Canadian National Railway Company Q3 2007 Earnings Call Transcript

Oct.23.07 | About: Canadian National (CNI)

Canadian National Railway Company (NYSE:CNI)

Q3 2007 Earnings Call

October 22, 2007, 4:30 PM ET

Executives

Robert Noorigian - VP of IR

E. Hunter Harrison - President and CEO

Claude Mongeau - EVP and CFO

James M. Foote - EVP, Sales and Marketing

Analysts

Randy Cousins - BMO Capital Markets

Scott Flower - Banc of America Securities

William Greene - Morgan Stanley

David Newman - National Bank

Thomas Wadewitz - J.P. Morgan

Walter Spracklin - RBC Capital Markets

Ken Hoexter - Merrill Lynch

Bill MacKenzie - TD Newcrest

Operator

Welcome to the CN Third Quarter 2007 Financial Results Conference Call. I would now like to turn the meeting over to Mr. Robert Noorigian, VP, Investor Relations. Ladies and gentlemen, Mr. Noorigian.

Robert Noorigian - Vice President of Investor Relations

Good afternoon. Thank you for joining us today. With me is Hunter Harrison, the President and Chief Executive Officer; Claude Mongeau, Executive Vice President and Chief Financial Officer; and Jim Foote, Executive Vice President of Sales and Marketing.

Today's remarks may contain forward-looking statements within the meaning of applicable securities laws, such statements are based on assumptions that may or may not materialize and are subject to risks described in CN's MD&A and other disclosure documents that are available on our website. As such, our actual results could differ materially.

Reconciliation of any non-GAAP measures that we discuss today will be posted on our website at www.cn.ca. After the presentation, we'll take questions from the people listening on the phone. Could you please identify yourself with asking... when you are asking questions and please limit yourself to the number of questions that you ask.

With that it's my pleasure to introduce CN's President and Chief Executive Officer, Mr. Hunter Harrison.

E. Hunter Harrison - President and Chief Executive Officer

Thank you, Bob, and good afternoon everyone. Thank so much for joining us, the trust that you have seen our press release would be results. I am going to ask Claude and Jim in a few moments that they will go through them in some detail. We'd... I think it goes to that we had real challenges in the third quarter. I was very pleased with our operating results, given some of those challenges with the Canadian dollar and with the weakness in our forest product segment, fuel prices, less the hedge, but I think also in the end this group performed very admirably.

Our EPS came at $0.96 that was with a 3% favorable tax benefit. So, if you take the tax benefit out, it was relatively flat or down about I guess 1%, but overall pretty good performance. Operating ratio came in at 62%, that's about 3.5 points higher than last year, buy I will point out to you that last year was a world record for CN, with the best quarter that we've ever had that we are laughing, so operating ratio of 62% is still far, far ahead of the... of our peers.

Couple of things that of a longer-term nature that happened in the quarter that we are very encouraging and exciting about you, although we've announced seeing the announcement of EJ&E acquisition which short lined bell railroad [ph] that goes around the perimeter of Chicago. We are very excited about that operating group. He is been working very diligently to put the operating plan together. We are hopefully optimistic that this would be hopefully amount of transaction and can do a lot to clear up congestion that we've experienced in the Chicago area.

Prince Rupert, the first ship is build due October 31st. We are looking forward to that pick up in business. We've talked to you before about the... about our new yard in Memphis, Johnston Yard. It's coming long ahead of schedule. Our siding initiatives in western Canada, which were... we're really expecting a lot of the growth in the company with exception of Rondout western Canada particularly above is going very, very well and the static are given some opportunity to again increase train fairs and productivity, and so I am very pleased we still have a couple of issues to do they were between Prince George and in Price Rupert, but we are right along the way there.

So I will have a few comments in the end. So, with that let me ask Claude to run through the financial for you.

Claude Mongeau - Executive Vice President and Chief Financial Officer

Thank you, Hunter. Has you said on balance is the pretty good quarter given some of the economic headwinds that we face during the quarter. Our reported EPS came in at $0.96, which is 2% higher than the last year. This included a $14 million gain from tax benefits from adjustments that we made during the quarter. If you exclude this $14 million or $0.03, our EPS on an adjusted basis was $0.93, which is down only 1% and that's pretty good performance given that the revenue picture during the quarter was a tough one from an economic expense standpoint.

Revenues, overall for us were flat, but 3% adjusted for exchange really, as Jim will give you more detail the strength in our petroleum and chemical franchise, our automotive business, our bulk sector has been masked by the weakness in the forest product sector and to a lesser expense minerals and metals and intermodal.

Forest products, really during the quarter was a tough environment for CN to operate in. The housing starts in September on an annualized basis were at just above 1.1 million, which is the low for many years, and we move a lot of lumber, we move a lot of newsprint and it's tough from the standpoint of our business not to be down on a year-over-year basis. As Jim will report, we are holding our own and we are even gaining a little bit of market share, but overall that's what explains our volume down offset by good pricing for total revenue outlook of 3% for the quarter.

I'll turn into expense now. Our third quarter expenses came in 6% higher than the last year, 9% if you adjust for the benefit of exchange. If I go down the expense category our labor and fringe costs were up 9% during the quarter, really a few things, higher wages and compensation. We also have higher headcount during the quarter. Our headcount increased roughly 2.7%. Also stock-based compensation is up on a year-over-year basis. Purchase, services and material is well behaved up 3% on an FX adjusted basis.

Depreciation and amortization are also up, really driven by our investments in the plants and in our franchise. Fuel, despite volume decline, is up 14%. Really WTI is up, but also crack, the refinery margin is up almost 20% on a year-over-year basis and the third quarter of 2006 was the last quarter when we had hedging gain to the tune of $10 million last year, so obviously, we don't have that benefit anymore and that explains part of the increase on a year-over-year basis.

Equipment brands are up, that's the net of expense and income. Our expense are well behaved. Our velocity to our car suite is improving, but this was more than offset by a significant reduction in car hire income. The cars that we use to move forest products, for instance, attract significant car hire income when they move offline to other railroads, so as we have less volume and also with our peers improving in terms of their velocity, we are collecting less car hire income, and that is why the expense category overall is up on a year-over-year basis.

