Canadian Pacific Kansas City Ltd (CP) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Canadian Pacific's fourth quarter results conference call. At this time, all participants are on listen-only mode. Following the presentation, we will conduct the question-and-answer session. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded, Tuesday, January 29, 2008 at 11 a.m. eastern time.

I would now like to turn the conference over to Ms. Janet Weiss, Assistant Vice President, Investor Relations of Canadian Pacific. Please go ahead, ma'am.

Thank you, Patrick. Good morning, ladies and gentlemen. Thank you for joining us for the 2007 fourth quarter teleconference. The presenters today will be Fred Green, our President and Chief Executive Officer, Kathryn McQuade, Chief Operating Officer, Marcella Szel, our Senior VP of Marketing and Sales, and Mike Lambert, our Chief Financial Officer. Also joining us on the call are Brock Winter, Senior VP of Operations 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 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 1 in the press release, and in the MD&A filed with Canadian and U.S. securities regulators.

Please read carefully as these assumptions could change throughout the year. All dollars quoted in the presentation are Canadian, unless otherwise stated. This presentation also contains non-GAAP measures. Please read Slide 2. The slides are available on our website, so please follow along. Following the presentation, we will conduct the question-and-answer session. Please feel free to queue up for questions now or at any time. [ Operator instructions ] Here then is our President and CEO, Mr. Fred Green.

Good morning, everyone, and thank you for joining us. Starting with the fourth quarter, demand was robust and we matched last year's record-setting workload levels. For the impact of foreign exchange, it was a record revenue quarter. Serious choppiness in the supply chain prevented us from fully meeting market demand. So entering in 2008, we have particularly good volume demand. On the expense side, we were up just over 1%, including some late-year operational challenges which pressured fluidity and productivity. Kathryn will speak to this.

All in, our Q4 earnings per share grew 4% year-over-year with the rapid increase in fuel price and the appreciation of the Canadian dollar, acting as significant headwinds. Looking at the full year on Slide 5, we delivered 9% EPS growth and grew our free cash flow by 24% to a record high $303 million after dividends. Our operating ratio improved marginally to 75.3% with fuel escalation masking the progress we've made in productivity. Taking away the impact of fuel, our operating ratio improved over 100 basis points. While I'm very pleased with the progress that we have made, I know we can do better. On past calls, we've spoken about the unforeseen challenges of 2007, including extreme weather events, labor disruptions, fuel price escalation and foreign exchange. It's been a tough year of events, but we have delivered the numbers, albeit in a fashion different than planned.

On the strategic front, we made two major announcements. Our plan to construct new track into the industrial heartland that serves the Alberta oil sands and the acquisition of the Dakota-Minnesota and Eastern which, of course, remains subject to SCB approval. These strategic initiatives and exciting new dimensions for future growth are progressing well through the various regulatory steps. To sum up, during 2007, we found ways to overcome adversity and demonstrated a remarkable degree of resilience. But fluidity is not what I expected. This is our opportunity for 2008. As you will see, our early operational metrics suggest the adjustments we have made are working well. I will now turn it over to the team to talk more about the quarter and our expectations going forward. Over to you, Kathryn.

Thank you, Fred. Good morning, everyone. No question, December was a tough month. The series of events that hit us and our supply chain partners late in December left little time for recovery. Our challenges included extreme winds and rain at the port of Vancouver, causing production issues at the coal unloading facility, rockslides in our west corridor and major snowstorms in the east which negatively impacted the port of Montreal. Even with those challenges we matched a quarterly record for GTMs and we did it safely. For the year, we delivered good financial numbers in terms of cost control. We moved 4% more GTMs and we did it with an operating expense per GTM that was 1.4% lower.

Let's start with safety on Slide 7. We had good results in our FRA Safety Statistics for the fourth quarter. I will point out to you that we continue to be the industry leader in train operations safety. Our reportable injuries frequency improved by 4% and our train incident frequency improved by 16% versus the fourth quarter of 2006. The number of incidents declined but those that we did experience were costly. This pushed our casualty expenses up and Mike will cover this later in the financial summary. We are on track with our long-term trends for continuous improvement in our safety performance. This will continue to be a key area of focus for the operations team.

Please turn to Slide 8. I'm not going to dwell on our fourth quarter fluidity metrics due to the many uncontrollable issues impacting us and our supply chain partners. My focus is on 2008 and I'm confident that the actions we're taking, such as powering up coal trains in the west corridor and insuring adequate contingent locomotive and crew resources, are beginning to pay off. Our fluidity indicators are moving in the right direction, in comparison to fourth quarter 2007.

As of the reporting week of January 19th, train speed improved 7%. Terminal dwell improved by 5%. Total cars online improved by 1% and car miles per day improved by 4%. Good progress in all areas and it bodes well for the year. I should note that we had an incident late last week in Northern Ontario in a very inaccessible location and under extreme frigid conditions that took our main line out for 72 hours. So you will see a dip in the numbers this reporting week, but the team has managed the recovery well, so our numbers should recover quickly.

Please turn to Slide 9. On the DM&E acquisition, we continue to move forward as planned. The STB will advise their final decision on September 30, 2008 with an effective date of the decision on October 30, 2008. Our next major milestone will be the submission of our Safety Integration Plan to the STB and FRA on February 5th. We continue to work closely with members of the DM&E and ICE team to plan for a smooth transition. Subject to the formal approval of our acquisition, we look forward to identifying and implementing best practices and to continue delivering strong results.

