Canadian Pacific Kansas City Ltd (CP) 2011 Q1 法說會逐字稿

Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific's first-quarter 2011 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. Janet Weiss, you may begin your conference.

Thank you, Stephanie. Good morning, and thanks for joining us. The presenters today will be Fred Green, our President and CEO; Ed Harris, who will be reporting on operations; Jane O'Hagan, our Executive Vice President and Chief Marketing Officer; and Kathryn McQuade, our Executive Vice President and Chief Financial Officer. Also joining us on the call today are Brian Grassby, our Senior VP, Finance and Controller; and Mike Franczak, our Senior VP of Operations.

The slides accompanying today's teleconference are available on our website. Before we get started, let me remind you that this presentation contains forward-looking information. Actual results may differ materially. The risk, uncertainties and other factors that could influence actual results are described on side 2 and 3, in the press release and in the MD&A filed with Canadian and US securities regulators. Please read carefully, as these assumptions could change throughout the year.

All dollars quoted in the presentation are Canadian unless otherwise stated. This presentation also contains non-GAAP measures. Please read slide 4.

Finally, when we do go to Q&A, in the interest of time and in fairness to your peers, I would ask you to limit your questions to two. If you have any additional questions, you can re-queue, and, time permitting, we will circle back. Here then is our President and CEO, Fred Green.

Good morning. Today, CP reported first-quarter EPS of CAD0.20, reflecting the impact of a very difficult operating environment. Our network capacity, service performance and operating costs were all severely impacted by winter. We obviously had a brutal quarter, and we are now working through the collateral impacts of Q1, snowmelt and flooding.

As you can see on slide 6, after the tough start in January, we improved in February, March and again in April. We took a step back in mid-April with flood-related diversions and washouts, but the current performance points to continued recovery. We are not through the flood season yet, so our metrics could stay choppy in the short run. However, I am confident that we are regaining our stride.

Second half of 2011 has the potential to be very strong, and we will have the resources ramped up, with 60 new locomotives arriving starting in August and 10% net increase in Running Trades employees.

We are positioned to execute and to deliver on anticipated demand. I'm going to turn it over to the team and have Ed outline our operational performance, Jane provide some market insight and highlight the sources of our optimism, and Kathryn break out the numbers and implications of winter. Before I turn it over to the team, I would like to make a few comments about our change in leadership in operations.

As you know, Ed has retired from the role of COO, and Mike Franczak, who is with us today, will be leading our operations as Executive Vice President. Ed was instrumental in setting the foundations of discipline and accountability for the reorganization of operations. In addition, his work in our yards and terminals and the rollout of our first mile/last mile projects will ensure fluidity in our yards, better service reliability and lower dwell.

I want to thank Ed for his focused commitment over the past year. He has helped elevate our game and I am pleased -- very pleased that he is staying on in an advisory capacity to Mike for the remainder of the year. He will be in the field with Mike, visiting yards and terminals to ensure that the changes he has made not only stick, but deliver continuous improvements.

I will now turn it over to Ed to walk you through the quarter.

Thanks, Fred. Well, in all my years of railroading, I have to say this was the toughest winter I have ever experienced. We always plan for winter, but we were hard hit by weather on a rolling basis across the network, and as a result, we weren't able to get our full facility out of our resources. Let's get started on slide 8.

Let me give you a few examples of the types of issues we faced. We had a once-in-30-year avalanche cycle in our western corridor. This caused us to be down about five times more than a normal winter. And it wasn't just us that was shut down, but also the highway system, affecting our ability to shuttle crews to trains. We even had to rail in food and supplies to our bunk houses.

We had record snowfall in the Midwest US. As a result, we had to plow our Saint Paul Yard, something we haven't needed to do in over 40 years. As you can imagine, when you need to plow a yard, it is a big deal. You have to pull all the cars from the tracks, plow it, dig out the switches, and you certainly lose a lot of productivity and capacity while doing so.

We also saw a lot of snow and blowing snow right across the entire network. There is nothing more frustrating than plowing at noon, having the snow blow back in by the end of the day and having to dig out those same switches all over again.

And finally, we had instances of running long distances as single track because we couldn't keep the passing sidings clean, clear and open for our train meets. That really eats at your capacity and increases your fuel burn, as you have a lot of trains waiting for track time.

Some of these things by themselves we should have overcome, but it was the sequential nature of the outages and capacity reductions that took us out of our rhythm and extended the impacts. For instance, in the west corridor, we would be out for avalanches, get cleaned up and ready to go, then have four terminal outages at destination. This type of supply-chain issue magnified and extended the impact of our original outage.

I am extremely proud of the team. They know how to railroad and they have worked very hard to recover the operation. The metrics have been showing some nice, steady improvement as the weather has eased, but let's not mince words here -- it was a pretty miserable first quarter, (technical difficulty) improving, not yet fully back into our stride.

We know our outages impact the supply chains and the level of service to our customers suffered. Improving service reliability will be the key focus. Let me take you through some of the numbers, slide nine.

This quarter, personal safety improved 13%. Train operations safety fell by 57% over last year, indicative of not only the extreme winter operating conditions, but also our extremely strong safety performance in 2010. I am confident that as we recover from winter, these numbers will certainly improve. On to slide 10.

Track outages across the network dramatically affected our operating efficiency. The multiple interruptions to train operations caused by avalanches, snowstorms and extreme cold combined to significantly reduce our fluidity. Train speeds were down 14%, which reduced asset velocity and network capacity.

Our fuel consumption rate increased as trains were staged during line outages and locomotives idled to prevent freezing. Fuel efficiency declined by 7% compared to last year. One bright spot was a 2% improvement in terminal dwell, evidence that despite a tough winter, we were able to sustain our yard processes and make improvements in first mile/last mile operations. This helped to minimize the decline on car miles per day, which was down 7%.

The new processes we have put in did not allow our mainline issues to flow backwards and congest the yards. I think it reflects some of the newly-found discipline that Mike and I have been instilling.

As we have moved through the latter part of March and into April, we've made some steady progress in our key efficiency metrics with car miles, for instance, tracking 4% better and terminal dwell 7% better in the last four weeks. Let's go on to productivity on slide 11.

Train weights and lengths held up despite the deep cold and are comparable to our performance last year. Our use of distributive power has been instrumental in keeping trains long, even during these difficult operating conditions. However, we experienced lower locomotive availability as a result of the extent of severe temperatures and network choppiness, affecting shop deliveries, which, when combined with the large number of trains staged, drove down the productivity of our locomotive fleet by 14%.

Similarly, train stage impacted employee productivity by 5%. However, since mid-March, we have seen conditions normalize and are seeing improvements in key metrics each day. For example, train weights and locomotive productivity are both improved. This in turn will start to drive improvements in fuel efficiency. So the trends are good, and our long train strategies will continue to be a key focus. Please turn to slide 12.

Summary. It was a difficult quarter, but as I pointed out, key efficiency and productivity metrics are showing improvements in the latter part of the quarter and now into April. I am confident that we will recover to our game plan and deliver the required level of service reliability for our customers.

Let me just sum up with a few personal remarks, as this is the last time I will have the opportunity to talk with you on the quarter. CP has an excellent operating team. They got knocked down this past quarter, but I can tell you this is a team that knows how to pick itself back up and deliver. I leave knowing that they will continue to drive improved performance.