All of this, we're revenue up basically 3% FX-adjusted, expenses up 9% FX-adjusted, you see our operating ratio increasing to 62%, for the quarter, still a very good performance and testaments of the strength of our precision railroading.

Turning to our cash flow. Year-to-date now and up for the quarter, but year-to-date we are at the $193 million of free cash flow. This is down from last year quite a bit, but the story as we discussed in previous quarter, almost $600 million on a year-over-year basis of decline is explained by the fact that we have cash back payments, which is both for on account of this year's cash back, but also installments that were really due to be paid on account of last year's income tax. So we get the double whammy effect on a go-forward basis, we'll only have about half of that cash back payable going forward. But that explains about $600 or close to $600 million of decline.

Other than this, obviously lower profitability, but also higher dividends. Our dividends have increased and year-to-date we are paying out to our shareholders roughly $60 million more than last year. We are still confident between now and year end including, as I'm going to talk about in a minute, the gains and the proceeds that we anticipate from the transactions that we have announced for the Central Station and the EWS. They come in, overall for the full year ahead of $800 million, but we had a strong fourth quarter to get there.

Just to wrap up in terms of our outlook for the full year. Year-to-date, given the challenges that we face to be flat and in terms of EPS is good performance. We expect the headwinds to continue into the fourth quarter, especially the dollar, which as you see on your screen has surged beyond parity, and also fuel prices, which last Friday were just under $90 per barrel.

The exchange alone for us if the dollar was to stay at around at $1.02 for the fourth quarter, last year the dollar was trading at $0.88 in the fourth quarter. Just back on a year-over-year basis is a $0.14 increase, which means about $0.07 of EPS headwind from the conversion alone. So between that and the fact that we don't recover on higher fuel for two months with the two month lag, we have a challenge in the fourth quarter to address, but the business is picking up. We expect good volume, good growth. Jim will talk to you about it, and that should help us offset the issues we are facing from an exchange and fuel standpoint, and with the closing of Central Station and EW West, which together should give us around $0.20 of EPS, for the full year we should have 5% EPS growth. But excluding the gain on Central Station and EWS, our overall full year EPS outlook is now flat on a year-over-year basis.

Good performance in a tough environment, but as we see this going forward, we think these issues will clear up and when they do clear up, we'll have the potential to return to better profitability momentum. With that, Jim?

James M. Foote - Executive Vice President, Sales and Marketing

Thank you, Claude. I'd like to go through the third quarter revenue page with everyone now, and as always when I'm talking about the revenues I will do that on an exchange adjusted basis.

For the quarter we achieved top line growth of 3%. Four of our seven business segments grew, three of which grew at double-digit rates.

Intermodal was down slightly and declines in forest products and construction material segments reveal the pressure on these markets from housing-related issues. Price during the quarter was the biggest contributor to revenue growth. On a per unit basis our same-store prices increased over 4% versus the same period last year. Average revenue per car increased 5% and cents per RGM increased 3%.

On a mixed basis our average length of haul increased by 3% during the quarter due to the stronger system average growth from our western Canadian franchise. That drove revenues up approximately 2%. Volume was down revenues declined approximately 2% due to lower volumes. As carloadings were down 3%, and revenue ton-mile declined 1% in the quarter. Fuel was also down the revenue associated with our fuel surcharge were also down in the third quarter solely as a result of the lower applicable crude prices this year versus last year.

Going through the various segments in a little greater detail, our merchandise segment was down in total 1%. However, petroleum and chemicals was up 10%. Very strong quarter for petroleum products, low-sulfur diesel fuel oil, gasoline, jet fuel shipments all increased. Our diluent shipments to the Oil Sand region of western Canada from both the west coast and from Texas continue to show very strong increases although on a very small base.

Our LPG shipments were up in the quarter as demand for butane and propane outpaced last year. And on the chemical side, on the petrochemical side, imported methanol over the west coast port of Kitimat, drove positive result and offset weakness in chlor-alkali other industrial chemicals.

The metals and mineral segment was down 4%. Demand for metals products was up in the quarter. Rolled steel products pipe, steel construction materials like I-beams increased as did aluminum slightly. That was offset, that's strength in our business was offset as weaker housing construction materials, roofing granules, cement etcetera were down as weaker scrap steel shipments. Shipments of iron ore were down in the quarter as manufacturers took maintenance downtime in this period.

Forest products down 9%. Our forest products franchise continues to be impacted by the weak market conditions for these products. The weakest demand was lumber and panels where carloads were down 10% and 25% respectively. I can't add much to what's already been said about the U.S. housing market.

The papers segments weaker in North American demand for all grades of paper and there our production cutbacks at five major CN's served facilities. Carloads were up 7% in paper in the quarter.

Pulp shipments on the other hand were relatively stable in the quarter as worldwide demand is strong and there are record prices, for pulp creating export opportunities for Canadian manufacturers.

Our automotive group up 6% another good quarter for automotive business driven by two of our large initiatives, we have talked about in the past. One in the new Suzuki traffic that we have been handling and the other servicing GM's new lancing facility.

Our Ford business has also been very strong during the quarter as the models produced the... Ford's models produced at CN plants have been selling well, and we are handling some additional increased volumes to western Canada.

The bulk business as Hunter said very strong outlook and very strong performance of bulk in the third quarter. Bulk in total up 10% with coal leading the way up 10%, Coke Canada up 16%, recognition there of the new mines that have come on line and are continuing demand for Canadian metallurgical coal. The U.S. coal down, again reflecting this short-haul Powder River Basin coal move to the Tennessee valley authority facility, which has been slowing declines throughout the year from a volume standpoint, again a very short-haul move for us and therefore not much of a revenue impact.

Grain and fertilizers they continue to show positive results up 11% in the third quarter. Canada very strong demand and a very good quality wheat crop is driving a good volumes towards CN's ports. And in the U.S. shipments of soybeans, ethanol, DDGs, and corn shipments from the U.S. into the Canadian markets were very good during the quarter, although they offset the gains or opportunities that we had for corn movement to portend export markets in the U.S. And fertilizer product shipments have also been very good.

