it. And it won't be in any of our other metrics either so the car loading, that sort of thing.

What we'll try to do though Ken this afternoon when we move into 08 we'll going to talk about the core Canadian Pacific franchise, we'll talk about the core regional railroad called the DM& E and then we'll have discussions also about the Powder River so inasmuch as you're not going to see them the financials or the fly sheets until we actually consolidate and embedded in the line items, we will this afternoon try to give you as good an understanding of the growth rates of the different franchises.

I was just wondering is there was timing for that?

Well I guess when, - shortly after, Mike, after we get off to the approval --

Consolidate it line-by- line?

The quarter following that, we would come in, if if you can tell me when we get STB approval I can tell you what to do.

I think he's trying to get an idea of when the STB.

Oh, the STB approval will be when they tell us but right now it's - if they deem it to be minor, it should be May. If they deem something bigger than that, which our view is it's not substantial, but if they do do that then it would be perhaps as much as three months after that. Okay, I think in light of our time, because we're approaching the end of this session, we'll take a break. If there's no further questions at this point and reconvene and before I get in trouble, Janet will you tell everybody where to come back to?

Absolutely.

Okay, thank you.

So, ladies and gentlemen, this concludes our Third Quarter call, and I would encourage all our callers to rejoin us at 1:15 for our investor conference. At that time, we'll be giving more color and insight around our 2008 Guidance and Expectations and thank you for joining us this morning. It does include Q3, for those of you in the room, I would ask you to exit out the back, if you go straight to the end and turn to my right, you will discover there is a room with lunch set up to greet you. Thanks very much.