As Fred said, I came here with two primary purposes -- to help accelerate yard performance and help groom the next generation of railroaders. I have largely accomplished this task, and I am leaving the role in some good hands with Mike Franczak and the rest of his operating team. And I will still be around this next year to coach, mentor and ensure the team has the benefit of my experience and critical eye in the march to a low 70s operating ratio.

You can expect that under Mike's leadership, the focus will continue to be taking actions that will deliver sustainable improvements and asset velocity, service reliability and safety. I will turn it over to Jane now to cover the markets.

Thank you, Ed, and good morning. The markets we serve continue to be robust, and the areas we have described before, of Asian trade, energy markets and North American economic recovery, are all presenting opportunities for growth. Clearly, Q1 was operationally challenging, but our demand fundamentals remain strong, and we are focused on recovery.

Reported Q1 revenue was flat. The significant weather-related operational interruptions in Q1 lead to a year-over-year decline in carloads of 3%, 2% being related to reduced US thermal coal volumes that we priced up last year.

On a currency-adjusted basis, revenues increased 2%. Fuel surcharge revenues generated 3% of the gain, and the combination of price, volume and mix had a negative 1% impact. On price specifically, same-store price came in at 2%, and our renewals continued to meet our targets at close to 4%.

Before I walk through the individual markets, I will comment on the potential impacts from the devastating Japanese earthquakes. We expect minimal impacts to the majority of our commodity lines. The automotive sector will be one area impacted by the recent Toyota and Honda announced reductions in North American production. We are in close contact with our customers and we are making the necessary adjustments.

Clearly, the rebuilding efforts will drive demand for commodities such as lumber, but the timing and level of that demand is unclear.

Now, I will provide comments on the quarter and some perspective on the balance of 2011. For clarity, I will speak to currency-adjusted revenues.

Grain revenues were down 12%, as were units. With the adverse weather conditions across the prairies and the Rockies and with the strong West Coast orientation of Canadian demand, our share position was impacted on the quarter. Demand remains strong, and with recovery and operational fluidity, we expect Q2 to be above the five-year average. Our recent agreement with the CWB on the 2010/2011 crop year will encourage supply-chain fluidity. And as that returns, we will rebuild to our traditional market share.

Beyond Q2, high world grain prices are likely to incent farmers to maximize production and plant more acres. It is far too early to predict production at this point in time, but let me describe some of the factors that will influence it.

The recent USDA forecast suggests an increase in acres and in corn planting intentions due to the market demand in Asia and from ethanol. These are key positive factors. On the downside, wet spring conditions create some uncertainty about the eventual mix, size and quality of the harvest.

Moving to coal. Revenues were down 3% year-over-year, and volumes were off 21%. A significant portion of the volume decrease was due to the loss of 40,000 short-haul shipments in 2011, as I reported in Q4. The remainder of the decline comes from an outage at a thermal coal receiver in the US Midwest and challenges across the met coal supply chain. For the balance of 2011, the fundamentals behind Asian demand for metallurgical coal continue to support strong Canadian export volumes.

Teck, our major met coal customer, has provided guidance on 2011 sales of 23.5 million to 24.5 million metric tonnes, representing an increase in the range of 1% to 6% over 2010. We are modeling consistent with their forecast.

We will also see the strong average revenue per car changes in coal continue throughout the year, aided by the new Teck agreement that will see repatriation of volumes that were moving short-haul over Kamloops.

Another positive factor for coal volumes going forward is the development of export movements of US thermal coal to Prince Rupert. In 2011, we expect to move in the range of 400,000 tonnes on a joint line basis with BN and CN, and will continue to work on opportunities with stakeholders.

Turning to sulfur and fertilizers on slide 17, revenues were up 13% versus Q1 2010, when potash demand was lighter than historic levels. In the quarter, given the significant increase in demand on short notice, some Canpotex potash loads were moved via an alternate carrier, despite our exclusive position.

We took this extraordinary step to assure that our valued partner could fulfill their sales commitments.

In Q2, with the recovery in our network, we have returned to handling all their business.

Potash and fertilizer demand has returned to pre-recessionary levels, driven by higher grain prices and the need to replenish soil nutrients. We are optimistic that the 2011 export shipments will be above 2010, while North American markets will continue to be strong.

In our merchandise portfolio, revenues were up 13%. While volumes are still below our pre-recessionary levels, we have been successful in securing many of the opportunities in energy that we shared with you at Investor Day, as well as benefiting from the continuing recovery in the North American economy. We are realizing longer hauls of ethanol to the US Northeast, Bakken crude movements, as well as inbound steel and sand movements to support increased drilling activity.

We have seen North American recovery in autos, steel and pulp shipments.

Looking forward, the current price of oil is supportive of continued investment in the Bakken and the Alberta Oil Sands. We expect this to translate into continued growth in energy as we develop opportunities across our network.

Forecasts support a continuation of the improvement in the North American consumer economy. Growth in autos will track the improvements in auto sales to the 13.3 million unit range, while pulp and lumber will be slightly stronger than North American GDP.

Turning to Intermodal on slide 19, revenues were up 1%. This service-sensitive segment was impacted by the operational challenges we faced in our transcontinental network. It is critically important to our customers that we reestablish the level of service they are used to. We are on the right track, and we expect continued improvement. Based on the recovery of the North American consumer economy, we expect GDP-like improvement in year-over-year demand.

In summary, Q1 was a challenging quarter. I have met face to face with over 40 major customers in the last few weeks. I used this opportunity to thank them for sticking with us as we work through our recovery. We also had good discussions on their current and future demand.

From these meetings, it is clear there is strong demand. We have excellent customer relationships, and we will continue to sharpen our focus on service reliability to restore their confidence. We still have to work through the impacts of flooding as all the snow from the winter melts, but we expect strong revenue growth over the remainder of the year.

Above-inflation pricing continues to be our target, and my team continues to pursue growth opportunities across the network. Now I will turn it over to Kathryn to comment on the financials.

Thank you, Jane, and good morning, everyone. In January, we told you we were ramping up resources to meet strong demand. However, the severe winter conditions in the quarter reduced our capacity, created very inefficient operations, which both increased our cost and left service demands unmet. The financial impact of these conditions can be seen in every line item of our income statement.

We have attempted to quantify this impact in comparison to 2010, and I will provide that information as I review each line item.

Now let's turn to the numbers by turning to slide 22. The winter conditions affected both revenue and expenses. Looking to the FX-adjusted column on the right side, total revenues were up 2%, with price and fuel surcharge revenues offsetting lower volumes. Operating expenses were up 12%, and operating income was down 46%.

Below the line, interest expense and other income were lower. Income tax expense at a 26% effective tax rate was 73% lower due to decreased earnings. Net income was down 67% to CAD34 million, and diluted earnings per share were down 67% to CAD0.20. The operating ratio deteriorated to 90.6%.

This quarter, the Canadian dollar strengthened above par to $0.99, and the headwind it created reduced EPS by CAD0.01. To update you on our sensitivity, for every penny the Canadian dollar strengthens, annual EPS is reduced by CAD0.01 to CAD0.02.