Intermodal down slightly 1%, overseas clearly a tale of two cities depending on which coast you look at, our volumes on our West Coast port for import international containers very strong. However, some declines in our East Coast port of Halifax, where we've seen some traffic shift to carriers that are making Montreal their port of call versus Halifax, as well as some changes in service and marketing strategies by some of the carriers there. The domestic business, basically flat during the period.

Going through the next chart, Mongeau has referred to, this is the chart that helps put in perspective for Bob Morgan what I just went through, shows that in most business segments we saw growth which would have driven our carloads up 2%, but taking the specific items that I just talked about, and putting them in a chart form to describe the carloads impact.

Forest products, as I said, down to the U.S. housing market. Our iron ore business, though, was down during the quarter, but this was clearly related specifically to customer maintenance issues at their mines, and we expect to show very solid volume growth for iron ore in the fourth quarter. Similarly, this TVA Powder River Basin coal issue phase is out as the fourth quarter progresses, so we will see better carloads growth in all of our coal segments.

In the intermodal segment, the opening up of Prince Rupert and the growth of the international containers there will turn our intermodal franchise business around. We are expecting volume growth in the 5% to 10% range in intermodal in Q4. And U.S. grain, we have already seen the impacts of a very, very strong corn crop in the U.S. We saw weaker corn shipments in the beginning of the third quarter, but they have begun to turn around and so far in the month of October we are seeing very strong orders for grain.

So in conclusion, taking in summary, the revenue outlook, obviously, our pricing strength continues. The guidance that we had provided was a slightly stronger pricing environment in the range of 4% to 5%, up from a range of 3% to 4%. The pricing on a per unit basis, as I said earlier, 4.5%, puts us right in the heart of that range. The outlook for bulk is very, very good in coal, grain, sulfur and potash. We are expecting to see volume growth in the fourth quarter of 7% to 8%.

The mixed outlook in merchandise will continue as again I am not any more of a predictor than anyone else is on the forest products market. So therefore, we are looking for that weakness to continue, although, we are certainly always in the hunt for new opportunities to offset that declines.

Market share gains from truck like the white paper initiative that we have been opening up with our warehouse strategy, our trucking and our rail network. Leveraging our oil sands opportunities with new opportunities in steel and pipe and aggregate businesses there, and probably the most exciting news at 6:00 AM on October 31, the first vessel... first COSCO vessel pours in to Rupert, Prince Rupert. We are expecting certainly a conformation at this time because the boat is enroute, that we will have very good discharge volumes from that vessel and those discharge volumes from COSCO should be enhanced as we go forward because we have an arrangement with Hangen who we are doing an arrangement of sharing a space on that boat with COSCO and that will be adding volumes to the discharge as we go forward.

So thank you very much and with that I will turn it back to Hunter.

E. Hunter Harrison - President and Chief Executive Officer

Thanks, Thanks Jim Foote. Well I think you can see that we have faced in the third quarter and we will face certain in the future to some degree some the very challenging conditions but in spite of that we contain interest for long-term growth. As Jim said, I don't think the dollar is going to stay this way, but I can't tell you when it's going to turn. I don't think housing starts will stay this way. I can't tell you when it's going to turn, but I can tell you that we are prepared and continue to invest in Rupert, EJ&E to be able to deal with this business.

And the best parallel I can draw to this quarter is last year operating ratio stands only if you draw parallel to that. We shot 58 under ideal conditions and it was a course record oil record. This year with bad dreams, the driving rainstorm, bad conditions we were able to shoot at 62 and nobody else has come close to that. So I am very pleased that we have got this strong operating model and a bunch a great railroads. We would not have been able to produce these type of results with these type of challenges that we face now.

So gentlemen with that, we will be happy to answer questions that the group might have.

Question And Answer

Operator

Thank you. At this time we will take questions from the telephone lines. [Operator Instructions]. We have a question from Ed Wolfe from Bear Stearns. Please go ahead.

Unidentified Analyst

Hi guys, its Scott Ehrens [ph] for Ed. Good afternoon.

E. Hunter Harrison - President and Chief Executive Officer

Hi, Scott.

Unidentified Analyst

Couple of quick ones, one, Claude did you break out the, with the Central Station and EWS I know you said $0.20, did you break out how much for each, am I miss that?

Claude Mongeau - Executive Vice President and Chief Financial Officer

No actually I haven't because the numbers in the annual vary depending on the exchange rate of the British pound and the finalization of our accounting for the Central Station, which include the sale leaseback. So, I think overall it's around $0.20 and we'll give you more details when we have actually done all of those entries in the fourth quarter.

Unidentified Analyst

Okay, great. On the headcount side up about over 2.5% with volumes down 3%, I know last quarter you have talked about some taking on doing more contract work, and how much of the headcount is for that and how much is for ramping up for Rupert and how do we think about headcount going forward?

Claude Mongeau - Executive Vice President and Chief Financial Officer

Well, there're couple of things that I can bring out, the contracting impact from the engineering standpoint so far is that of 160 people. We talk about for sometime that we're going to be contracting more in and net-net best calls to us. We're also going. We have the demographics in the West. We've lower employee, I think we've about... average age is about 47. So, we are doing now hiring to replace retirees, and we have an overlap there. So, when 300 or 400 people are going to retire for some six months, we have 800 people, if there is a 400 are live in.

Now, one other things that we are doing in the belt-tightening exercise, is going to reviewing the training we are doing for the people. And we, I think now comes at conclusion that we can give the same amount of hours of training, but do it in a three to four months timeframe rather than six months to help that situation. And then a few of... some of the other employees are result of just ramping up CN worldwide and CN worldwide North America to the mid-tier [ph]. So that that gives you some kind of flavor for headcount because that is... that bugs of trend that we have been going in the opposite way for sometime.

Unidentified Analyst

That's helpful Claude and is that 2.5% a good run rate to you as going forward?