Now to sum up on Slide 10. We delivered good cost control performance despite the headwinds and choppiness in our operating metrics. Our adherence to our integrated operating plan is improving our performance and will allow us to meet our 2008 targets. We are confident that we can deliver on our commitment of IOP savings of 25 to $30 million and continue to lead the industry in train operation safety performance. I like how the operation is running and the way the team responded to the challenges we've already faced in 2008. We have our stride back and we will continue to deliver both an efficient operation and one that meets our customer needs. I look forward to reviewing our progress with you next quarter. And I will turn it now over to Marcella.

Thanks, Kathryn. In 2007, our diverse portfolio, strategic accounts and disciplined pricing delivered good revenue results in a challenging year. With solid pricing fundamentals and global demands in [both] remaining strong, I'm planning for continued growth. This morning, I will review Q4 then turn to 2007 overall, followed by an update on 2008.

As Fred noted, supply chain challenges late in the year kept us from capturing all the potential volumes in the fourth quarter of 2007. Turning to Slide 12, you will see that in spite of these challenges, we grew revenues by 5% on an FX adjusted basis. I'll review the commodity results focusing on the FX-adjusted numbers to highlight the market performance. On the grain side, we delivered 5% top line growth on solid yield improvements. Coal was up 10% as a result of lower volume due to supply chain and weather impacts late in the year, as well as the top year-over-year price comps. Turning to sulfur and fertilizer, Q4 revenues were up 5% on continuing strong pot ash shipments.

As expected, forest products continue to experience a tough ride from the lumber and panel products. Pulp and paper performed much better but the overall portfolio was off 4%. Industrial products had an excellent quarter. Very strong yield gains, along with continued pricing, continued strength in chemicals, mines and metals resulted in 16% growth. Auto revenues were up 11%, reflecting early shipments to reduce year-end inventory, something that typically happens in Q1. And finally on the intermodal side this business group continues to deliver. Revenues were up 7%.

On Slide 13, I have broken out the volume mix and price component. Volume growth was offset by mix for a net 1% gain. Mix impact was primarily the result of growing by 22,000 intermodal containers in predominantly short haul lanes. As you know intermodal revenue is per container, whereas, other segments are per railcar. So the reported average freight revenue per car load is comparatively lower in intermodal than other segments.

Moving to price, the quarter delivered about 5.5%, including fuel. This was reduced 1% by the coal pricing offset. As I said earlier, a solid 5% growth in Q4. With the Canadian dollar increasing 15% in value from Q4 2006 to Q4 2007, reported revenues were negative 1%. This significant FX change offsets the strong yield performance on freight revenue, as well as average revenue per car. In fact, if we exclude intermodal due to the mix impact I mentioned and coal due to the pricing change, our average revenue per car is up 7% on the quarter on an FX-adjusted basis. I'm very pleased with these results in a challenging year.

So let's turn to the year on a whole on Slide 14. Record revenues supported by strong yield gains delivered growth of 5% before the impact of FX. In addition, we delivered on our price target with average price increases on the contract renewals above our 4% to 5% target at 5.5%. FX impacted the results by negative 2% or $89 million for a reported 2007 revenue growth of just under 3%, again a good result given a slowing domestic economy and the rapid rise in the Canadian dollar. With 2007 complete, let's turn to Slide 15 and look forward to 2008.

There's no material change to our overall target since last fall's investor conference. But with more insight into 2008, there are upsides and offsets. Largely unchanged is grain. A strong crop in 2007 bodes well for early 2008. Last fall, I noticed we anticipated a revenue cap reduction on regulated grain due to a review of maintenance costs by the Canadian Transportation Agency. They will announce their conclusion shortly. On the coal front, we are modeling another strong year and with the recovery of some lost ground from late 2007, we're looking at half a million tons as an upside. Our target for sulfur and fertilizers is also unchanged as we still expect growth to be led by pot ash sales with some upside potential. In short, bulk remains a great business with strong fundamentals and upside base on global markets.

Turning to forest products, housing projections are even lower than anticipated last fall. We don't think we've seen the bottom for lumber and panels. With an industrial product, we've modeled a robust year based on large diameter pipes, chemicals, and developments in the industrial heartland serving the oil sands. We'll look at also for continued pricing strength here.

Automotive is off to a softer start, given the earlier inventory shipments I mentioned. A recently announced life extension for Ford's St. Paul's facility will help to offset sector weakness. Finally in intermodal, I'm certainly watching the retail side of the market, but I do expect positive results as our strategic customers and port strength will continue to deliver top line growth.

Before wrapping up on the outlook, I will comment on price. I see the overall pricing environment remaining positive, and our pricing discipline will continue. As I said earlier, we exceeded our target renewal range in 2007 indeed with about 200 contract renewals in December alone. We delivered a weighted average increase over 8%. This increase is carried into 2008 revenues, of course, for a solid start to the year. Our plans also include price lifts from fuels given a revised outlook based on WTI at US$ 87, up from $80 modeled at Investor Day.

Summing up, a weaker North American economy has clearly impacted areas such as forest products and automotive. On balance, however, our targets hold as our product is improving in early 2008 and we are positioned to take advantage of our upside, some volume from late 2007 planned to move in 2008.

Global fundamentals for grain, coal and pot ash are excellent with commodity prices remaining at record levels. Alberta will continue to develop its energy resources with CP positioned to take advantage of inbound and outbound shipments. The port of Vancouver delivered the highest growth on the West Coast in 2007 and is calling for a 6% to 8% increase in volumes in 2008. And our pricing momentum continues. So I remain confident in my team's ability to deliver 4% to 6% top line growth. Thanks and over to you, Mike.

Thanks, Marcella. Fourth quarter was one that delivered good financial improvement, despite a number of external factors which impacted our core results. These included the 15% appreciation of the Canadian dollar and the 40% jump we saw on price of crude. Though these swings did not play a part in our operation of our railway, they do have significant impact in the financial results we will be discussing today. As Fred mentioned earlier, and this is just math, if not for the impact of fuel pricing, our operating ratio would have been over 100 basis points lower in 2007. And with that, let's look at our fourth quarter results.