Let's begin with compensation and benefits on slide 23. In total, including an FX gain of CAD5 million, compensation and benefits was up CAD11 million or 3%. We estimate excess winter cost of CAD13 million with higher than expected re-crews and overtime of field employees. Productivity lagged, as our GTMs per expense employee declined 5%, and comp and benefits expense per employee increased to CAD26,019. Without the winter cost, we see this number decline year-over-year.

Wage and benefit inflation increased this line CAD8 million, and pension expense was up CAD3 million, consistent with our guidance. Training was up CAD5 million this quarter, and higher training expenses will continue through the year as we continue to ramp up resources on strong demand. I expect us to be at about 14,200 expense employees for the next quarter and up for the full year about 2% to 3%.

Our [A&A] organizational and delayering work is largely complete, and we incurred restructuring costs of CAD2 million. Also associated with this effort are relocation costs, which are included in purchased services, which I will speak to in a moment. Partially offsetting these increases was incentive compensation, which provided a tailwind of CAD16 million due to lower bonus accruals and stock price.

Turning to slide 24, fuel expense was up CAD44 million or 24%. In the quarter, fuel price increased expense CAD52 million, as our all-in costs were $3.12 per gallon, up from $2.44 in Q1 2010. Our OHD-based fuel recovery program is very responsive. However, when prices rise dramatically in a short period of time and you're at quarter-end, a lag will occur. This quarter, the lag cost us CAD0.04 of EPS.

Also contributing to the increase in expense was a decline in fuel efficiency. We always expect some seasonality in fuel consumption in the winter and in the first quarter. However, as you saw on Ed's slide, the 1.31 gallons per 1000 GTMs is far above last year and significantly higher than the previous five years. Our multiyear investments in new locomotives, technology and fuel efficiency initiatives were not enough to offset the quarter's severe operating conditions.

The increased consumption rate was partially offset by lower volumes when compared to Q1 2010. Foreign exchange was a tailwind of CAD8 million for the quarter.

Turning to purchased services and other, this line was up CAD28 million or 15%, including the FX tailwind. As I mentioned in January, we expect higher IT costs this year, as we plan and scope requirements for projects funded in our capital program. IT expenses were higher by CAD13 million. This run rate should continue for the balance of the year.

Casualty costs were up CAD8 million, reflective of the increase in train incidents Ed mentioned. Weather-related costs were higher than expected by CAD7 million, with increased snow removal, detours, crew housing and crew hauling expenses. Relocation costs were up CAD4 million as a result of the reorganizational work I just mentioned. And lastly, land sales were unfavorable by CAD3 million, which are typically low in the first quarter.

Moving to the remaining operating expenses on slide 26, you will note that all had an FX tailwind. Both material and equipment rents were up year-over-year, in part due to the anticipation of strong demand, and also due to the need to respond to the decline in our operating fluidity.

Materials were up by CAD8 million, with most of the increase due to weather, which drove higher locomotive failures and wheel changeouts. However, we do have some offset for this increase in AAR car repair billings, which was netted in the winter impacts shown on purchased services.

Equipment rents were up CAD2 million, with more cars on the property at high leasing and per diem cost due to the decrease in asset velocity across our property.

Depreciation was up CAD1 million, the one line item that was not impacted by winter.

So let's summarize the quarter. We were ramping up resources, crews, cars and locomotives to meet the strong demand we saw and continue to see across the book of business. Severe winter conditions began slowing the network, consuming resources inefficiently and reducing capacity needed to handle the additional business. As the conditions continued and multiple events rolled across our network, we were unable to recover network fluidity in the quarter.

Since mid-March, conditions have subsided, and we are seeing productivity returning. However, the flooding conditions are having impact, but nothing to the extent we saw in Q1.

In total, we estimate unusually severe weather and higher fuel costs lowered EPS by CAD0.40 when compared to 2010 revenues and expenses. This estimated impact of winter does not try to quantify the amount of business lost above 2010 levels as a result of the service issues and reduced capacity.

We are glad to have this quarter behind us, and as Jane commented, our book of business remains robust, and we expect a strong second half of the year while Q2 sees recovery. Mike and the team continue to bring resources online and reset the network.

Our CAD1 billion plus capital plans are on track in support of our growing business demands and productivity initiatives. And we look forward to sharing more details of these plans with you in New York in June.

So now, I will turn you over to Fred to wrap up.

Thanks, Kathryn. Clearly we've had a tough start to the year, but I see it as an anomaly and in no way indicative of our future performance. I'm confident that as the flooding subsides, we will recover quickly and fully. The next couple of months and the quarter look good, and it certainly looks like a robust second half.

What is important and what drives my confidence is that demand remains very strong, much stronger than I had anticipated even nine months ago. Resources we began hiring in August of 2010 are now coming online. The network is resetting, which is improving our service, our efficiency and productivity initiatives are progressing, the structural cost changes remain on target and our capital program will support the sustainability of our efficiencies as business levels increase.

While the first quarter was a setback for 2011, it does not impact the longer-term target of a low 70s operating ratio in the next two to four years.

I would encourage you to join us in person or by webcast on June 13, when we plan to share more details on the actions underway.

With that, I will now turn it over to our operator, Stephanie, for questions.

(Operator Instructions) Scott Malat, Goldman Sachs.

Thanks. I think you've shown you've already been hit by some flooding. Can you help us think through the impact on 2Q already, and then just help us think through how that compares to the CAD0.12 hit we saw last year from flooding?

I think, Scott, the chart that I used -- I think it was slide 6 -- gives you a pretty good illustration of the impact that we experienced in kind of the mid-April period. The consequence of that was basically taking out our Saint Paul Yard, which normally has 3000 cars in it. We were down to virtually none, and had to reposition that level of activity out to subordinate yards in the general vicinity. And also have called upon other yards to do switching and blocking to avoid that yard.

It was also our primary US mechanical shop, and we had to disperse that work and take it to other shops throughout Canada, basically, to get locomotives repaired. So that was a very difficult kind of 14 days, but the Mississippi has come and gone in the Saint Paul area. And, as you can tell from, I think, Ed's comments, we are now out in Davenport.

So from a -- the other significant issue we faced was just last week, when we saw our carloadings drop pretty significantly. We had a 48-hour outage as the water levels in Manitoba elevated very rapidly and washed out our main line. That has of course been repaired, and we have overcome that.

In the current situation, what we've got is the Emerson line for us, which runs south of Winnipeg, has been taken out of service as of, I think, 24 or 36 hours ago. We would anticipate that would be out for two or three weeks. It is not -- I will call it a primary line, but it's an important line that runs to the south. That will mean that we will have detour and incur incremental train miles, whether it is around the top of the Great Lakes or whether it is back through Saskatchewan and down to Saint Paul. A bit of a challenge for us, but something very doable.

With regard to the line at Davenport that is out, we are at this point detouring wherever we can on other railroads. And the consequence of that, quite simply, is that although we can keep things moving, maybe not identical to what we would do, it is a little bit more incremental expense because you are paying a third party to do what you would normally do.

So I am not -- this is not the type of flooding that we experienced with the June main line 11-day event last year. That was a very, very significant one-in-100 year deal. But it is -- I'll just call it spotty. And it is problematic in that you get the fluidity going and then you have to stop a whole bunch of trains as these things emerge.

We are today -- the single greatest impact I would say that we have today is that many of the grain-gathering lines in the US are either out of service or have very selective service, depending on water levels. So it is impacting our ability to solicit some of our US grain activities. And that will impact probably for another couple of days or a week, and then eventually that will fade.