Claude Mongeau - Executive Vice President and Chief Financial Officer

No I think we're going to come down a more closer to flat they are going forward because some of these items are one-time in nature, the engineering employees is a good example. We may continue to see a increases there, but not to the tune of 160, and similarly further running trade. Ones you get your compliment of people in training, we may have 400 and 500 at the moment in training. You don't need, you just replenish them when they go into the workforce and we don't go higher than what we have at the moment. So, flapped is slightly up depending on volume would be better number to use.

Unidentified Analyst

Okay, that's of. And just one last one for Jim, on the revenue for carload up 1%. Can you just... I know you gave, can you just give again the split on fuel, price, and mix and what are exchange rate, how that comes into play and if we should be thinking about that going back up as we get to the fourth quarter and beyond?

Claude Mongeau - Executive Vice President and Chief Financial Officer

Well excluding exchange here again the numbers that I provided was that price would have been up 4%, revenues up 4% from price up 2% from mix down 2% from volume and down 1% from fuel.

Unidentified Analyst

Okay. That's helpful. Now... is that I mean... in that 4% for price was that was same as last quarter isn't?

Claude Mongeau - Executive Vice President and Chief Financial Officer

Yes right that's again, you know, again on a per unit basis we have gone up slightly into the range of 4% to 5%. 4% I believe is what we are exactly, what we said in last quarter, and I believe the quarter before so that's the range and I would like to see that overtime move close, which is the 5% in the range, but I can't tell you exactly when that will happen.

Unidentified Analyst

Okay. So, as we just say kind of about these depressed levels until the exchange rate kind of normalizes?

Claude Mongeau - Executive Vice President and Chief Financial Officer

4% price.

Unidentified Analyst

No the total report yield, kind of like revenue for --

Claude Mongeau - Executive Vice President and Chief Financial Officer

When you look at exchange alone in this quarter it's an headwind and that it is quiet significant to the tune of 4%. In the fourth quarter it's going to be even more than that like just as I said earlier and I was talking EPS, but in the fourth quarter the dollar last year was $0.88 and its trading at dollar to now that's a whooping increase, and that's having a direct impact on our reported revenues. Right on a reported basis we will have a larger impact from exchange in the fourth quarter than we did in the third quarter this year, and I mean if you want to try and put it in prospective to try and understand it, we actually had a slight positive in the first quarter of this year, and we will have almost double the impact in the fourth quarter from exchange as you assume it stays in this like dollar, $3 to $4 range, so it's... that's why I try to strip it out when I do my explanation to have apples to oranges, otherwise it's so variable.

Unidentified Analyst

All right. Thanks for your time, guys.

Operator

Thank you. The next question will be from Randy Cousins of BMO Capital Markets. Please go ahead.

Randy Cousins - BMO Capital Markets

Good afternoon. Jim, I wondered if you could, you got the first boat coming into Rupert. I wonder if you can answer two questions for us. Can you give an indication, I guess this calling into three ports: Rupert, Vancouver, and Seattle. How many of the boxes are going to be dropped or what percentages of the boxes are going to be dropped in Rupert and how many of the boxes are going to be making their way into the United States versus staying in Canada?

James M. Foote - Executive Vice President, Sales and Marketing

Well, I think that what we are looking at right now in terms of just dealing with TEUs, at least for this first call, we are looking at a discharge of about half the boat, and in terms of the final destination for those boxes, my original plan here was to have about somewhere between 70% or 80% of that going into the U.S. I have not, to be honest with you, seeing the final manifest, but I would assume that they are still in that range.

Randy Cousins - BMO Capital Markets

And has COSCO or Hangen given you a sense as to sort of how they are seeing that service developed or what they are looking at in terms of order flow over the balance of this quarter and into 2008?

James M. Foote - Executive Vice President, Sales and Marketing

Well this is kind of... the run rate... well to be honest, I'm very excited about the first call that the volumes are this high to be honest with you, because this is kind of the run rate that we were looking at to kind of kick off the service so to speak, and to have it there on the first, and appear to look like on the next vessel, that's a good sign, there's clearly in the shipping community, either the manufacturers or the receivers of freight desire to want to use Prince Rupert because of all the benefits that we talked about, congestion-free, etcetera. So it's not only the steamship companies that have been there to look at it but the big box stores and everyone else has been up there as well. So it looks good so far and we are on track here and very excited.

Randy Cousins - BMO Capital Markets

So you are not seeing any... FX the run of the Canadian Dollar have you priced this in US dollars? You have not seen an FX impact in terms of the viability of Rupert?

James M. Foote - Executive Vice President, Sales and Marketing

No, no I mean it's... we certainly had anticipated the volatility in the dollar not to this extreme and had marketed and priced the product accordingly.

Randy Cousins - BMO Capital Markets

Great, that's good news. Second question and my last one, I wonder if you guys could comment on the CTA proposed with reference to the Hoppermann [ph] and how it's going to impact the results both this year and I guess next?

James M. Foote - Executive Vice President, Sales and Marketing

Well, this year the decision of the CTA has been safe, so I think it's not going to have any impact into this year, but the government is on the record that they think that the estimate for the maintenance adjustment is about $2 a ton and so there's going to have to be consultation and technical analysis with the CTA to arrive at that number and it could be up or down around $2 a ton.

Randy Cousins - BMO Capital Markets

And what would that mean to CN?

James M. Foote - Executive Vice President, Sales and Marketing

I forget the exact number but I recall it on the order of $20 million a year or so.

Randy Cousins - BMO Capital Markets

Okay thank you.

James M. Foote - Executive Vice President, Sales and Marketing

Okay.

Operator

The next question will be from Scott Flower of Banc of America Securities. Please go ahead.

Scott Flower - Banc of America Securities

Yes. Good afternoon all. Just wanted to see... obviously this has changed a lot more than anyone thought on a change rate but obviously the exchange rates tend to on a lag basis affect a lot of the product loads, and that tends to take to place every six or nine months. I'm just wondering there seems to be a little bit of an less skew in your business right now with the West obviously has continued strong with the bulk in the East for all sorts of reasons is a little weaker. Does the currency shift accentuate that? Where does currency actually, assuming it's not just reported financials but in effect product flows obviously paper and perhaps pulp and there are products like industrial that get impacted in and how can you actually manage some of the operational challenges if you get a skew of business stronger in the West, a little bit weaker in the East?

