Canadian National Railway Co (CNI) 2009 Q1 法說會逐字稿

I would like to remind you that today's remarks contain forward-looking statements within the meaning of applicable Securities laws. Such statements are based on assumptions that may not materialize and are subject to risks described in CN's first quarter 2009 financial results press release and an an analyst presentation documents that can be found on CN's website. As such, actual results could differ materially. Reconciliations for any non-GAAP measures are also posted on CN's website at www.CN. C A. Please stand by, your call will begin shortly. Welcome to the CN first quarter 2009 financial results conference call. I would now like to turn the meeting over to Mr. Robert Noorigan, Vice President, Investor Relations. Ladies and gentlemen, Mr. Noorigan.

Thank you, Patrick. I'd like to remind you again about comments that have already been made regarding forward-looking statements. With us today is Hunter Harrison, President and Chief Executive Officer of CN, Claude Mongeau, the Executive Vice President and Chief Financial Officer, and Jim Foote, Executive Vice President of Sales and Marketing. After the presentation today, we'll take questions from those of you that are listening by phone. Could you please identify yourself when you are asking the questions. In order to be fair, could you limit the number of questions you ask to two? With that it's my pleasure to introduce President and Chief Executive Officer, Mr. Hunter Harrison.

Thanks, Bob and welcome everyone and thanks for joining us this afternoon to review what I think were pretty solid results and I think you would agree, a very challenging environment. I'm going to go over a couple of things that Claude and Jim will go over in more detail but just highlight a few things in the quarter. Then I want to talk to you a little bit about, before we move forward, some of the improvements in operating metrics that were really the driving force in our ability to achieve these type of results this quarter and I know it would be very, very important to us going forward, the rest of the year. But if you look at our earnings as reported, it was CAD0.90 for the quarter but if you take the one-time items out and look at the adjusted EPS, we came in at CAD0.64 versus CAD0.62 last year, same time.

Our revenues were down 4% and there's some plus and minuses there that Jim will go through. The operating ratio came in at 74.1% but I would point out to you that if you exclude the one-time charges for the EJ&E transaction, the operating ratio would have been at 71.7% I believe, which was about a point, a bit over a point improvement from last year. And very importantly in the quarter, we closed on the EJ&E transaction after a pretty long, hard battle with a few of the communities, but we got that transaction closed January 31st. We started moving our first trains over the EJ&E early March. The operation has been very, very successful so far. We continue to try to make voluntary mitigation agreements with those communities affected, and right now I think we have 16 of the 33 communities that were affected that we signed these agreements with. That represents I think over 50% of the population along the EJ&E line. So that whole process has gone very, very well for us.

Let me take just a minute to look at some of these operating metrics which were all records that this operating team produced. And I would point out to you that with my experience on the operating side of the ledger, it is very, very difficult when you have volumes down to make big productivity gains. Typically you see those gains when you see volumes at a very high level and some of these performances were pretty outstanding. If you look at the productivity in the yards, it was up 12%. The terminal to well time was down 16%. The gross ton mile of available horsepower was up 3%. Our car miles per car day was up and we made a big breakthrough up, was up 26%, and train velocity was up 18% just to name a few.

And our train size, in spite of the fact of the volume falloffs stayed effectively the same, and the encouraging thing here is these numbers continue to improve and get better and I would expect that they would all be what I would characterize as significantly better going into the second quarter. Just to give you a couple of examples, our car inventory is down on a year-over-year basis, about in excess of 20%. The locomotives, active locomotives is down 22%. Our train starts, both for road trains and yard engines are down in the 20% range and the cost is down even further. So that outstanding operating performance put us in a position to be able to produce these results in spite of the reduced volumes that we experienced affected mostly by the economy. So I'm very, very pleased and look forward to some more results throughout the year like this or maybe possibly even better.

And so with that, let me turn this over to Claude to kind of break down some of these numbers for you. Claude?

Thank you, Hunter. As Hunter said, it was an all around solid quarter in what was a very tough economic environment. We're pleased to have turned in strong earnings and free cash flow, despite what is roughly a 15% volume decline from last year. If you look at our results on a reported basis, we delivered CAD0.90 of EPS versus CAD0.64 in 2008. That includes the benefit of roughly CAD135 million after tax for the gain on the Weston subdivisions which we sold to GO Transit in Toronto. We also had benefits from lower income tax with the recovery of deferred income taxes.