So all in, we are not going to try to quantify it because we can't quantify it. We don't know what is coming our way. But at this point in time, relative to the CAD0.12, it should be nowhere near that level of activity as a result of flooding, unless there is new events that emerge.

That's very helpful. The other thing was on same-store sales, help us think through the 2%, the puts and takes there. And then how that's going to look through the year, and how do we get to the point where we are converging between what same-store sales look like versus what renewals look like?

Scott, I would start off by saying that, basically, I've been really explicit about our price strategy. And our price strategy is targeted at above-inflation pricing. And we have delivered positive price over the last number of quarters.

The one thing I will say about same-store price is that it is a mathematical calculation that really takes into effect timing, it takes into account mix. And we've had several mix changes, and the mix changes in Q1 have certainly been an impact.

So it is derived, but we feel that our pricing in the marketplace is strong. But what is most important to me at this point is -- and while not going to predict where price is going to end up -- is that we are consistently delivering to the 3% to 4%. And so our renewals are in line and we are price-positive, and this demonstrates the discipline that we need to have in the market. And so getting price in the market is never easy, but we have a good product, we're focused on recovery and we expect that our price plan, we feel confident in that, as well as our pricing strategies.

Okay. Thanks so much.

Turan Quettawala, Scotia Capital.

Good morning. I just had one question for Kathryn. Just looking at the cash flows for the quarter, I guess always some weakness here. Just wondering -- I know you said that you plan to keep the CapEx online. Does that really impact your balance sheet plans at all?

No, it does not. We are still committed to continuing to strengthen the balance sheet by targeting our debt, as well as expecting free cash flow for the year to be positive. So in that regard, the first quarter is always a little challenged as our capital programs ramp up in the quarter, and with, of course, earnings low this year. But overall, our plans have not changed in any way.

Great. Thank you very much. And I guess, Jane, on the grain side, is there any sense of how much product is still in inventory in Canada? Because I guess it has been pretty strong overall (multiple speakers).

Thank you very much for that question. I would say that at this point, we've had -- certainly the weather has impacted our ability on those portions of our network where we move grain. We have really great origination in the country, and in fact there is a lot of grain to move. There is still a lot of grain to move to export positions, and grain prices are high. And again, with more resources coming online, we are going to see our volumes recover. So we are very optimistic, as I said in my remarks, about Q2 being a strong quarter for us.

That's great. Thank you very much.

Tom Wadewitz, JPMorgan.

Good morning. Wanted to ask you, Ed, since I guess this may be the last chance we -- at least the last chance we get to ask you something in this venue -- what is your view of the -- I guess the CP network versus CN, where we tend to see this greater weather sensitivity? I know it's not something which shows up very often, fortunately, in terms of the magnitude of the snowstorms and certainly difficult conditions.

But I guess if we look at the CN's expected first-quarter results, they do seem to -- the weather has had a very different impact on CP versus CN. So do you think that it is a function of where they go through the Rockies or capacity or condition? And is it something that can be changed over time, given capacity investment? Just some thoughts on how you view the two different networks that way.

Tom, I really don't want to get into making a one-on-one comparison against CN. I will tell you, I've railroaded a long time, and in all 40 of -- plus of my years of railroading, I have never gone through a winter like we have just gone through.

I think in line with Fred's comment, as far as this quarter being an anomaly, that is exactly what it is. As indicated in the slides, in the last four weeks, you can see productivity improvement, GTMs, car miles per car day -- everything you want focused in the right direction is heading in the right direction.

And albeit January and February, as I said, were certainly challenging, to run a one-off comparison against another carrier, I just don't want to get into that.

We have certainly, as I said, Tom, done everything we could in line with the snow clearing, the extreme cold, the work through our mountainous territory. But you have to imagine it is just not trying to fight avalanches. It is predicting avalanches and working with Parks Canada and taking your railroad out of service to disperse snow and knock down potential avalanches so they don't get in the middle of your traffic line. I mean, we only had one train incident caused by an avalanche, where an avalanche went through one of our intermodal trains. To me, that was an exceptional move as far as showing the diligence of our team, Mike's team, Parks Canada working in line with them.

And again, I've never gone through anything like this in my career, and I think I am a pretty decent railroader and I don't want to extend the comment, other than just saying there is nothing wrong with this railroad. It can handle winter. This winter was a bit more than what -- anything any of us even bargained for. So don't be concerned. We'll be fine.

Okay. And then a second question for you as well. And I don't think that there is any doubt that you are a very good railroader. But I guess the decision to leave was surprising when it came out, and I would've expected that you would be at the railroad for a couple years or so. The kind of sense that I've had from it is basically there is a lot of travel, a lot of demands on you, and perhaps a bit more so than you expected, and maybe that is the reason why. But is there any perspective you can add in terms of your decision to leave after what seems like a fairly short period of time at CP?

I think your perspective is right on. Indeed, my decision to leave was more personal than anything else, and it certainly has to do with my immediate family and the travel demands. And being able to do my job the way I need to do my job was just too much of a strain with the personal issues I had going back home.

That being said, Fred and the Board were more than gracious to ask for my continued support in line -- going through this next year, and I certainly welcome that opportunity. Please don't look into anything more than just that. My focus, my work with Mike -- and I've continued to work with Mike and will continue to work with Mike and his team on a regular basis, is certainly the plan. And my contract as a continuing adviser to CP I hope goes longer than just into the next year, but we will just see how this thing works out.

But again, I will stay close, I will keep an objective eye. Mike and I have already started scheduling some field trips in line with the work we started in first quarter and last quarter of last year, as part of our yard performance plan and our first mile/last mile focus. So business as usual, new leader on board, but certainly a very capable leader.

Okay, great. Well, I appreciate the perspective and wish you the best going forward. Thanks for the time.

Ed Wolfe, Wolfe Trahan.

Thanks. Good morning, guys. When I think about how successful you've been over the years in cutting costs, Fred, and then you see what's going on right now, and also the relatively less pricing power it feels like that you guys are feeling relative to at least the US guys right now, is it possible that you cut too much too far and you've got to bring assets on? Is there something here beyond whether as you think about allocating assets coming back going forward?

I think probably the best way to look at that is if you look at the data, you will see that we actually had, I think, in the first quarter about 8% more locomotives. And I think -- than we had on the prior Q1. And I think if you look at people, it was 2% or 3%. I don't remember exact number, but it was higher than the prior period.

So did we go deep? Absolutely we went to deep in 2008 and 2009, because the nature of our commodity base, if you will, was the greatest volatility. And in 2010, you saw a pretty rapid recovery of 17% RTM growth. And we were able to handle that, albeit not perfectly from a customer service perspective.

And then unfortunately, what happened was even with the incremental resources we brought on for Q1, the extraordinary weather that Ed described contracted our capacity. So I'm sure that in some aspect somewhere, we could find an example where we cut too deep. But when you think of the core fundamentals, the same track is there that used to be there, the same yards that used to be there, 6% more locomotives -- or 8% more locomotives and more crew.

So it is not evident to me that the problem was there is an underlying problem. What is evident to me is that we dealt with a succession of extraordinary weather events that never allowed to get us our rhythm back. And the contingent resources that one -- we had already built in were consumed and then some, leaving us actually with an inability to take on the opportunities that presented themselves.