E. Hunter Harrison - President and Chief Executive Officer

Well, Scott, you know that has been the challenge for us in the quarter, where we've hit very, very strong business segments in Western Canada in the bulk businesses. It's that they have been coming at us very quickly, you know when some segments like our coal business etc. we are 20% ahead of what we had budgeted for the year. So we have been working very hard and diligently there to meet our customer demands for the significant growth we are seeing in the west.

Now the East obviously does not have the similar characteristics in terms of its markets and therefore it's heads have been softer to begin with, and before the dollar appreciates take a look at the issues associated with the softwood lumber agreement where a lot of the lumber had already been manufacturing, had been transitioning from Eastern Canada to Western Canada, and now paper manufacturing is clearly impacted by the exchange rate, because there is clearly you know, a manufacturing it done in the Canadian dollars and a market for the product in U.S. dollars and there have been cutbacks and there have curtailments by our customers, five of which were new in the third quarter and unless something happens with the exchange rate, those shutdowns could be of a very long duration. Our challenges to hustle around and find new opportunities to take their place in Eastern Canada, and that's what I challenge my sales team to do everyday, and I am optimistic we will find new business opportunities in the East to grow just as fast as we have in the West.

Scott Flower - Banc of America Securities

How can there... I mean obviously it is just an infrastructure issue or is there anything tactically you can do operationally to try to in addition to Jim getting his sales team to try that to get back to try to manage that skew, which looks like it may get worse before it gets better?

E. Hunter Harrison - President and Chief Executive Officer

I mean it's not... I mean it's a clear to visit, Jim described between East and West. We were just a train size in the East. We have taken pairs of trains off in certain market. We rerouted traffic between Toronto and western Canada, different route scheme so the whole operating plan affectively in Canada is being redesigned and has been redesigned as we moved into this overtime. So, as we go into write now we are heavy in the grain. We are heavy in the potash. We are heavy into all the bulk commodities in the West. But that's the way the model adjusts accordingly, so from that standpoint it's relatively manageable. Now, you have to fixed assets, you've got people in place for the business. You've got locomotives there, you've got cars there, but from a variable cost standpoint it's certainly manageable.

Scott Flower - Banc of America Securities

And the last question I'll let someone else have had it I know that Claude mentioned in its discussion of car hire obviously that both in terms of lumber car is going less sale into the U.S. as well as some improvements in U.S. when should we expect some of the car hire income issues to last will that be fourth quarter because if I look at last year your comp seem to get easier in the fourth quarter is that going to be something we will continue to see into the first half of next year I an just trying to get a sense of when should I think about the car hire income issue getting more normalized?

Claude Mongeau - Executive Vice President and Chief Financial Officer

Well I mean there is two things. One, if you just look at it from a just the last basis or number two is when the forest products comes back stronger and so you might have a double affect, I mean I start to read it the same thing that you'll all read about the lumber picking up fourth quarter of '08,first quarter of '09 when the predominant one largest area that is clearly centre beam cars, lumber cars which are a quite expensive cars standpoint I think we have like 1,800 part, as we speak, so if you can look at a car that's getting $25 or $30 a day and you get 1,800 on part well if you start laughing on these quarter same time the business picks up you will see a big swing in the car hire accounts.

Scott Flower - Banc of America Securities

Alright. Thanks very much

E. Hunter Harrison - President and Chief Executive Officer

Yes, sir.

Operator

Thank You the next question will be from William Greene of Morgan Stanley. Please go ahead.

William Greene - Morgan Stanley

Yeah. Hi, good afternoon, I am wondering if you would know the answer to this and that is can you tell how many car loadings were affected by the change in currency, in other words not thinking about the revenue per car impact from currency, but how many car loadings maybe didn't go this quarter as a result is that some thing that you can tell just looking at what shutdown on the lines this quarter?

Claude Mongeau - Executive Vice President and Chief Financial Officer

That's very difficult I don't think it's just real vague kind of number that we look at that we think the dollar is the overall impact and how much of the dollar or how much of the economy, how much of the shift that very, very hard to determine.

William Greene - Morgan Stanley

Yeah, that's right I just thought to ask it anyway. So, then as a follow-up some of the questions asked on productivity, if we look at things on a cost per GTM basis it actually went up by almost 6% this quarter excluding fuel, and so I am wondering if, if it's sort of a sign that maybe that's just is that all mix or is that a sign maybe some of the productivity efforts that CN has been sort of announce for so longer, you've kind of gotten as far as you can on that without volume growth there is not much more you can do?

Claude Mongeau - Executive Vice President and Chief Financial Officer

Well you know, I don't if the volume growth, I mean I think it's, number one it's return of volumes, the issue become when you gear up for certain volumes when times are good and hard times happen, you can't just give over the assets, that you bought, okay, you've got locomotives part, you've got cars part those beings it can impact, now if you can peal back and look more when you start to touch the volume out of the numbers the productivity number all continue to improve. So, it's more of a volume driven issue then it is anything then productivity. Now having said that I think we said to you last year that we were 58 or 62. We'll probably not going to 50, so in as we've said before we'd like to grow this business and what we get better economic conditions at low favorable dollar in forest products housing starts and those being, we can but I don't think if any sign or any slippage from a productivity standpoint.

William Greene - Morgan Stanley

Okay. And then Hunter one last question for you just you've now done a number of acquisitions over the years, is there a lot left in terms of small acquisitions that you can tuck-in here, and how do you think of about acquisitions that are non-contiguous?

E. Hunter Harrison - President and Chief Executive Officer

I am not sure that, number one once that we potentially be that are non-contiguous are very limited number one. Number two, I don't think that necessary an ingredient, we've said we do a pretty good job of railroading, if we can buy a railroad the right price and make a buck out of it. You know we have started to take look at that but obviously, the small niche acquisitions, given what we have done, I mean we have done now about $7.5 billion since '95, they are running down. So with the exception of a larger transaction, those things are not going to be available like they have been.

William Greene - Morgan Stanley

Thanks for your help.

Operator

Thank you. The next question will be from David Newman of National Bank. Please go ahead.