All of this offset by the CAD46 million expense under new accounting rules for the transaction expenses of the EJ&E. If I exclude these elements, our EPS was CAD0.64 or 3% higher than the last year. Our free cash flow was also solid at CAD207 million for the quarter, which is a full CAD146 million higher than Q1 2008. These results are clearly a good indication of our disciplined approach. We were able to protect our top line with sustained pricing as Jim will explain in a minute.

Bottom line, despite lower volume and also lower fuel surcharge, our revenues came in only 14% down on an FX adjusted basis. We quickly adjusted during the quarter our resources and our expense base in line with the lower volume. We were able to improve our operating ratio as Hunter mentioned by 1.2 percentage points if I exclude the cost for the EJ&E transaction. We stayed focused on cash flow generation with a smart monetization initiative, and when you bring it all together, we think these are good results in a very, very tough environment.

Let's take the expense performance apart a little bit. Overall, our reported expenses came down 2%. This includes a CAD135 million or so headwind from foreign exchange and also the CAD46 million of EJ&E transaction cost. If I exclude these two items, our expenses are down actually by roughly 15%. Very much in line with the reduction in our revenues on an FX adjusted basis. This performance was achieved through solid execution, basically across the board.

You heard Hunter mention some of those statistics but let me go over them again because they are quite exceptional. Despite the significant volume decline, we were able to maintain our train load essentially flat. Our train speed was up 18%. Our yard throughput was up 12%. Our car velocity was up 26%. We had basically 22,000 cars stored at the end of the quarter. Our locomotive utilization was up 3%.

And best of all, our safety performance was just exceptional. Our injuries came down a full 40% in terms of the FRE ratio and our accidents came down 20% on a year-over-year basis. If I look at this kind of performance, and translate that into expense category, you get expenses pretty much in all categories. Labor an fringe benefits, for instance, and I'm looking at this year on an FX adjusted basis, came down 10%. Roughly half of that is lower overtime, lower wages, and the fact that we had lower headcount during the quarter. If you take our reported headcount, they are down 1.7%. Or just under 400 employees. But that includes the fact that we had higher number of employees from the acquisition of the EJ&E and the acquisition in the fourth quarter. Excluding those items, our FTE are down roughly 900, that's a 4% reduction.

Our road starts were down 16% and 20% respectively so very focused, disciplined management to line up our resources with the amount of business we handle during the quarter. Looking at purchase services and material, down 8%. We were focused on reducing outsourcing. We are actually in-sourcing a lot of activities and that roughly gave us a CAD10 million benefit in purchased services and material. We are obviously reviewing and managing down every discretionary expenses and basically all of our purchased services except perhaps for repairs and wheel sets were down on a year-over-year basis during the quarter. Fuel, as you would expect, was down quite significantly. On an FX adjusted basis, down by roughly 53% or order of magnitude, CAD160 million. CAD120 million of that would be the price of fuel itself.

Volume would be another CAD40 million, we also gained productivity, our consumption rate improved by 1.5% during the quarter and that would have translated to a roughly CAD5 million benefit. Depreciation expense up, up on the basis of our new depreciation rate. Also up on the basis of our capital investments in prior year. Equipment ramp is up and that's really a function of car higher income being much lower.

As you know, we are a strong originating carrier and those cars, when they're not moving offline to other railroads in the US in particular, are not collecting car higher income for us. Equipment ramps is the net of car higher income and expenses for leases. Our leases were actually down but this was more than offset by lower car higher income. Casualty and other up 44% or roughly CAD48 million on an FX adjusted basis, CAD46 million of that is effectively the transaction expense for the closing of the EJ&E transaction.

Excluding that, as I said, our overall expenses are down on an FX adjusted basis, 15%. Very solid cost control. We are aligning our resources to lower volume while statement protecting our ability to rebound when the economy turns.