I will start with total revenues which is at the top of the chart on Slide 17. I will focus my comments on the far right column which shows FX-adjusted variances. As Marcella talked to, revenues were up by 5% over last year. Operating expenses were up by 6% due mostly to the dramatic increase in fuel prices. This translates into operating income of $306 million and an operating ratio of 74.3%. Below the operating income line, other charges were down significantly due to the inclusion of the DM&E equity pickup, which was worth over $12 million in the quarter. Interest expense was up by 37% on an FX-adjusted basis as we have additional debt associated with the purchase of the DM&E.

Finally, income tax expenses are down 20% as a result of the Canadian government's new legislation passed in December which reduces income tax rates. The impact of this rate reduction on 2007 was to reduce our annual effective rate a full 100 basis points, 29% with a more pronounced effect on the fourth quarter. So our adjusted income, which is before foreign exchange gains or losses on long-term debt and other specialized items, was up by 9% without the impact of foreign exchange. When you add back the impact of foreign exchange, our adjusted income was $185 million or a 2% improvement.

On Slide 18, I will reconcile our Q4 EPS growth which as you can see from the graph had many moving parts. Starting on the left, fuel price net of a one-time fuel price adjustment in the U.S., cost us $0.20 EPS or $42 million. WTI moved from US $61 per barrel in 2006 to nearly US $87 in Q4 2007. Foreign exchange cost us $0.06 or $12 million on the quarter. We saw an increase in casualty cost of $0.05 or $10 million. A number of items drove this variance, including a couple of costly incidents and a Q4, 2006 one-time recoverable. On the positive side, price, including fuel cost recovery added $0.24 or $50 million to the quarter.

Increased car loadings were largely offset by mix but added $0.05 EPS or $10 million. The income tax benefits I talked to earlier added $0.08 or $17 million. And finally all other removed $0.01 from the quarter. Overall, we delivered $1.20 in adjusted EPS or 4% growth in the quarter. The slide 19 and a more detailed look at our operating expenses. I will start at the top and work my way down through each line item. Again, for this breakout, I will talk to the FX-adjusted numbers, which are in the far right column. Compensation and benefits were down 1% in Q4.

Wage and benefits inflation, including pension expense of $6 million, was more than offset by lower incentive compensation and a favorable impact of our head count reduction. We also had a positive effect of approximately $6 million from our regular review of labor, restructuring accrual. Fuel was up 25% as a result of higher WTI. Materials expense was down 8%, due to lower consumption and unit costs. Equipment rents were up 6% or $3 million due to higher car and locomotive counts throughout the quarter. Depreciation expense came in as expected while purchased services and other were up 10%. In addition to the increased casualty costs, we experienced higher maintenance cost due to the increased number of locomotives online. All in, operating expenses were up 6% without the impact of foreign exchange. A stronger Canadian dollar brought this back to 1%.

Let's now move to Slide 20, and look at our 2007 full year results. Revenues, up 2.7%. Operating expenses, up 2.6%. Overall, 2007 was another strong year for cost management as we reduced our per GTM expenses by 1.4%. Our operating ratio was a record 75.3%, while adjusted diluted earnings per share was $4.32 or a 9.4% improvement over 2006. Free cash flow came in at $303 million, excluding the DM&E and the reclassification of the asset-backed commercial paper. Balance sheet continues to be strong with a net debt to net debt plus equity, at 42.5% while return on capital employed is 9.5% after tax.

2007 was a year with many challenges but we delivered in line with our targets and we were able to meet or exceed our EPS guidance for the fourth consecutive year. So as we look into 2008, on Slide 21, we're projecting a 4 to 6% increase in revenues, and Marcella gave you some insight into where this growth will come from. Operating expenses are expected to rise 3 to 5%. Growth and workload will be offset by 45 to $55 million in savings from our ongoing initiative. Included in that is 25 to $30 million from additional IOP benefits. Free cash flow is expected to be in excess of $250 million.

Finally, given the trends in oil prices and foreign exchange, we are modeling WTI to average US $87 per barrel for the year, which is up from US $80 per barrel we talked about in October. We're assuming foreign exchange will be at $1, or par which is unchanged. As I said at the beginning, when you remove the impacts of fuel and foreign exchange from the equation, our 2007 results were good. I remain confident in our 2008 plan and I'm pleased with the start we had. With that, I'm reconfirming our 2008 EPS guidance of $4.70 to $4.85 or a 9% to 12% increase versus 2007. I will now turn it back to Fred.

Thanks, Mike. Before I wrap up, I will provide a brief labor update. This past Sunday we announced a new tentative three-year agreement with the CAW representing our mechanical services employees. The agreement represents months of hard work by CP and by the CAW representatives. It meets our expectations on pattern and adds a breakthrough dimension on labor flexibility. I can't say more until a ratification occurs, but I think it's a credit to both bargaining teams that they were able to design creative means of work flexibility to allow CP to reward its employees. Also during the fourth quarter, we reached a new tentative five-year agreement with the Teamsters representing our Canadian conductors and locomotive engineers. You recall that the previous settlement failed to ratify by a very narrow margin. We expect the results of this ratification vote on February 13th.

This year was a very busy year for our industrial relations team. I'm very pleased with our success in negotiating balanced agreements that support our vision of safety and fluidity. So let me return to my key message. 2007 was a year with many obstacles but we delivered within our EPS range and we met our guidance for the fourth consecutive year. In 2008, we plan on reaching an improved level of operational performance, and this will drive further improvement in efficiency and the quality of our service. I'm confident that our yield program, integrated operating plan, and focus on execution excellence will deliver further improvements in 2008.