David Newman - National Bank

Good afternoon, gentlemen.

E. Hunter Harrison - President and Chief Executive Officer

Hi David.

David Newman - National Bank

What do you anticipate the fuel headwind could be on the top line in percentage terms in Q4 and as looking out in 2008, and would you anticipate that there be any pushback in your customers, given the tougher economy, especially given you guys have taken 4% price increases?

E. Hunter Harrison - President and Chief Executive Officer

Right. Before I answer that... I want to about it look [ph], customers pushback at whatever area it is okay? They don't like 1%, they don't like 2%, they don't like 3%, they don't like 4%, so you know it's a marketplace to work out there. And the customers that are using this or using is what we get, all brings in the best service with the best value. If we don't do that we are not going to be affecting price increases.

David Newman - National Bank

Does the bottom get tougher though, Hunter?

E. Hunter Harrison - President and Chief Executive Officer

Well it's tough today, tough last year, when shippers, and I love them okay? That's why we are here. But let me qualify with that, we may have gone for 20 years without price increases and then if we walk in the door and say you got to start taking increases, it doesn't set really well with some of them. But you are in the Canada and you are in the U.S., but that's the kind of the market that it works.

Claude Mongeau - Executive Vice President and Chief Financial Officer

In terms of revenue generated from fuel surcharge in the fourth quarter, it shouldn't reverse itself from the third quarter, as the price that's tied to calculate the fuel surcharge will be higher in the fourth quarter of 2007 then it was in 2006. I think the crude was up 8% or something like that in the fourth quarter and I just mirror exactly what Hunter said, customers would always like to see lower rates.

David Newman - National Bank

You should see a bit of a negative spread of $85 are correct, WTI? Until you catch up I guess in the New Year?

Claude Mongeau - Executive Vice President and Chief Financial Officer

Yes there's two month lag. The 8% that Jim was quoting is on the basis of the prices during Q3 which will by and large for the first two months dictate our fuel surcharge in the fourth quarter.

David Newman - National Bank

Right. And last one if I may, guys. Just in terms of, obviously the long term impact of the exchange rate on the Canadian manufacturing and the housing downturn, does this change your strategy at all especially related to the acquisition twist? In a perfect world what would you like to do I guess?

E. Hunter Harrison - President and Chief Executive Officer

We seldom stay in a perfect world. I don't think... I think what we have to do is adjust our strategy to markets. I don't think we are able to stretch that strategy and I think to some degree we go through these times and we learn our lessons going forward about things change. And I think we've got a pretty solid portfolio, pretty diversified and if we talk about in January we look at the annual result and look at the headwind we are going to have to compete with, overall for 2007 and have a flat year if that's the case. Just hypothetical that's going to be all American. And when we get a little picked up in Rupert, it's just the niches kick in from the J, a little bit. I don't think the dollar's going to stay here, I don't think housing starts are going to play one-on-one in the U.S., and things kick in, but we are not in this kind of business you are not able to all of a sudden to shift your strategy overnight to adjust the market.

David Newman - National Bank

Okay very good. And just last one, it's on guidance. The guidance for the full year, is that based on the $0.93 or the $0.96?

Claude Mongeau - Executive Vice President and Chief Financial Officer

We're guiding looking out to the current environment, and we see the exchange at parity and that's what we were guiding on.

David Newman - National Bank

No, I mean for the quarter results this quarter, Claude, is that based on the $0.93 or the $0.96?

Claude Mongeau - Executive Vice President and Chief Financial Officer

Yes, $0.93.

David Newman - National Bank

$0.93 very good. Thanks gentlemen.

Operator

Thank you. The next question will be from Tom Wadewitz of J.P. Morgan. Please go ahead.

Thomas Wadewitz - J.P. Morgan

Yes, good afternoon. It's Tom Wadewitz.

E. Hunter Harrison - President and Chief Executive Officer

We know you, Tom.

Thomas Wadewitz - J.P. Morgan

You know the name. Let's see...on the...yes, I think you started to comment a little bit on '08, but when you look at some of the pressures in fourth quarter that look like you drive earnings down a little bit year-over-year in first quarter, how much of the continues in '08 and I mean is it, you know is it reasonable to think that you get some good growth in '08, or conditions don't change a lot, are earnings maybe flatter down in '08?

E. Hunter Harrison - President and Chief Executive Officer

Well, I mean Claude's going to comment on this more to get more specific. But I can say this, this kind of environment is extremely difficult to forecast, what's going to take place. We had, I don't think any of us entirely, I don't think anybody in the world that will see Canadian dollars at the rate of a dollar three, almost a dollar four a rate. I certainly didn't see it. I didn't see the housing starts like this, so you know there is lot of big questions going into 2008 which we are going to have to qualify whether we stayed batted, we just slightly don't know, and some I can help a bit if we can get some guidance. We might have to give it in ranges, but I think the fundamentals are there. Claude is going to talk you about some of the challenges we are going to have. We are going to get better, in some areas from a productivity standpoint and it's nothing that I think, I think we can deal with it. But, once again it's a very, very volatile affect to the environment.

Claude Mongeau - Executive Vice President and Chief Financial Officer

In fact I would just basically echo Hunter's comment, at this juncture they are calling the economy is a tough call, We think that the unbalanced the housing issues will not have too much contagious affect and that we will be able to rebound at the... soft landing in 2008, but you could see it going the other side and leaving to the side for a moment the high Canadian dollar and fuel price it's just very difficult to have a clear direction into next year.

For sure if the dollars stays at parity of it or above just that on a Canadian dollar reported EPS basis is a headwind of 5% that we have to face. So, we are cautious about next year. We think we can come in with the EPS growth if the economy holds up. Is it going to be a double-digit, probably not, is it going to be a high single-digit, at this juncture we are not providing a high or formal guidance, we just like to wait and see what the economy does and provide you more color at the first quarter earnings call.

Thomas Wadewitz - J.P. Morgan

Okay, that's fair enough, I know it's pretty tough to tell it from here you know especially giving from the economy, what about the cost side you've got a couple questions on that. Are there places where if volumes don't pick up you can push harder on headcount or are there other areas you can pull a little bit of a time lag, you can go after it even harder on the cost side?