Let me turn quickly to cash flow and bottom line, that is another very positive story. We have strong performance during the quarter, generated CAD207 million of free cash flow which is a full CAD146 million higher than last year. This includes the benefit of the Weston sale, CAD110 million of cash was the upfront payment. The balance of that sale proceed, roughly CAD50 million, will come to us in Q2 and the other two quarters before the end of the calendar year 2009.

Overall, this is a good transaction and partnership with GO Transit. We are allowing them to become owner of a strategic corridor. For us, we are protecting access for our freight business into person duty and are generating good money from monetization of that asset which is not a main line for us. We are also very disciplined in terms of working capital management. Throughout the quarter, even though we are facing difficult times, we were able to maintain our DSO or our collection cycle stable and we are managing our inventory very tightly and really are focused on generating cash in every line item. We are focused on keeping a strong balance sheet during the quarter.

We have completed a very successful financing. I think it was mid February, $550 million for a 10 year bond deal which was priced at basically an all-in yield of 5.77. So good access to capital market. Also, good cash position at the end of Q1 with just under CAD350 million of cash balance which puts us in a position where we are ready to handle our upcoming maturity which will come forward to us in early August. In the current environment, our focus is clearly on protecting our profitability, generating strong cash flow, to further strengthen our balance sheet.

Just to wrap up, as we look out to the balance of the year, obviously we still face a lot of uncertainty. There are some positive signs out there, starting to emerge, but the contraction may still have some distance to go at least in some of our commodities that we serve. Assuming that there is a turn in the economy towards the back ends of the year in Q4 time frame, the economy in the US could contract in the range of 3% if not slightly more in 2009. That would be one of the worst recessions since 1982. The key question for us is whether this could take longer to come back, whether the financial sector or some of the risks of major bankruptcy could have an impact on confidence.

It is tough for us to read this environment but in that kind of environment our focus is on running a tight ship if I may say so. We have a strong franchise. We have a proven business model. We have shown our ability to have disciplined response to lower workload and we also have the help from our shock absorbers, the fact that the Canadian dollar is coming down and also the benefit from lower fuel prices. Bottom line, we feel that CN is extremely well positioned to weather the storm and in fact there is no better proof point of our resiliency than the Q1 results which I just reviewed with you.

And I know one thing. When this economy does come back, we will be ready for the rebound. Jim?

Thanks, Claude. Just a couple of moments on a few slides here. On the revenue performance in the quarter. Significantly softer volumes drove exchange adjusted revenues down 14%.

Revenue ton miles were down 14%. Lower oil and diesel fuel prices reduced our fuel surcharge revenues another 8%. Same store price increases in the 4 to 5% range and favorable mix offset some of those declines. In the merchandise business segment we saw declines across all the groups. Petroleum and chemicals did better than the rest of the merchandise group, down 7%. Strong movement of condensate from various North American origins into the Alberta oilsands were offset by declines in chemicals, plastics and sulfur. Metals, minerals and iron ore saw the fastest declines from previous quarters showing the cutbacks in North American manufacturing.

Forest products were again down this quarter 22%. And auto was down 42% in line with unprecedented declines in North American vehicle sales. The bulk side of the business is doing much better than the merchandise commodities. US steam coal growth including the impact of the EJ&E and Illinois basin coal moves offset lower Canadian metallurgical coal moves. Strong Canadian wheat and canola shipments mostly offset slow US corn and soybean moves. The very low level of fertilizer shipments drove the grain and fertilizer segment into negative numbers. The intermodal segment is two different stories.

Overseas is very weak. Volumes to Prince Rupert are better than Vancouver and there is some new activity in Halifax. On the domestic side of the business, that is doing very good. Other revenues were down, reflecting lower volumes at our trans load facilities.

We go to the next page. To try and give you somewhat of an outlook, it appears that our volume numbers have settled into a range that is about 15 to 20% below last year. The various specific new initiatives that we are working on to produce results like the condensate moves and market share gains from trucks are working. But we need some change in the macroeconomic environment before merchandise will improve. On the bulk side, US steam coal shows promise and the large Canadian grain stocks and export program will help. And in intermodal, we are focusing on the domestic business to continue to gain more business from truck, while concentrating on further developing our retail program.