We have a great franchise, a very good book of business serving the fast-growing Asian economy and a team that's personally committed to a safer, more efficient railroad. We are in an industry that has a lot of promise and even in these economic uncertainty times, pricing discipline continues. Economic uncertainty also demands that we prepare ourselves for a possible downturn and I can assure you that cost control is front and center. My expectation of the team, that we will seize the quality of growth opportunities but also be quick to trim expenses should a less favorable economic environment unfold. With that, I will turn it back over to Patrick, and open the call to questions.

Thank you. (Operator instructions) One moment, please to for your question. Your question question comes from Fadi Chamoun of UBS Securities. Please proceed.

Thank you. Good morning.

Good morning.

I actually have one question. Are you at capacity on the West Coast? Like, if you can run through how many trains currently go through the West Coast and how much you can do on capacity and potentially the initiative that you can put in place to increase velocity or improve that potential handling of coal and pot ash that appears to want to move higher.

Fadi, we have the capability to move more product. We are taking actions to insure that we do not miss business opportunities. I will give you a simple example right off the bat. Over the course of between about the 20th of December and today, we have towered up all of our coal sets. I say all, but I think we have three or four left to go where we have added an incremental locomotive unit to the trains, and this will enable us to take the train speed of the coal trains up arguably by almost 50%. It sounds a bit crazy but they were creeping over the hills and we have the ability to move them more quickly.

That as one single initiative creates even more capacity for us. So we have the capability to move everything in our revenue plan. We are optimistic that with changes, such as I just described, we will have the ability to take on any new opportunities because we have prepared ourselves by hiring sufficient new crews and we are - - right now we have taken delivery of about 20 new locomotives and there are 20 more over the next two weeks. So we are very well prepared we believe to seize opportunities as they arise.

Okay. Just to follow up on this. When you increase the speed on the trains, can this be done on a sustained basis or this is sort of a temporary situation that you can do to accommodate sort of peak volume and --

This is a plan that we see going forward as being sustainable and it's how we are going to run the west corridor. It's a much more capital-efficient way to create capability and capacity than it would be to simply go and put more track in the ground. We will, during the course of our capital program. We do have further programs this summer that will do rifle shot expansions, as we have done literally for the last several years to ensure that our track capacity and our operating capability is not a constraining factor for the growth of ourselves or our customers.

Great. Thank you.

You're welcome.

Your next question comes from Tom Wadewitz of JP Morgan. Please proceed.

Yes, good morning.

Good morning, Tom.

I wanted to ask, this may be a little bit premature in terms of not having STB approval, but are you able to have conversations at all and have you noticed any interest in potential partners on the PRB project related to DM&E or is that something you can't really talk to people about it until you have the STB approval?

Well, I think the only appropriate answer at this point in time is that when one looks at the DM&E project, we've made two distinct initiatives. The first of which is to ensure an absolutely first-class integration of the railroad that we bought, the regional railroad. That is progressing beautifully. The teams are working very well. We are allowed to communicate and we just can't influence the date of the operations. We work through the trustee.

On the PRB side of things, it is premature to speak about it because it's a complicated big initiative and we are going to do it in a first-class way. So I would ask that - - bear with us as we really stay focused on a great integration and as information becomes available with regard to the possibility of us participating on PRB, we'll gladly share that. But it is just premature at this point.

Okay. That's fair. And I had two more for Marcella. I guess on the coal outlook you mentioned something about a half a million additional tons. I'm just wondering in car load volumes, just kind of a broad parameter for what might the right number be to look at for coal car load growth in 2008. And then you said something about 8%. If I caught it right, 8% increase on some of the contracts that repriced in December which sounds like a bigger number than maybe you have been realizing and I'm wondering if that's - - what does that mean? Your pricing is accelerating or is that just kind of smaller data sets so we shouldn't view that as outside the broader trend? Thank you.

Thank you, Tom. Let me go to your coal car load question. That would translate to about 5,000 additional car loads. With our critical capacity and the cars we have, that's the aluminum fuel set with respect to your question on the 8%, the 8% was indeed a really terrific result for us in December and, in fact, in Q4, the results in Q4 alone was 7% on all of our renewals. So it was slightly higher than expected and that will roll over into 2008. In 2008, I still have my target pricing for the team on the renewals and I expect it to come in on the high side, Tom.

So you might continue some of this momentum on pricing in terms of what you've seen in December.

Yes, I expect to continue the momentum in some of our lines of business.

Okay. And then the 5,000 cars is the total growth you would expect in coal in '08 versus '07?

No, I think, Tom, just for clarity, the 5,000 cars Marcella spoke to is the extra half a million on top of whatever we had built into the plan. So we just have to look at whatever the original plan was versus last year, and then add 5,000.

Yes. Can you just refresh on what the numbers look like? I mean, are you looking at, like 6%, 7% growth in coal cars in '08, just broadly?

Let me just ground you a bit in that. If you recall, we've said we are going to move about 2 million extra tons in 2007 and we were short that because of the Q4 weather and supply chain impact. So it pushes that half a million tons into 2008. So we will be moving more coal in 2008 than we did in 2007. And again, to ground you, Tom, we already moved about 7% more coal in 2007 than we did in 2006. Does that help?

Yes. Yes, that's good. I appreciate the additional detail on it. Thank you.

You're welcome.

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

Good morning. Recognizing that you are still on the regulatory process but actually now starting to report an equity line, the contribution from DM&E, can you give us an idea of what happened to them in terms of revenue growth, operating ratio, improvement, and whether the results in the fourth quarter were to plan? And given that you are planning now to equity account this whole thing, can you give us some sense of sort of guidance range that we should use in terms of thinking about DM&E's contribution at the equity line?