So we are pretty frustrated. We are pretty disappointed that we didn't deliver for the shareholder and for the customer, candidly. But when you look at the train lengths and you look at the train weights, you look at the yard performance, what we've got here is a bunch of independent events that occurred basically on the main line. And as we get our rhythm back and start to take more and more cars out, get our fluidity up, get our car miles per day and locomotive miles per day back up, I think you are going to find that we are beautifully resourced and that we're going to have every opportunity to seize these big market opportunities that are clearly in front of us.

And how do we think about 2% pricing? I know -- I think it was Jane or maybe it was Kathryn -- said there are some mix issues here. But even when you look at the mix issues, it feels like at this point you are struggling to get pricing above inflation, which is obviously the long-term goal. Am I missing something there? Or is it not related to the volumes, or is it related to the volumes, where we are seeing the pricing decelerate quarter-over-quarter?

I would say, Ed -- it's Jane -- again, just to be clear, the environment we have in Canada is very different than the US environment. We have different markets, we have different regulatory environments. I can assure you that we price our product in the market for value, and we have been successful at this point in terms of producing positive price and delivering to our price strategy of 3% to 4%.

And again, I'm not going to predict where we take price, but we take that very seriously, we have discipline in the marketplace and we are delivering to that.

So we shouldn't look at it as decelerating. From where you are looking at it, is it decelerating, flat or accelerating, as you look at contracts as they come up?

I would say at this point what we have to do is go back to this quarter and just remind ourselves that there is significant mix and other issues that are going on. We feel very confident in our price strategy. So I am not going to predict where price is going to go, but I can say that our price is not decelerating.

Okay. And around that, Jane, can you talk about grain pricing, given the Canadian Wheat Board and the different structure? Assuming there is strong need for farmers to -- or want for farmers to get product to the market, how much ability do you have to take that pricing up both domestically and internationally on pricing?

Well, I would say Ed, just to step back on that, with respect to price, as you know, in the Canadian environment, we are in a regulated environment. And that the revenue entitlement for this year is 7% for the 2010/2011 crop year.

So in that period, we will get 7% in price over the year, but the pricing environment will remain dynamic. So it is really tough to say up or down that we are going to see quarter to quarter that price will remain constant. It will fluctuate. But again, we are pricing for value with our grain products and that is where we are headed.

Just for a little bit of clarity on that. As Jane says, it is seasonal pricing. These are choices we are permitted to make in the marketplace, where we would choose to incent or disincent certain activities at certain time of the year. All-in, they must come under the total 7% revenue entitlement.

And as you know, it is a very complex formula with length of haul, et cetera. Quarter to quarter, those are choices that we will make working in the marketplace, and nobody should read one quarter's worth of grain pricing as anything other than a part of our broader strategy to participate in the market.

Last question is a clarification, and I'll let it go. But can you talk, Fred, just as clarification on are you able to incent international shipment of grain relative to domestic based on that or is it a separate structure?

They are really quite separate issues. The CWB and all of the activities under the grain cap are largely -- are entirely to do with export markets. And that, as you know, is the vast majority of the business that we participate in. So that is a separate issue. We have commercial rates for commercial movement of domestic grain, and obviously, we've done well in those markets.

Okay. I appreciate all the time. Thank you.

Matt Troy, Susquehanna Financial.

Thank you. I wanted to ask about the Canpotex agreement. You mentioned some -- we'll call it assisted diversions to your competitor in light of some tough operating conditions. Just curious, how long does that exclusive agreement with Canpotex last? And what do you see in terms of the road map in terms of expanding production capacity for that key commodity over the next several years?

Matt, it's Fred. The contract is in place, and it is a long-term contract that, as I recall -- sorry, expires in about midyear 2012. We obviously at some point in the process, when our customer's interested, we will spend some more time negotiating or talking about what they would like to see in the long run.

The decisions that we made in Q1, which was to enable their success -- granted, a little bit at our own expense -- I think were pretty wise decisions and I think that will be taken into account as they consider the quality of partner that we are going forward.

How fast they grow -- now, it's not just them -- there are multiple other parties interested in the potash business, as we all saw last summer. It's about half how fast the underlying parties and therefore Canpotex grow with regard to export volumes, what ports they choose to go through.

I can assure you that in our dialogue, as we enter into it into the future, for discussion purposes, we will make whatever appropriate investments are justified, based on a return on capital employed. So on the basis that the contract is appealing to our shareholders, we would never let capacity be a barrier to us participating in as much as they want to move over time.

You've seen some very large numbers come out of the underlying parties and Canpotex with regard to their aspiration -- 15, 20 million tonnes over time. And in addition to that, you've got another two or three substantial global players that are talking.

So will it all be built? Who knows. In what timeframe will it be built? Who knows. But I can assure you that we will be active in any dialogue, and as long as there is a return for our shareholders, we would be interested in ensuring the capacity exists to participate and enable their success.

And that was the heart of my question, was not actually Canpotex, the other people potentially coming on line -- it's safe to assume you are in as active negotiations or discussions with them as you could be at this point?

Absolutely. Jane (multiple speakers) might want to comment on that.

I think certainly we have a great relationship with Canpotex and our focus is on proving that each and every day. But again, we have substantial know-how. We have a great origin-destination network. And we have a great supply chain that, obviously, with the new players, BHP, Vale, Potash One, et cetera, you know, we are focused on basically syndicating that know-how and knowledge to grow with those customers as those market segments expand.

Thanks. My second question -- and it's more just longer-term in nature. You were kind enough to give again the Canadian dollar sensitivity. But it seems here that given the deficit levels and the fiscal issues we face here in the US, the dollar may be -- some would argue -- susceptible to a long-term period of weakness.

Do you see that as having any material impact on your business? Are customers talking about it, either through the viability of certain transport or trade flows or relocating manufacturing facilities? Or are we still too early days for that to be anything more than a conceptual thought?

I think you are onto it. I would say that in discussion with our customers, I mean, we've lived with volatility in the Canadian dollar now for the last number of years. And the producers that we work with are strong in their market segments, their products are in demand. And so at this point, they don't see an impact from that.

I might just jump in. It's Fred. To complement Jane's statement, which is probably more related to the manufacturing side of things, in the work that we do at a more national level, if you will, working with our associates, what causes people to be efficient is whatever crisis comes along. And I would argue the Canadian -- strength of the Canadian dollar will simply force the manufacturing community to get smarter, get better, get more efficient, get more productive.

So will there be some changes in flows and production locations? I could probably it is inevitable. But I mean, it's not like everybody is just going to shut up plants in Canada because their dollar is strong. What it causes is people to become more efficient.

And I might also note that 45% of everything we do is bulk. And the commodity prices are at extraordinary levels. And even if they retracted by 50%, they would still be at extraordinary levels, whether it is met coal at [330] or potash in the whatever it is these days, [400] to [450] range. And the Canadian dollar is insignificant on a global basis, if you think about the fact that it has moved 4, 5, 10 points, when you're selling things for what is literally three and four times the price of what you sold it for five years ago.

So given that 45% of our book of business is bulk, and those commodity prices are so strong and likely to stay strong, I don't think it is going to have any impact whatsoever on their desire to continue to grow and our desire to participate in it.