Hunter?

Thanks, Jim and Claude for those excellent presentations. Let me just wrap up this way. This is going to be about more of the same, the same things you've heard from us before, the continuation to drive productivity, control our cost, sustain our pricing discipline which Jim has continually talked about, focus on structural growth opportunities and as Claude has said earlier, we're well positioned to weather this storm. This is a strong franchise with a proven operating model with an operating team that's got the ability to execute and that's what we do best. So I am very encouraged, even in this environment, that this organization is going to do much better than most and looking forward really to what just how far we can go with these productivity initiatives.

So, with that, Patrick, we would be glad to answer questions you might have from the group.

Thank you. We will now take questions from the telephone lines. (Operator Instructions). The first question is from Tom Wadewitz from JPMorgan. Please go ahead.

Yeah, good afternoon.

Hi, Tom.

Let's see. Wanted to see if you could give some thoughts on operating ratio performance. I guess if you take out the one time numbers in the quarter, you were up -- I think you improved about 120 basis points year-over-year, which is pretty impressive in an environment where volumes are down so hard. Do the comps as you look going forward, allow you and the expected performance, does it look like you can keep improving the OR going forward or are there some things that kind of change around and make improvement more difficult if you look at the next couple quarters?

I think, Tom, that typically, particularly in Canada, the first quarter is always our weakest quarter from an OR standpoint, given the weather impacts and I would expect that these operating metrics that I've talked to you about, and that are running even at a stronger rate the first 20 or so days here than we've experienced, that if the revenues basically would stay the same or improve a little bit, that you will continue to see the seasonality factors and the operating ratio will certainly continue to improve second and third quarter significantly, and typically, the seasonality with the fourth quarter kicks in a little bit and year over year comparisons it would still be much better, but I would suspect that second and third quarter could be pretty outstanding.

I was referring really more to the year-over-year performance. Is it fair to think about year-over-year improving going forward as well?

I would say last year we had a tough winter so that helped us on a year-over-year in the first quarter and we're also benefiting a little bit from the fuel surcharge lag in the first quarter but other than those two items, we see the exchange rate continuing in the range of these $0.80, $0.82 and we have good momentum as Hunter said on the productivity side. The key question, Tom, will be what happens to the revenue line.

Okay. And can you quantify at all on the fuel surcharge in terms of time lag benefit or year-over-year impact?

In the first quarter it was a small impact. As you know, in the fourth quarter it was a fairly large impact because of the steep decline in fuel prices, but in Q1 it's in the order of $15 million or so that we benefited during the first quarter.

And that's the time lag or the year-over-year?

The time lag. The fuel surcharge lag, yeah.

Okay. Great. Nice results. Thank you for the time.

Thanks.

Thank you. The next question is from Chris Ceraso from Credit Suisse. Please go ahead.

Thanks. Good afternoon. Can you give us an idea of what you did or changed to achieve those big improvements in the car miles per day and the velocity, were there any fundamental changes to the network?

Well, we have rerouted some trains, for example. It's a continuation of the smart yard initiatives. It's a continuation of the impact of the new yard at Memphis, which is fully implemented now. That it had on the US network and a small degree in Canada. Our largest terminal, mac yard is breaking new records. We made some personnel changes which had been very significant to us. But it's just a lot of hard work and the J transaction certainly started to have some impact. So some of what you have to go through when you're operating in change is you have to develop confidence in that change, and people just didn't believe that we could have this kind of sustainability with some of these results and we've proven them wrong again.

Okay. And then just one quick follow-up. Jim, I think you mentioned that you had strong shipments of condensates up into the oilsands. I would have thought activity up there would be slowing. Is that just new business for CN or is the activity there continuing despite the decline in crude?

The output of the bitumen continues and therefore as the bitumen continues to be produced, they're going to need the condensate to move it. So that's been part of the strategy that we've been working on developing.

Okay. Thank you very much.

Thank you. The next question is from Jason Seidl from Dahlman Rose. Please go ahead.

Hey, gentlemen. Jim, couple quick questions. We still have obviously a lot of depressed volumes, particularly in forest products which seem to have been depressed for a couple years now. Do you feel we're getting to the level we have base consumption of these commodity groups, that they won't fall much further?