Sure, Randy. It's Mike. Thanks for the question. They came in as expected for the year. You recall at the analyst day, we had said that we expect their EBITDA to be in excess of $100 million and it is in excess of $100 million. Their operating ratio, we have not disclosed but essentially their operating ratio is sound and good and better than ours. We like that. And in terms of going forward, we haven't given a number in terms of projections this coming year, other than to say that it will be accretive. Our estimate is $0.15 to $0.17 and we are sticking to that number, despite the U.S. dollar being weaker.

Okay. My next question is for Marcella. Just basically with reference to your intermodal business, hat bag Lloyd used to do a lot of business between Europe and Canada, and with the devaluation of the U.S. dollar, I want to comment on what's happening with your eastern franchise and are you seeing any impact on your eastern franchise to the Canadian dollar in terms of your flows into Chicago?

Thanks, Randy. Our growth in the port of Montreal has remained consistent with all of our customers at the port of Montreal. There's been no change in that growth due to the devaluation of the dollar. We are expecting the growth to continue through 2008.

Maybe just a little more color, Randy, because it's an interesting area. The export volumes over the last half of the year have actually - - instead of moving back a lot of empty containers, there's a lot of export loads leaving North America and destined for Europe.

In fact the exports are greater than the imports at the port of Montreal.

And just in terms of your Canadian or eastern franchise, are you seeing the impact of the Canadian dollar, vis-a-vis the U.S. dollar affecting your flows from Ontario into Chicago?

We have not seen any significant or any impact on that at all. We still have the most efficient route from the port of Montreal into Chicago and our customers continue to utilize that most efficient route. We have a lot of growth on our short haul volumes from the United States into Canada. I mentioned we had a growth about 22,000 units. So a lot of that was across the border south to north movement into Canada.

See, Randy, one of the things that's worth to note was simply the - - Marcella mentioned that we had a surge of auto movements late in the fourth quarter. We think it's kind of inventory moving in advance. There were some extended shutdowns in the auto sector within the first two weeks of January and people really didn't come back up in any significant way to the 15th so our auto volumes - - these are finished automobiles coming out of the plants in Eastern Canada were certainly much softer in the first two weeks of January than we thought they would be. They have since recovered and they are now running at a normal rate, but that may or may not be attributed to the U.S. dollar or the Canadian dollar exchange rate. I'm not sure.

Okay. Great. Thank you.

You're welcome.

Your next question comes from Ken Hoexter of Merrill Lynch. Please proceed.

Hi. Good morning.

Hi, Ken.

On pricing side, it sounds like you got something in the coal side. Marcella went over why coal pricing is up and intermodal, you threw out, I'm sorry, why pricing was down on intermodal is all the short haul stuff, but what about sulfur? It seemed to also be a little bit larger to move. Was there something going on there as far as repricing within the sulfur category?

Within the sulfur and fertilizer group, the fertilizers have grown well beyond our expectations, actually. And as I've mentioned that our investor conference on the sulfur side, there's some deterioration because of a lack of sour gas available to convert into sulfur. But overall, the portfolio exhibited our expectation. Whether we remember that in the sulfur and fertilizer portfolio because there are almost 100% who ship their own cars as well which impact the mixed numbers.

Okay, great. And then I think you mentioned -- you were talking earlier about the kind of western capacity, but you mentioned that pot ash is growing at such a sustained rate. Is there enough capacity to continue to meet the demand that's grown within the pot ash side?

Ken, it's Fred. Absolutely. We have an excellent working relationship. We are very much in tune with the aspirations of our major client, Computex. I think we still have almost four years to run on that contract. Our commitment to them is that the capacity either exists today or we will find a way to create capabilities to move their volumes for export. We are delighted to be able to do that in a really robust global market for their product.

Right. Great, in fact, and one financial, I guess, question for Mike. I noticed in your footnotes you wrote that you've looked on the equity method for the DM&E for the full year. If you get approval on the 31st, and then when you start, I guess, to that point to consolidate the results. There's no difference to the $0.15 to $0.17 accretion. It's just been how you are accounting for at that point; is that correct?

Yes, that's correct. We did that for simplicity of modeling at our analyst day and also for the analyst community. The good news around that is once we have control of the property, it will increase our cash flow.

All right.

In terms of our accretion estimates, it will be the same.

Great. And last thing if I can for Marcella. The refresher on coal pricing for the contract this year. What are you expecting based on the contract and metal pricing?

For 2008, Ken, we are going to see a negative compare Q1 over Q1, as we roll over the price, and then commencing Q2 through the balance of the year. The price will actually increase based on our assumptions of selling price of coal but overall through the course of the year, the price should be flat, compared to 2007.

Thanks so much for that. Appreciate it.

You're welcome.

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

Thanks very much. Good morning.

Good morning.

The first question is for Marcella. Just one on the coal. Interesting that - - I don't know if she can give us some sense of what you are, assuming for pricing because with BHP declaring forest reserve and never hearing talk of 140, maybe 150 per ton, how does that shape up against what you are assuming internally for your coal prices?

Walter, as we explained in our investor day, once we hit a certain point, we are in advance. So the price that we've assumed is already within the highest span. So if the price goes up to $140, $150, I even heard $200, it is not going to make a difference on our pricing.

How will it affect do you think on the - - we talked in $140, I mean, $200 seems a pretty juicy price to be shipping a little bit more. So is there any - - if you are thinking of upside, are there upside? Have you talked to forwarding about an upside there and it's capacity there if they want to ramp up their - - bought at the port and at the real capacity, or if they do want to ramp up production if they can?