All right. Thank you for the thoughtful answers.

Walter Spracklin, RBC Capital Markets.

Thanks very much. Good morning, everyone. My question is pretty much on a go-forward basis, in terms of what you might have learned from the first-quarter winter weather. That in forward quarters, if we do get hit with winter weather again to this kind of extent, what assurances can we get that the volatility that we saw in this quarter won't be repeated in forward quarters?

I guess the reason I'm asking this is if I look back through my notes on Q1 -- I guess fourth-quarter Q1 on prior years -- '07 and '08 seemed to be both those impacted by inclement and one-in-five year weather. And I am just curious if we do have weather as a consistent and expected item here in terms of volatility, what did you learn in this quarter that helps soften the blow in the forward quarters?

I think -- Ed Harris, Walter, and then I'm going to pass it on to Mike. But I think one of the things you have to remember is all railroads are going to have an extremely tough first quarter, especially the northern railroads. And I don't need to tell you that, I know.

But indeed, the level of the perfect storm, so to speak, and the level of disruption that we had to deal with this first quarter, we just never had -- we never really got a chance in January and February to try to recover from the intermittent outages that we had; even albeit some of them were portions of days, it is just when you stop this network at any location in the network, it is tough to recover.

We again reminded ourselves how important it is to achieve a balance across the network in running trains. What did we learn? As far as weather, I can't predict the weather. We just -- I explained how we try to protect against avalanches. What will we do in the future? Mike and I have discussed this. I am going to talk -- I'm going to pass it over to Mike for a little further highlight on that.

Walter, I mean, we've -- as Ed said, this was an extraordinary event for us. We do extensive winter planning every year, right down to crew sizing, locomotives, snow clearing. We undertook some extraordinary actions this year, including reroutes on other railroads, where we had an available route to us. And using other parts of our network that we haven't done before in terms of getting around some of the bottlenecks.

As Ed noted, I am actually quite -- I'm not happy with the performance, but given the extraordinary nature of what we were up against, the team performed very well. There are always a few lessons learned in every event, but I would tell you that our avalanche process remains very robust. There are plenty of resources in the west corridor to deal with that.

And again, as noted, but you still have an inordinate number of events you have to go after, but each one of those was handled very quickly. So there are a few things you pick up every winter, but I would say largely going forward, we will remain committed to appropriate resourcing for those contingencies, making sure that we've backstopped ourselves in terms of snow clearing, reroutes and appropriate resources to handle the winter.

Okay, thanks very much. Second question here relates to your long-term target of low 70s operating ratio, your two to four year target. Now that we have some more color into two what are pretty significant events, the impact that weather can have on your earnings, as well as the higher WTI prices obviously having a negative effect on your operating ratio, even if your profitability remains constant, how are those two items going to be offset, or how are you dealing with those two items in continuing to focus on that low 70s operating ratio? In other words, do they impact your ability to get to that low 70s?

Walter, this is Kathryn. We always know there is winter, and in those targets that we've put out there, we always have said several times that it doesn't mean you will be in the low 70s for every quarter. But that will mean that some quarters will have to be even lower.

So we do take that into account, and we do have normal seasonality that we know our first-quarter operating ratio will be. Not to the extent that we saw this quarter; this is an anomaly. But to normal seasonality, that is anticipated in that ratio.

In terms of what we have is a sensitivity of about 30 basis points for every CAD10.00 rise in WTI. And so when you look at that -- now, if we are talking about big, huge prices, it may impact our ability. But what we have not been modeling in that is rapid runups way past too high of levels of fuel prices. I ultimately believe fuel prices would cause the economy to suffer, and there is a balancing mechanism. So we are anticipating in that target higher fuel prices, but not astronomical fuel prices. So that shouldn't be something that would get in the way of us meeting our targets.

Okay. Thank you very much. That's both of my questions.

Chris Ceraso, Credit Suisse.

Thank you very much. Maybe if we can talk about it in the context of the CAD0.40 that you outlined in terms of the impact from weather, how much of that do you think you recover in Q2, taking into account that you are going to have some recovery and you've also got the issues with flooding that you outlined? But how much of the CAD0.40 do you expect to get back as we walk to Q2?

It is really difficult for us to specify an exact number. But, as I indicated before, what we are expecting is sequential growth coming over the next several quarters as resources come online and as our service reliability continues to recover and improve. So a portion of the growth that we are going to see will be carryover. But at this point, it is really hard to isolate the amount, because that would really be a guess.

But if you look at the market today and you think about what is moving, you would see carryover basically in all of our commodities that use the west corridor that have been impacted by the severity of weather this winter.

When you say carryover, you mean you are still trying to recover?

Right.

Then the second question, I know we've talked about this a couple of times, but maybe we can just dig into it a little bit more, the difference between the 4% renewal rate and the 2% same-store sales. It seems that each quarter there is a difference where your renewals are better, and you mentioned mix.

Is there something else in there that we are missing, or ultimately should the same-store sale number start to approximate your renewal number?

Chris, this is Kathryn, and Jane will probably want to add to this, but it truly is mix. And if you start thinking about '09, '10 and actually the first-quarter of '11, we have had tremendous changes in our mix. You know, we had huge -- and that means our O-D point pairs are changing out as different businesses come back and forth through the recession.

So, you know, it is not unusual to see these types of divergence at this time, and we need to get kind of more steady state in terms of normalized growth within each one of the commodity groups before you would see those two coming in line.

I would just add to Kathryn's, again, we are showing discipline in the market which I think in the pricing side is key. As Kathryn also indicated, with opportunities that we've had where we've had new business come online, with the volatility that we've had to deal with in terms of volumes and changes within commodities. But again, just to reassure you, we feel that we are on track and we are very confident in our pricing strategy.

Okay, thank you.

Jason Seidl, Dahlman Rose.

Hey, everybody. Two quick questions here, and I don't mean to beat the dead horse. But on the pricing side if we can remove mix and go to sort of what some of your competitors call a same-store look on the O-D pairs, what would pricing have looked like in 1Q?

Just to clarify, we did give color on the same-store price, and our same-store price was positive and it is 2%. And that has been positive --.

So that excludes mix in the number then?

That is mix.

So that includes mix then, the 2%, and that is why -- because if I am hearing you guys correctly, you're saying that the difference between the renewals at 4% or better and the 2% has to do with mix, and you are changing O-D pairs, correct?

Yes.

If you excluded the changes in O-D pairs in the first quarter, what would the pricing have looked like?

It is very hard for me to speculate at this point on what that would look like. Mix is something that we've had to deal with in Q1. And I've got to come back to the same point is that, again, we are out there; we are pricing for value; we are looking at each and every contract. We are focused on getting our renewals within our price strategy at above inflation pricing. And as we continue to do that, we should see our same-store price improve.

Okay, fair enough. Looking forward here in 2Q so we can get a better sense on how to model out, there is going to be, obviously as you pointed out, some lingering impacts from the weather. Are there any specific commodities that are going to be more impacted than other in 2Q?

I think, Jason, probably the significant thing that I hope you will see and believe you will see, based on where we are going already in April, is that the amount of grain activity is going to increase pretty substantially. And we are really disappointed that we haven't been able to meet the needs of all of our clients in that regard.