I would have tried to give you some guidance on that on the forest products a few months ago, or a few quarters ago. I didn't think that it could get any lower at that point in time than it was. And it has continued to decline. So I'm somewhat reluctant there. One would certainly hope that at these levels with housing starts, et cetera, that the forest products and some of the chemical areas maybe are near their bottom and maybe a little bit more to go on the metals and minerals. But as I said, we seem to have settled in at at least somewhat of a run rate that would lead one to believe that maybe we are nearing the bottom in the merchandise segment.

Okay. And on the same lines, obviously 4 to 5% pricing is in line with expectations here. If we continue at this range, down 15 to down 20%, would you expect there to be some erosion of that 4 to 5% pricing gain or do you think you can maintain those levels?

Strategy is to maintain that range.

Okay. Gentlemen, thank you for the time, as always.

Thank you. The next question is from Cherilyn Radbourne from Scotia Capital. Please go ahead.

Thanks very much. Good afternoon. I wonder if we could bounce back to the slide that goes over the operational highlights, and if you could just speak to each of the operational metrics that's highlighted on that page, and talk about which ones are particularly difficult to improve productivity in the face of severe volume declines, and which ones you think are going to be sustainable as we move forward and hopefully see some better volumes.

Well, number one, I would say to you, they all to some degree tie in together. Clearly, the productivity in the terminals, that is a big jump. That's probably the biggest quarter-over-quarter improvement that I can remember. Is there a top to that? Yeah, probably. Are there -- is there 6, 8, 10% more there? Probably.

On the terminal dwell time, which just measures the time the cars spend in the terminal that they arrive there, that was down 16%. And that's through a faster processing in the yard. That reflects some of the capital improvements in the infrastructure that we made in terminals. And that starts to directly relate and tie in to car miles per car day. That is the biggest jump that we've had, I'm sure of that quarter-over-quarter of 26% and I would give you a little insight that right now the second quarter, that number is running in excess of 200 miles per day.

The gross ton miles available horsepower with the locomotives has -- that's a 3% improvement. We've kind of been at that level for some time now. But I would expect that second quarter, third quarter, that could have improve -- that could improve 7 to 10% range and going forward. And a little bit of that is tied to some degree with the investments we've made in distributed power. That's allowed us to run longer trains, higher tonnage trains and still at the same time control the in train forces and all those to some degree have been related to the train velocity numbers which are effectively basically the speed between terminals and to some degree when we're talking about a through train that might be running all the way from Prince George to Memphis, it does include the terminal time, but if the trains are between Toronto and Chicago, for an example, it would effectively just measure that time.

We have made some pretty significant reroute changes that traffic has allowed us to make. For example, we have always run a pair of trains out of Jackson, Mississippi, to Baton Rouge and one from Jackson, Mississippi via New Orleans [Gazmer] to which is our chemical basin and now with the volume decrease, we've been able to put one large train on that serves both the Baton Rouge market and Gazmer and route it through Baton Rouge which is the shortest miles. So this is a pretty significant gain. We're not going to probably see these numbers do the same quarter-over-quarter, comps from second to first, but there's still continual improvements that we will see in these areas, and then if you start to overlay volume back on this, as we have some return from the economy, then you'll see another move up in these numbers given that basis.

So hopefully that kind of answers your question.

Very detailed answer. Thank you. I wonder if I could ask one question just on price. Intermodal stood out as the one category where the yield per RTM was actually down year-over-year. I wonder if you could just speak to what's going on there, whether that's a function of mix or pricing pressure or a combination of the two.

Oh, that would be -- that would definitely be a question of mix. As well as probably the exchange in the Canadian dollars, most of that business being priced in Canadian dollars and not a mixture of US and Canada.

Okay. Perfect. That's all from me. Thank you.

Thank you.

Thank you. The next question is from William Greene from Morgan Stanley. Please go ahead.

Hi, guys. Just a couple of quick questions. One of them, as you look at the quarter, acquisitions clearly boosted revenue and expenses a little bit. Is there any way to look at how the financials would have trended organically or without the acquisitions and what opportunity there may be in '09 from bringing the CN model to these tuck-ins?