E. Hunter Harrison - President and Chief Executive Officer

Well there is clearly I am not did the headcount more in costs, we might, if it's smart, if it lowers there are calls that raise in the headcount, I am not adverse to doing that. We clearly with the J acquisition and with the capital investment we are making amidst this over the last we have made number two years and completing in 2008. Clearly, will give us a lot of savings in the U.S. internal operation. It will give us car velocity improvements and a lot of things there. There is a continuing initiative with siding initiatives in further in western Canada. Keith Creel is looking on some issues and reroute the traffic between east and west. We've got distributed power coming on with locomotives where we can sustain longer trains coat in colder weather. We've got some air repeater cars so there are a lot initiatives and this operating group shines the greatest when times are the toughest and so we will overcome.

Thomas Wadewitz - J.P. Morgan

Okay, great. And then the last one I will pass along to someone else. On the Preentroopers forecast I think back in May there was some good enthusiasm, you achieved 500,000 TEU in 2008. You mentioned the Hangen doing some volume on the COSCO ships. Do you think that still possibility in '08 or is that... how would you characterize 500,000 TEU go for Rupert innovated in terms of your outlook now?

Claude Mongeau - Executive Vice President and Chief Financial Officer

I think that the guidance that Mr. Norgan has provided, which I have enforced is that we would have $100 million of new revenues in the first 12 months so there is what we are anticipating beginning in October, in addition to that I am still what I have said was what I had hoped for was to have the remainder of the capacity sold out at Prince Rupert and what I've also said is that we need one more customer in there in order to one more big customer in there to have that capacity sold out, and I would hope that we would get that sooner than later. We're still working very hard. We still have a tremendous amount of interest and if we get that customer signed at sooner than later it will be additive to their $100 million in the first 12 months that Bob has talked about.

Thomas Wadewitz - J.P. Morgan

So, you're still comfortable with $100 million for the first 12 months?

E. Hunter Harrison - President and Chief Executive Officer

That's in the bag with this customer, yes.

Thomas Wadewitz - J.P. Morgan

Okay, great. Thanks for your time.

E. Hunter Harrison - President and Chief Executive Officer

Thanks, Tom.

Operator

Thank you. The next question will be from Walter Spracklin of RBC Capital Markets. Please go ahead.

Walter Spracklin - RBC Capital Markets

Thanks very much. Claude, you know I just wanted to make sure because it was real mid [ph] time last year that you sort of started guiding us for '08. Did you say first quarter next year is when you'd expect to come out with your early guidance?

Claude Mongeau - Executive Vice President and Chief Financial Officer

Yes. That's the fair approach. The things, Walter, reality is the subs call the economy. Everyday I look on the screen the dollar is up $0.02 and fuel price is sky rocketing. At this juncture we just like to see a little bit an environment that's little less volatility for us to be able to provide you with some guidance, and so at this juncture we'll just reserve and do that in the early part of next year.

Walter Spracklin - RBC Capital Markets

Okay.Move on to Jim. Jim you had mentioned there was a shift from Halifax to Montreal. I know Hunter you've talked a lot about Halifax as an important gateway. Are we seeing this as shift as a permanent thing, part of a longer term trend or you are still optimistic with respect to he Halifax as a part?

James M. Foote - Executive Vice President, Sales and Marketing

Well, Halifax has a great potential for us and we continue to market it very aggressively with the new port players out there. We have owners of the terminals and the port authority etcetera, so we think it's got great potential. This shift from Halifax to Montreal is a result of industry consolidation, one steamship company buying another steamship company and taking advantage of certain different routings of all sorts, so no long-term implications.

Walter Spracklin - RBC Capital Markets

Okay, but I guess Halifax has always been pretty good potential but in terms of the growth and in terms of capitalization hasn't always come up to expectations, anything that would indicate that Halifax is any problems there or is it just continue to be optimistic?

E. Hunter Harrison - President and Chief Executive Officer

I know there is no problem in fact it's a very well run port and there's certainly been new investor investments by new players into that, everybody is extremely optimistic about the port of Halifax, as more and more trade with North America comes through the Suez, as manufacturing picks up in India and in that area everybody is extremely optimistic that Halifax will be a huge player in that business - so much so that other people are currently looking at developing new port facilities on the East Coast because they don't believe that Halifax is going to have the capacity to accommodate the growth.

Walter Spracklin - RBC Capital Markets

The last question just on Prince Rupert, you mentioned getting up to full capacity through the year, are you considering any options in terms of the strategy used? I know you do want to get that 70% to 80% U.S. destination, is there any ideas toward or thinking toward being lenient on the first little bit in terms of getting some utilization up at the expense of perhaps not necessarily at the high ratio of U.S. or are you going to stick to that target ?

E. Hunter Harrison - President and Chief Executive Officer

No, I just, you know, we don't see any reason to change our marketing strategy and we believe that we have a premium product, a gateway on the West Coast of North America that doesn't exist anywhere else and we're going to continue to market our product just as we have.

Walter Spracklin - RBC Capital Markets

Okay that's it from me. Thanks very much guys.

Operator

Thank you. The next question will be from Ken Hoexter of Merrill Lynch. Please go ahead.

Ken Hoexter - Merrill Lynch

Hi. Good afternoon. It's Ken Hoexter.

E. Hunter Harrison - President and Chief Executive Officer

Hi, Ken.

Ken Hoexter - Merrill Lynch

Claude, can you just talk a bit about what happens if the dollar actually gets a bit worse on volumes. Obviously, nobody would've guessed the $1.40 is now down to $1.20 now down to $0.97, so what happens if we end up and we're talking about a $0.90 or $0.88 dollar the reverse way versus the year ago, how does that impact the business?

E. Hunter Harrison - President and Chief Executive Officer

Well don't mix it up on me, because I am paying you a dollar and I live in Canada so, but the, it's who knows, we think that the dollar has run up ahead of its fundamentals a little bit and that it should pull back. The reverse is also a possibility and one could argue that it would move to $1.05 say in exchange rate. I think the issue that we face then, it's straightforward from a conversion standpoint.