And just as an example -- it's anecdotal -- but I would think this week we will probably put somewhere around 4700 cars under the spout, and that will be higher than what one would normally expect at this time of year. And we have not been meeting that level by quite a margin until the last week or two.

So you are probably going to see a pretty substantial increase in grain car loadings relative to what you saw in the first quarter. And that -- obviously it will meet an unfulfilled demand, which is good for our clients and good for us as well.

Okay. That's great color. Guys, thanks for the time, as always. I appreciate it.

Chris Wetherbee, Citigroup.

Thank you very much, guys. I guess just thinking about -- to that last point -- as you see some of the business come back, is there anything you think you might need to do in advance of playing a little bit of catch-up here, whether it be on the western corridor, with coal demand being relatively robust, and also seeing that on the grain side and potash side? Is there anything you can do from a capital perspective to maintain service levels coming out of the problems in the first quarter?

I would just suggest that we are returning to levels that we have performed very well in the past with the existing infrastructure. What we have in the program that Mike introduced to you in June and that we will reinforce when we come back together in New York in June is the opportunity to be more productive with those volumes, one. And second, to capture incremental growth opportunities, be it in coal or fertilizer, potash, grain, et cetera.

So my view would be that we have the existing capabilities and we have opportunities over and above that, which was Kathryn's reference to the CAD1 billion capital program. About a couple hundred million bucks is probably oriented to ensuring that we are both more efficient and that we have the ability to continue to grow and speed the utilization of our assets, and deliver an improving quality of product to our clients.

So there is nothing that is a prerequisite to doing what we are talking about for the balance of 2011, but there are clearly things we want to do, some of which will be complete and we will enjoy the benefits of in the fourth quarter of 2011, post the construction season.

Okay, that's very helpful. And I guess just one final technical point. When you think about the cost per employee, you gave a helpful figure that was ex the impact that you had in the first quarter. When you think about run rates going forward, is there anything to think that would be different relative to that kind of ex-winter number that you gave us?

Well, I would certainly hope our incentive compensation and stock-based compensation would go up. But other than that, no, nothing significant.

Okay. So that is the main delta to keep an eye on going forward?

Yes.

Okay. Fair enough. Thanks for your time, guys.

David Newman, Cormark Securities.

Good afternoon. Just two questions, one on the operational side. Fred, I knew a few years ago you had the western corridor expansion, and certainly adds to your customers in the coal and potash, et cetera. Are you pushing against a wall at some point here, especially given the operational issues that you face in the winter? Or do you anticipate at some point you might have to revisit that? I know you put in avalanche shelters, et cetera. Anything in the future that you might have to do?

David, it is a little bit of a build on the last question, and I would just characterize it differently. We have the current capacity to do what we need to do and somewhat more.

What we are excited by is the growth opportunity as -- I'll just use an example. If you look at what Teck's long-term plans are with regard to moving from the numbers they are at to substantially greater numbers, we've got the opportunity to move a lot more coal, and we've got a customer who wants to move a lot more coal. And we've got the -- I'll call it a coordinated approach between ourselves and a very, very arguably strategic relationship at this point, which we are delighted with, where we are going to work -- we are very actively working together, and it is imminent that we will begin [a few of] the construction opportunities, both at mine site and on the whole supply chain, including the port, that will enable us to move that coal.

So do we have the capacity? Yes. But can we move it more efficiently, which is good for everybody, with some strategic capital investments? I would argue that's probably the way we will want to go. And that it is imminent that amongst the capital spending Kathryn referred to earlier, we will find a portion of that attributed to certain supply chains, including the coal supply chain, as an example in the west corridor. But those assets can also be used by other commodities if done properly, and that is what we plan to do.

Okay. You had a couple derailments in the quarter. Was any of it related to the long train initiative, and what is your take on the review that is sort of ongoing on the long trains?

Let me just say this, David. The couple derailments had nothing to do with the long train initiatives.

Okay.

Weather-related, different story. A broken wheel in one incident and some ice buildup in another incident, that took the major brunt of Kathryn's comment as far as how that impacted financially. So no, nothing regarding long trains.

Okay. Last one for Jane. Obviously, flooding in Manitoba. Your catchment areas, how are you being impacted, I guess, as far as seeding intentions and I guess the ultimate impact on the grain and ethanol within Western Canada. Obviously I understand the Midwest is also impacted.

I will just keep it short. I mean, at this point, with the flooding and with the weather conditions, this is something we are going to have to stay on top of. But it is really too early to predict what is going to happen with upcoming crop year at this point.

Obviously, it is hitting Manitoba pretty hard. But I flew across the prairies last week and it looks like a bit of a swamp. Is there other areas, like Saskatchewan, Alberta, are they in fairly good shape as far as soil conditions and things like that?

I think, David, as Jane is saying, a snapshot on April 20 tells us that the ground is saturated, and inevitably that will have some impact. I believe -- I may be mistaken, but I believe the Wheat Board and/or other agencies have issued in the last couple of weeks the expectation that there would be a delay of seven to 10 days in planting. And that happens every year; it moves back and forth within, say, a three-week window. So I would say seven to 10 days, if that is all they are predicting, is actually a pretty good news story.

Yes, let's hope it warms up. Thanks a lot.

Not too fast though, David.

Cherilyn Radbourne, TD Newcrest.

Thanks very much. Good morning. I guess my first question would be what is the best metric that you would suggest for us to measure the recovery of your network here on a progressive basis in Q2? Is it your weekly carloads getting over the 50,000 mark? Is it train speed? Where would you point us?

I think, Cherilyn, the amount of activity or RTMs or carloadings as a proxy for that is probably a pretty good indicator. I would like to see us contract the numbers of cars that we have online, because over the course of time, as the winter affected not only us but others in the supply chain, particularly the clients, the uncertainty or the lack of confidence causes everybody to beef up their fleets. So those fleets need to be contracted, whether they are our own fleets that need to go to storage or whether it is us working with the clients to now start to contract the fleets and get them off. Because that just leads to congestion and not a healthy environment.

So number of the cars online and number of loads would be a good indicator. I would caution you a little bit on train speed, because, as Kathryn mentioned, we have a CAD1 billion work program. Given the size of it, we've had to start earlier. And although I think we've got a pretty thoughtful program that will have a minimal impact on the service performance across the continent, there is clearly an awful lot of work that is going to go on this year relative to the previous couple of years. So train speeds may look like they are not coming back, but it's all quite planned and calculated to accommodate a much bigger work program on the main line than we've had in past years.

Thank you. That's helpful. Second question, just for Jane. You mentioned you have spent a lot of time with customers in recent weeks. Could you just comment on the degree to which they have been sympathetic to the weather issues that you've experienced, or has there been some damage to relationships done here that needs to be repaired?

As I said, we've been in constant communication and working with our customers to keep them advised of the -- certainly the severe weather impacts that we've had. I mean, in some cases, customers have had to make alternative arrangements for their supply chains, but we don't see those as permanent shifts in market share. Again, our customers are very focused on, number one -- and we are as well -- looking at the positive dialogue and relationships we have with them and building on that. But again, they are really focused on what Fred discussed, which is one restoring their confidence through service reliability and consistent performance.

Cherilyn, I would jump in there just a little bit and add that when you build deep relationships over, arguably, decades -- but certainly in the last five years, we've done a great job with our client base, you build some credibility. We have clearly eaten into it through Q1. We want to acknowledge that. We are not very happy or proud of that.