I would say, Bill, during the quarter, the impact of the acquisition is very small, given that we are just starting on the EJ&E for two months and the early -- with some of the depressed volumes at the moment for steel, the early impact on the bottom line is very minimal. But the going forward opportunity with the J is still intact, if not better than what we had guided the Street initially and that is to basically take a $20 million of EBITDA base business, double it on the consolidation synergies and then double it again or add another $20 million or $25 million to that on network synergies. So over the next three years, you will see this order of magnitude of $60 billion -- $60 million plus of EBITDA coming from the EJ&E. As far as the CFQ, it is a small railroad and it's in a corner of our market that is quite impacted at the moment by lower forest products shipments, but this is another one of those acquisitions that we hope to have it contribute to earnings over the next few years. But nothing significant in terms of your numbers.

Oh, okay. Thanks a lot. By the way, this is Adam in for Bill Greene. Just one last follow-up for Hunter. Is it -- Hunter, do you feel it's unrealistic to think there might not be another acquisition before you leave and would you be okay leaving with any unfinished business?

I considered it finished when we did the J. Now, I don't see anything in the binoculars here that says there's going to be another transaction that I will get started before I leave. I think this year will be more focusing on the basics and ABCs.

Okay. Thanks a lot.

Thank you. The next question is from David Newman from National Bank Financial. Please go ahead.

Good afternoon, gentlemen. You mentioned that the DSOs were relatively stable but do you see any receivables risk out there, first of all, and have shippers run down their inventories to the appropriate levels that you can see see?

Maybe I can take the first part of the question, then Jim can handle the inventory one. In terms of our DSO, we settled in for the quarter at around 26 days which is right in line with good performance for us. So we're pleased about that. We are obviously monitoring the situation, for instance, you know that BTB that just filed for CCAA in Canada and Chapter 11 in the US. And we have been engaged with the BTB and have protected our position to a very large degree. So we're staying on top of things. There's obviously some concerns around the big auto manufacturers but generally speaking, our collection cycle and our risks on the receivable is very well diversified and we're staying on top of it.

What can you do, Claude, to rein that in on the auto side to protect yourself?

Well, at the moment, some of it is getting done itself because as they are lowering their volume --

Right.

The receivables are coming down quite significantly. And again, for us, the main point is even our largest customers at the end of the day, the receivable is something that is manageable and other than that, you have a contract, you just keep them to the contract.

Okay. And shippers?

On the inventories, I think that everyone is still struggling with this issue of inventories and there's a lot more that needs to be burnt off before people would be comfortable that in the event there was a rebound in economic activity that shipments would snap back right away.

Just one last one. In the current environment, can you accelerate some of your efficiency initiatives like the smart yard, obviously distributed power which reaped some dividends in the quarter. You have the co-production agreement with Norfolk Southern. Anything you can do, Hunter, where you can really step on the gas in terms of getting some of these initiatives through on the efficiency side?

We've hit the end here and might have to put a new engine in. There's other things here. Don't let me give you the impression that these initiatives that we listed here are the only ones. I mean, overtime is effectively non-existent, except for emergencies. We have reduced significantly that expense, and when you expense overtime, that's not straight time, that's time and-a-half.

And we have talked about these, that we might need to be and hopefully we can take advantage through our strength with cash flow and be opportunistic ,and one of the things that we discovered and Claude has taken over the IT Group now, is that we have a tremendous opportunity to go out with the labor market shift that exists in IT now, where we were paying a rather high priced premium for consultants, that now are looking for work and now we're turning around and in-sourcing IT work that we couldn't have afforded to do a year, a year and-a-half ago, so I think we'll see throughout the years some traction gained with those efforts. So there's nothing internally, there's no stone that goes unturned as far as looking for opportunities and I'm telling you, every time you peel it back you find a little something different and then that brings up another opportunity and this gets to be fun before it's over.

Excellent. Thanks, guys.

Thank you. The next question is from Walter Spracklin from RBC Capital Markets. Please go ahead.

Thanks very much. Good afternoon, guys.

Hi, Walter.