Walter, we sure do talk to elk valley all the time in terms of the candid understand their numbers. They are not going to be coming out until mid-February with their formal numbers in terms of volumes that they will be looking to move and to sell. So we're going to be waiting for that to be able to confirm what our numbers are. In terms of our capacity to move, I think Fred is going to make a few comments but I want to say the capacity connects both to their production capability and all supply chain partners in the system.

I think, Walter, on that issue, the important dialogue that will occur with our major clients is around the full supply chain. When one looks at December or even parts of January, no matter how well the railway runs, it's irrelevant if they can't load efficiently at the mine or if they can't unload at the port. And while we certainly had a handful of issues in December with regard to a rockslide, they took us out for a couple of days, as well as some snow conditions for a day or so, there were equal or more and I would argue more issues associated with mechanical failures, with choices to metrics blend using the unloading capacity to load ships with products shipping from other mines to use the same capacity we could have used.

The consequence of that is that the cycle was not very efficiently. It is a big conveyor belt and when people make choices or have mechanical failures, the whole conveyor belt stops and it actually impacts not just the coal cycle but also the cycle of all the hardwood commodities. So we have the capability to move more coal. We have been delighted to do it. We're taking some actions on powering up the trains to create some capability. But I think I think the other partners in the coal chain help [Camp Dali] and their ship and their partner Westshore, Neptune are going to have to be a very big part of any ambition on all of our part to move more coal because there's gross inconsistencies and some failures to execute on parts of other parties that have to be addressed if we are going to move more coal next year.

That's great color. Second question is just on pricing. You are going to exclude -- I don't know if Mike or Marcella is the best one to answer this. If you exclude the fuel surcharge from the price gain, what would you be coming up with price in the fourth quarter?

On the pricing side, most of the price is on the price side as opposed to the fuel side, Walter.

Okay. Okay. And just housekeeping, you mentioned, Fred, February 13th for the Teamsters. Do we have a date for the CAW in terms of when they'll vote on their contract?

About the same time, I believe. I think they will be a little bit more expedited just because the nature of their employees are in terminals they are supposed to spread all over.. So sometime around that. We don't have a specific date but probably within a week of that date.

Okay. That's great. Thank you very much.

Pleasure.

Your next question comes from Jacob Bout of CIBC World Markets. Please proceed.

Hi, good morning. First question just on your target improvements and operating ratio. Take a look at what you talked about with I/OP and delivering $25 to $30 million in additional savings in 2008. If everything else is being held equal, or we do assume then that you are targeting a half percent next year -- or, sorry, in 2008.

You say half a cent, like 50 basis points? No, 100 basis points. All things being equal, that's about 100 basis points, $50 million.

Okay. And then just in the -- okay. And then just in the effective tax rate here. According to my calculation about 25% for the fourth quarter. What should we be looking out for 2008, 2009..

Fro modelling purposes, so big impact in the year, brought an effective rate for the year down to 29%. It was 30%, and that's why the fourth quarter rate is so low. Going forward, we had anticipated these tax rates coming down when we modeled, and next year will be 29 to 31%. We are feeling optimistic, obviously, but we are still modeling -- but you should model 29 to 31%.

Okay. Are there any indication that that there's a decline in pot ash volumes with the Chinese negotiations not being solved? And then, what type of lead time, if you look back to 2006, did camp Texas give you. Let's say the Chinese negotiations do stretch on past the, you know, end of March, April time frame that we have been given by the main pot ash producer and actually extends into the summer and they have to take mine shutdowns.

Jacob Bout, Let me speak to your first question about the decline in pot ash. I will give you my perspective having spoken customers. They can give you far more color on since they are directing involved in the discussions and negotiations. From my discussions, there appear to be - - there is a shortage of inventory on the customer side. Huge demand for pot ash larger than it has ever been. I would expect that those market fundamentals will cause a very different negotiation for our partners in the world market and have a different impact in terms of both the pricing and the timing of the negotiation.

Jacob, on timing, I just don't -- I don't think it would be appropriate for us to get into dialogue. These are -- you know, these are very important clients and I think Marcella has done a nice job of kind of saying the fundamentals of what the customer is facing. They obviously do their best to keep us tuned in as the dynamics of a complex global negotiation occurs, but we are not reading at this point in time a reason to be concerned.

Okay. Thank you.

Pleasure.

Your next question come from Cherilyn Radbourne of Scotia Capital.

Thanks very much and good morning. My first question is on grain. Just specifically I noticed that the problems in Alberta, Saskatchewan and BC came out yesterday expressing support for deregulation of barley marketing. I'm just wondering if you have any comments with respect to possible timing of full deregulation in Canada, in other words both barley and wheat? What's your thinking based on your conversations with customers?

Well, both from our perspective, and we follow this very closely and speak to our customers regularly about this, as well as the regulators. I think it's frankly impossible for me to guess any timing on the regulation, in terms of how the policies and politics are going to play out with respect to the deregulation. But I would add, Cherilyn, to that from our perspective, our focus is on an efficient handling system. Whatever the outcome is, our focus is on making sure that the grain family system it going to be efficient from the origins to its various destinations.

Okay. Thank you. In my next question relates to the effective income tax rate in Q4. If my reading of number 6 is correct, and maybe, Mike, you are the best one to answer this. There was a $17 million one-time benefit that went through in Q4. Am I reading that correctly that that's what pushed the effective tax rate down in Q4.

Essentially, it was to adjust the effective rate on an annual basis from 30 to 29%, and we made the adjustment in Q4, which brought the Q4 effective rate down lower.

Okay.

But, yes, you are right.

So that would have been built into your guidance when you updated guidance early in December?

No, it actually wasn't because this happened right at year end. We weren't -- we weren't certain that the legislation who come through in either late '07 or early '08, so we are quite pleased that it did come through in '07.