But our clients have stuck with us for the most part and are giving us the chance to recover. But they clearly need to see the evidence too. Because it is their supply-chain and we owe it to them, and obviously, Jane is spending a lot of time listening and making sure we hear clearly what their specific issues are. And Mike and his team are doing everything they can to quickly get back to the fluidity that they became accustomed to, and we fully expect that they will see that pretty quickly.

Okay, thank you. That is my two.

Bill Greene, Morgan Stanley.

Thanks. This is John filling in for Bill. It is great to see that you guys reiterated the two to four year low 70s OR target, but I just wanted to dig a little bit deeper. Can you help me understand how you get there in two years? Is that a booming economy, moderate oil, no more weather events, or is there something CP-specific that gets you there?

John, I tell you what, I would really rather not get into a lot of the details. We've been pretty clear we do have a pension headwind that really keeps with us, until 2013, particularly. That is one of the things that we are fighting as we put our tailwinds in on all of our initiatives.

So I think the Investor Day in June will give a little more color on some of the items and the interdependencies of some of our capital programs, et cetera, in order for us to meet the productivity initiatives. But if we had a booming economy and lower fuel prices and all those things, it certainly would help us. But predicting it now is still contingent on a lot of things, and I think we are just going to have to give that color on Investor Day.

Okay, fair enough. And just a quick [nit]. I noticed that period-end expense headcount was lower than the average for the quarter. Can you just help us understand how to think about headcount as we enter the second quarter? Is there sort of a range that is reasonable, given some of the disruptions in the first?

I did give that. We are expecting toward the end of the second quarter to be at 14,200. And again, the [nit] for the end of the year is -- I mean end of the quarter really happens about when people are coming out of training, particularly our road and engine crews; they don't come into our count. And so we had a bunch of people in training that are not in that count that will be coming in in the second quarter.

Okay, perfect. Thanks.

Ken Hoexter, Bank of America Merrill Lynch.

Hi, this is a Steve Sherowski. I am in for Ken today. Thanks for taking my question. My first question is more of a clarification. Did I hear you correctly earlier when you said that you get to a low 70s operating ratio, you model WTI higher than current market prices. Did I hear you correctly?

No. What we said was that should not get in the way tremendously, unless it was extremely high WTI prices. So we are expecting WTI in that model to remain high, with some moderate increases year-over-year, but nothing that would show a spike that would end up creating a headwind.

Okay, but it does take into account moderate increases year-over-year from current levels?

Yes, more back to traditional type increases, yes.

Okay.

And (multiple speakers) responsive fuel program.

Okay, thank you. And just sort of on that same note, I was hoping you could just talk about the Bakken opportunity. I know there is obviously a lot of producer interest in that basin. What exactly is the opportunity? Is it mostly crude movements, or is it frac sand transportation? And to any degree that you are willing to quantify that opportunity would be appreciated.

Well, I think at this point, just to clarify, our opportunity with the Bakken is both an inbound and an outbound. So we are moving unit trains of crude from North Dakota to the Gulf. In addition, we are working opportunities, and we are moving inbound steel and frac sand into those areas.

We have also indicated that -- and you will hear more about this at Investor Day -- about some investments that we are doing up in the North Dakota area. It's specifically on the line -- we call it the Newtown Sub -- that allows us to access that so that we can continue to build that.

So at this point, in terms of modeling that volume, we will give you certainly more color on Investor Day what the upside is on the volume. But I can tell you that GDP plus would be a good way for you to look at that.

Okay, thank you. Great.

Gary Chase, Barclays Capital.

Good morning, everyone. This is actually Brandon Oglenski. And I know it has been a long call, so just one question here. And maybe following up from what Cherilyn was asking earlier about measures that we can look at to see when the operations are getting back on track.

As I look at your weekly car loadings in March and early April, it looks like you were running about 51,000 to 52,000 cars a week, about flat with last year. And I know you guys are definitely staffing up for some growth expectations. So could you just quantify the level of carloads that would like to see the network at, where we start to move beyond some of these productivity impacts from having maybe a little bit too heavy on the asset side or the personnel side?

I can't do that off the top of my head, because we don't tend to think about carloads. We think more in the sense of gross ton miles or other metrics. Car loadings, of course, have the risk, as you see with the US coal situation where you can lose 40,000, but you don't really impact your RTMs in any substantial way. So I wouldn't use car loading as an example.

I think that the activity levels that you can expect are April of last year was a very big month, and the data right now would indicate that we are within a point or two of doing the same thing. As we move into May, it was fairly busy last year and then, of course, June and July back off a little bit and we had a tougher June.

So I would just encourage you to -- I mean, keep your eye on car loadings, but you've got to be aware of the mix of traffic and you will need to discount those things. I'm not going to attempt to put an exact number on it. I'll let you guys do that.

All right, thank you very much.

Benoit Poirier, Desjardins Securities.

Thank you very much. My first question is related to the Intermodal. When we look at the RTM at a carload measure was down 2%, which clearly a reversal versus the good performance last year and also clearly below peers. You mentioned some operational challenges. So if you could provide maybe more color and what is the weather issues or the weather problems in that quarter, the impact?

Benoit, in very simple terms, the fluidity of the railway was severely impacted, the consistent arrival and movement of trains. And you have to think about the inbound arrival of trains affects the outbound capacity for import, so the export cars arriving at the port affect the import abilities.

So if you've got five times the impact of avalanches this year versus last year, which was what we experienced, there were many, many days sadly that there was so inbound train because it was held up for 24 or 36 or 48 or 72 hours back on the other side of the avalanches.

So you found circumstances arising where the trains would not arrive. And then, of course, they would arrive three in a day, and you can't possibly load that amount of capacity onto a train because you had to switch them in and out of the terminals. So the impact on Intermodal was a sporadic and inconsistent service offering relative to what we have always provided and relative to what our customers expect of us.

And it was driven by these unique weather events that were causing us to be not arriving on a consistent basis. So that led to people either trucking, for instance, from the Port of Vancouver into Alberta, or it could have led to some bleeding to other parties if they had the capabilities. Or in some cases, people just grew concerned and started to divert greater percentages to different ports, as in Seattle or Tacoma rather than run the risk of being held up.

So we clearly impacted the supply chain on the container side, and that is reflected in our volumes. As we have become very consistent of late, clearly there is a much more higher comfort level with our performance, and we are starting to see the return of those volumes.

Okay, thanks. And with respect to the fuel components, Kathryn, could you maybe provide an update on your hedging policy? What was the impact in the first quarter, and what is the hedging policy going forward?

Our hedging policy is unchanged. We will continue to hedge about 10% to 12% of our fuel conception, which is closely aligned to the Canadian regulated grain, which has a 12-month lag in its fuel index.

And I believe -- I am doing this off the top of my head, but I believe we had a positive impact from the fuel hedge of $3 million. And that will all be disclosed, of course, in our financial statements when they are posted.

Okay, thank you very much for the time.

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

Well, very good. Thank you, everybody. Sorry for the long call, but appreciate everybody's interest. And we look forward to seeing you in June, those who can make it, and join us for a more robust discussion on our low 70s operating ratio targets. Thank you.

Thank you. This concludes today's conference call. You may now disconnect.