For every penny that the Canadian dollar appreciates, we lose about $0.02 of EPS. The tougher call is what happens to the number of manufacturers, our customers, the people who are selling into the U.S. markets, it's tough. It's tough for the dollar, it's a lot tougher at $1.05 or $1.10. So I think you would see more casualties and we'll have to be even more nimble to work with our customers in that kind of an environment. I just don't personally see it. I think that what you're going to see is the Canadian dollar gradually coming back to more reasonable levels, but it's very tough to call.

Ken Hoexter - Merrill Lynch

But just in case this does head in this direction, are you then talking about mostly cross-border traffic, and then what fields are mostly exposed? Just the forest product business? Can you kind of direct us to which businesses we could see impacted more than others?

E. Hunter Harrison - President and Chief Executive Officer

Well, by the time it gets to $1.05 we will be looking at business that is south-north and shipping Budweiser into Canada. If you see the dollar go much higher like that, to Claude's point it is going to be produced somewhere in North America. And if is not produced in Canada, the chances are it might be produced in U.S., you can stuff that U.S. over the Canada instead of vice versa. So there's the point where manufacturers can only survive so long in that kind of environment. So we just... if that's the case I don't happen to think that's going to take place, but if it takes place there could be some fundamental shift.

Ken Hoexter - Merrill Lynch

Okay. Right. I guess back over to Jim on the congestion at Port Valley Long Beach obviously was... it was actually volumes I think and the imports were down 1% last month. If we continue to see kind of some loose capacity at the Port Valley Long Beach, does it make it less likely for you to be able to get that upside to your 100 million target in getting a second committed customer? Are they in discussions about thinking about what happens when volumes actually do pop back up and they do get ahead of the congestion or are they saying hey nothing's wrong right now why even think about it?

James M. Foote - Executive Vice President, Sales and Marketing

I think the lack of congestion in LA Long beach caused us to... caused some customers to be not as eager to make a complete shift to Prince Rupert, and therefore my comments earlier in the year that I was pretty confident that I would have the facility sold out this year haven't come to reality I think everybody expects is that as we move into 2008, which is why more and more vessels continue to go all water out to East Coast ports to avoid the west is that this congestion issue will return and that will make Prince Rupert again not only more attractive, but a necessity, which is why I said earlier its not only the steamship companies that are interested in going there, is there manufacturers and the receivers of the product that they want to make sure they can get in there markets and why they are eager to use Prince Rupert. And so, in 2008, if we don't get it done this year I still think that we will still get it for more lager customer and there we will have the facility sold out and we will continue to progress and be aggressively pursue expansion of the port of Prince Rupert.

E. Hunter Harrison - President and Chief Executive Officer

I think Ken can further that point is this, I think we will find and customers will see and we are going to see right soon that even without congestion in Long Beach, Prince Rupert needs Long Beach from Asia to Chicago for example all things in it's a premium service and once its sold out its sold out there is not an option then when there is congested in California saying now we are going to Prince Rupert because Prince Rupert we think will be sold out by the end and I think to a degree it deals more from a pricing standpoint then.

Ken Hoexter - Merrill Lynch

I think I want just a quick clarification I just don't understand Jim it was the on east side Halifax you are saying its switched to different ports it's not an issue that trucks are getting more competitive and it's going half of rail onto truck is that correct or is that our truck spending marketplace?

James M. Foote - Executive Vice President, Sales and Marketing

Yes. That's so I suppose to discharging their cargo at a port... at a terminal in Halifax is taking that vessel all the way into the port of Montreal.

Ken Hoexter - Merrill Lynch

Okay. Thanks for the time.

James M. Foote - Executive Vice President, Sales and Marketing

Thanks.

Operator

Thank you. The next question will be from Bill MacKenzie of TD Newcrest. Please go ahead.

Bill MacKenzie - TD Newcrest

Thank you. Jim, can you just talk about the other revenue line little bit it was the driver to the revenues in terms the year-over-year growth. Just wondering if you can give us a little bit of color in terms what's going on there and what is our CN worldwide any of the factors that are driving that the improvement there?

James M. Foote - Executive Vice President, Sales and Marketing

Yes. It's at the top of my head, I think it was the growth of $22 million a year-over-year by half of that comes from the non-rail logistics businesses growth warehousing, trucking etcetera where, as you know we are aggressively pursuing growing that business and the other half of that comes from a slight change in the methodology of accounting for the revenues associated with our cold dock and iron ore dock where the revenues from that used to be up in the business unit item and they are now down in the other revenue although we did not restate the prior period because it was a little you know one little small little change.

Bill MacKenzie - TD Newcrest

Okay. And I think from a business perspective that's driving that significant growth that you saw this year this quarter?

James M. Foote - Executive Vice President, Sales and Marketing

Well beside the accounting change and the growth in the non-rail business segments like warehousing and trucking, no, that's what it is.

Bill MacKenzie - TD Newcrest

Okay. And so just a question on in terms of the asset sales is there are any sort of longer term impact on earnings from entering into sale lease best transaction or any lost sort of other revenues from the sale of these assets?

E. Hunter Harrison - President and Chief Executive Officer

Our other income will be lower a little bit if we conclude the sale of EW West, but the central station, the lease expense that we will have going forward will be offset by the profit so that we would differ overtime on the transaction itself, so the sale lease back component of the transaction as I preferred, amortize gain, which is about the same as the increase lease expense.

Bill MacKenzie - TD Newcrest

Okay. So, no bottom line materially EPS impact?

E. Hunter Harrison - President and Chief Executive Officer

No actually it's really... those are two good deals the way I like them, but the cash, no impact on the P&L.

Bill MacKenzie - TD Newcrest

Okay, great. Thank you.

Operator

Thank you. We have reached at the end of the question period at this time I would like to turn the meeting back to Mr. Harrison.

E. Hunter Harrison - President and Chief Executive Officer

Thanks, thanks Joe, and thanks so much for joining us we appreciate it.

Operator

Thank you. The conference has concluded at this time you may disconnect your telephone lines. We thank you very much for you participation, and have a great day.

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