Okay. That's it for me. Thank you very much.

Thank you.

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

Good morning.

Good morning, David.

Just on the grain side, you are calling for a fairly robust outlook. On the Canadian side, what are you seeing there? I see the shipments still look pretty strong but as you look out, I think with the production being down and the [curio] back down, how do you think the year will progress?

Well, we will got a really strong 2008, as I mentioned, David, coming out of the 2007, '08 crop. We don't know what's going to happen with the '08, '09 crop because it isn't in the ground yet. The projections, if you go back to the crop ending in 2008, the export volumes still continue to be at the higher level. So we expect to see our strength in our plan to continue as I had described to you at Analyst Day.

So essentially, based on last year's actual harvest and the actual fact that the curio was relatively depleted, you think that the -- or you feel that the actual volumes will be strong because the export and the farmers will draw down the pipeline.

David, I think that's pretty good comment on that, but in terms of drawdown on the inventory, we don't believe that they have been fully drawn down. There's a lot of information out there. If you go to different sources, if you go directly to the farmer, to the grain elevators to the CWB, I hear different stories about that, the inventory. My understanding and my expectation is that there, in fact, is inventory in the system, as well as the production.

Okay. Very good. And just on the coal side, and only one comment at this stage. But just in terms of the actual plan of attack, I guess, or the actual timing thereof, on the elk valley coal contract, I guess it's up for renewal and for the effective date of April 1st, 2009, I guess obviously they are calling for regulation on rates and things like that, and which I assume is partly positioning. What is the actual plan there?

I think you got it on the head. It's positioning by other parties in whatever form they can. So we have no comment. They are highly valued customer who appreciate what we do, I'm sure, and we'll do our best to command value for our services in a fashion that only they can -- they can set the stage for. So I would just ask you to stand by. We will do our best to bring that to a conclusion sooner rather than later but that's a function of the client's interest and aspirations.

Fred, when do you actually sit across the table from them and start negotiating?

Whenever they would like us to.

Okay. A last one if I may, just in terms of the actual year and how the quarters will play out, it looks to me like FX will be a bit of a head wind in the first half of the year, obvious subject to some carryover from last year on volumes, et cetera. Are you calling for more of a back end tilt here? Obviously as the year plays out?

David, it is Mike. I think you have it right. Firstly, we don't give quarterly guidance, but I think in terms of modeling, seeing foreign exchange where it is now, and fuel where it is now, the impact is going to be more impactful in the first quarters rather than of the last quarters of the year.

Thanks, folks. Have a great day.

Thank you,

Your next question comes from Bill Mackenzie of TD Newcrest. Please proceed.

Good morning. Fred, I think you mentioned on coal that you guys are in protest of powering up all your coal sets. I was just wondering how many sets you have. . What is the mix between steel and aluminum and how many have been in storage before that you are

Just for clarify, when I say we are going to power up the coal set, our coal fleet has largely been active the whole time. The problem is when the supply chain is broken, as it has been throughout the fourth quarter and parts of January, you are not getting full situation out out of the fleet. So we will have all of our fleet powered up. We have the ability to lease other cars should the opportunities exist. And when I say powered up, what I'm talking about is extra locomotive on the trains and the benefit of that is rather than have faster trains being held up by slower coal trains, we are going to - - with the increased power on the trains, we're going to elevate the speed of the coal trains, which will not only improve the performance of the cycle time, again subject to the other partners overcoming their problems, but also it will speed up the fluidity of all of the trains in the corridor. So I think the ability and I will call it the risk management approach to putting incremental power on there, preventing stalls, preventing other things that could damage, a corridor that's very busy, is a very sensible way to go.

Okay. And do you still have steel aluminum cars in your fleet?

The majority of our cars are now aluminum, but we still have some steel sets left. There is superintendent, obviously, over the course of time to convert the remaining steel sets to aluminum. That would obviously be the subject of discussion with our client as to what kind of volume opportunities they see for us in the future.

Okay. Great. And then, Mike, just one housekeeping item for you. On Slide 18, when you ran through the diluted EPS calculation, analysis, you've got in there for fuel prices the $0.20 EPS impact and just noting that it says net of one-time gains. Were any one-time gains in fuel this quarter and if so, what did they relate to?

Bill, you may recall in my commentary, I mentioned a fuel tax in the U.S. I call that a nickel. It was around $0.05. It was a fuel tax that we got in the fourth quarter. But essentially all in fuel, partially because of the increase but partially because of the lag cost us $0.20 on the quarter.

Okay, great. Thank you.

Your next question comes from Tom Varesh of Canaccord Adams. Please proceed.

Good morning. I just have one question. I was wondering if you could tell us what percentage of your book of business will be renewing in 2008?

Yes, Tom, 50% of our book of business is going to renew in 2008.

Okay. Thank you.

Thank you.

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

Thanks very much. Just a couple for me. Number one on the fuel side, how much of the -- how far are you behind, if you will? Could you quantify that in terms of recapturing it on your fuel recovery i.e. what kind of bump could we maybe expect in Q1 if we have some stability on the fuel price side?

Cameron, it's Mike. I think I'm trying to understand your question in terms of a lag and I'm going to correct myself. I said earlier $0.20 in the fourth quarter. It was about $20 million in the fourth quarter, about a dime impact once you consider the fuel coverage program and the lag.

Okay.

But in terms of lag, you shouldn't expect any benefit if we're modeling $87. It was our -- our average was $87 in the fourth quarter and so when there's no change, there's no lagging.

Okay.

Is that what your question is directed at?

Yes. It's just a question of - - is there any type of - - given the fact that there is a two to three month lag, my question is simply is there any catchup for you in the first quarter versus what you were behind, if you will, in fourth quarter? With that assumption, apparently the answer would be very little if any.

That's right. It looks like even with the forward curve, it's at about $89. So even for the year, there won't be much lag impact.

Okay. In terms of the overall earnings, outlook and guidance and so on - - from an overall macro GDP standpoint, are you factoring in? Or is there a specific GDP point estimate you could provide? Are you factoring in a recession in those guidance numbers or are you factoring in more of a soft landing and if a recession does occur in the US or if they're already there, could the guidance perhaps change?

Cameron, we haven't made any dramatic change since the Investor Day and if you recall, at that time our view was probably soft landing, although we were not going to be economic forecasters to be able to be so specific. I believe what we said was that the GDP in the states would be around 2% or so. And that although there's lots of moving parts here, we are not seeing reason to believe that we are off the mark too far on that. What is really important, I think, when you look at our franchise is we are not dependent on the U.S. economy, the way some parties are. So so much of our activity is serving the high growth Asian economies with our export products and as a consequence, while it's important, it's not a critical matter in our economic outlook, I guess is a better way to put it.

Okay. Thanks. That's my two.

My pleasure. Thank you.

Your next question comes from Ed Wolfe at Bear Stearns. Please proceed.

Thanks. Just quickly a couple different questions. DM&E, Michael, could you tell us what the pretax number was for the $12 million of the equity interest in fourth quarter? And how do we think about it? What's the guidance for that equity contribution as we go forward in '08?

Ed, we haven't given the pretax amount. We have disclosed EBITDA and the EBITDA came in as expected. And analyst day, we said that both topline and EBITDA would increase double digit and everything we are seeing so far. As much we are in the STB approval process, we can listen in, so we don't have control of the property but we can listen in and everything we see and hear, we like. We are still projecting double digit increase in the top line and double digit increase in EBITDA.

Okay. Fair enough. How do we think about the Fording coal contract if we get to April '09 and like last contract you don't have a new contract ready to go? I think it was a year or so last time. What happens? Does it stay on the terms of the last year or how do we think about how that works?

I think the best way to think about it, if there's no contract, Ed, it is exactly as you said that it would just continue until the contract were in place.

So continue on the terms of the last year of the contract?

Ed, I think we are a little ahead of ourselves, candidly. I expect that if there's coal to move and there's a contract in place, we'll move it. If there's not a contract in place, then there are other means available to the parties, some of which we had to use last time. But it will not be as protracted an exercise it as it may have been last time because these are commercial issues and they can be solved. So we will solve them, either through commercial negotiation which is our aspiration, or work through other mechanisms if not.

Okay, fair enough. Fred, to get to the free cash expectations I'm having trouble getting there in '08. I think you said at the analyst's meeting that there's 100 to $140 million of a cash tax payment due at some point in '08, is that correct?

Yes, it's Mike, Ed, and that's exactly what I said. We're becoming cash taxable. And that's about $140 to $150 million. Despite that, our free cash is only coming down 50. So the balance is an increase of $100 million.

I just can't -- if I take the midpoint of your earnings guidance, I'm getting about $740 million of net income. The depreciation is $490 million or so, and you have got CapEx of $895 million and a payment of $125 million. What am I missing? Is there any change in the deferred taxes or something that I'm missing here?

Ed, I don't have the puts and takes in front of me, but essentially, I think you are getting at it the right way. There's also a slight reduction in our pension funding. That would add to it and a slight improvement in our working capital as well. Those are two things that are probably have the difference.

Okay. And the pension funding, can you talk about the difference on the cash side and the earnings side?

On the cash side, I expect a reduction of about -- in round numbers, $20 million. On the expense side, I expect it to come down 5 or 10.

$5 or $10 million?

Yes.

Okay. And Marcella, when you look at pricing 5% fuel and price and then you talk about recent contracts in the quarter going up 7% and 8% for December. How do we think about that because I'm guessing that if there's 5% price in fuel, the price is only three, four tops in that mix? What has led to that acceleration, it's just a mix of what's come up recently?

Yes. I think that's right, Ed. The mix of the business that has come up in the last quarter and particularly in December that has brought us some really terrific price results that we are going to carry over to 2008.

But when you think about pure pricing, should we think of more 3%, 4% as an ongoing, fair mix of everything number?

I think what I've said was that it would be 3% to 5%, Ed, and not expecting to see it coming in on the higher side.

Okay. Thanks a lot for the time. I appreciate it, everybody.

Thank you.

Ladies and gentlemen of the media, at this time if you would like to ask a question, please press the star followed by the one. (Operator Instructions) Your first question comes from Brent Jang of the [Globe and Mail]. Please proceed.

This is a question for Fred. So you are forecasting dilutive earnings per share growth of between 8.8% and 12.2% according to my calculator. So, I'm just wondering whether this bodes well down the road for a dividend increase like CN announced last weekend?

Brent, the issue of dividends - - it's a board matter and until we are in front of the board and have discussions with their aspirations in this regard, we can't make public statements but I think directionally what we have said over the course of time is that as our earnings grow, we would address the dividend side of things. So bear with us. The board will contemplate and in due course, we will make whatever appropriate comments.

Okay. And this is a big picture question. This will be another record year. So that has to make you feel good to be in the railway industry.

Well, Brent, it's an outstanding industry at this point in time and what is exciting about it, I think for everyone in the industry, is that there's just nothing on the horizon that would indicate the ability for other modes to be as competitive as the rail industry is going be over the next decade. Yes, we like where we are and our job is to keep improving the quality of our products so that we command value and get a great return on investment to justify continued expansion.

Thanks.

Thank you.

Mr. Green, there are no further questions at this time. Please continue.

Thank you very much, everybody. We will see you again on the next quarter. Bye now.

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