Just on the -- just wanted to ask a question on trucking competition. We're hearing a lot of your competitors over the border talking about very intense competition from trucking, given everything that's going on. Jim, are you seeing it on your business, I guess intermodal would be the obvious one here. But is that coming up? Are you noting that increase in competition and pressure on pricing from the trucks these days?

Well, we're seeing an increase in competition in that there a lot of people that use trucks for a portion of their business that want to make sure that those truckers don't fail and are continuing to give them some of their business. But not so much -- it's not like there's a free for all out there of competition on price that people right now are looking -- people right now on the domestic side of the business are looking for the most efficient way to ship their product. They're not willing to pay a premium to get it there a day or two faster. And rail has always been 10 to 15% cheaper and, therefore, we are using that to our advantage and that's why I think you're seeing across the board in the industry the domestic intermodals volumes going up at this point in time and it's not going to make any difference to how much a trucker tries to discount here or there. Those are the simple facts.

So you're not seeing any pressure on the pricing side on the intermodal from trucking at all in the first quarter?

I think there are a lot of trucks out there. There's a lot of smaller and independent truckers out there right now that are in desperate shape but that's always the case. And over time they seem to be weeded out and I think that's the best strategy.

Okay. And this one for Hunter, just thinking strategically. We were talking a bit about the eventual upturn if and when it does come. My question is pretty much how you're positioning CN Railroad for that potential upward turn and what you're doing that might afford you to be a little bit quicker than your competitors at realigning your business, if we do start to see volumes coming up. Are you going to be able to be faster than your competitors in terms of realigning your business?

Well, I mean, we have -- at this point, we have not cut our capital spend. We continue to invest in the infrastructure. We made recent investments in rolling stock, in distributed power. We would like to take the assets that we have sitting idle and put them to work and we've got plenty of them. And I would love to see the day when we have pressure put on our rolling stock as far as business levels.

We have people, and once you make the productivity gains you need fewer people when you do have a rebound so I'm hard-pressed to look at a spot and say where could we get hurt and business bounce back on us that we couldn't take advantage of it and handle it. So I think that's a two or three year out problem that somebody else will have to deal with. I just cannot see it coming. That's not something I'm focused on.

I guess what I'm asking is how much time will it take you when you first see the uptick in volumes to do what you need to do to be able to service those volumes? Are we talking, can you do it next day? Do you take a couple weeks? Do you have to bring in some of those furloughed workers? Bring some of those cars online. How quickly can you respond to an uptick in volumes once it comes down the road?

Almost overnight. We can get the locomotive ready quickly. We've got people that are available. Some of our people that have some form of guarantees, maybe they're working and they're getting 65 to 70% work now so we could have an uptick of 20% and they could be there, the infrastructure is still in place, the cars just have to be pulled out of storage. Watch us. We can do it.

Okay. Just last question here, if I may, just on succession planning. Will the board be announcing anything on that any time soon? I know you're coming up to the end of your term. Is there a time line on an announcement there?

Yeah, I think soon is fair.

Say that again.

I think soon is fair.

Soon is a fair one. Thanks very much. That's all my questions.

Thank you. The next question is from Jacob Bout from CIBC World Markets. Please go ahead.

Good afternoon. Had a question, another question on pricing. Going out into 2010, what are the percentage of contracts that you have renegotiated and then maybe in talk a little bit about the pricing on those contracts, have you seen any year on year decline in the increase on pricing?

We have about 70% of the contracts for this year renewed in the 4 to 5% range and we have going into 2010, 20% already done. And they would likewise be in that same 4 to 5% range.

And then on the CapEx, what do you -- any cutbacks there at all, considering where volumes are at this time of the year?

We are rearranging our CapEx, to take advantage, for instance of the bonus tax depreciation in the US. We are obviously looking at everything, anything that's volume related we have a very sharp eye on and we've taken down our CapEx on a year-over-year basis as we previously discussed in the range when I adjust for everything, 15%. At this point in time, what we see is opportunities to actually use the fact that we have less traffic to do the work more productively and to get better deals with our suppliers. So that's our approach at the moment. And as you could see, our cash flow in the first quarter was not impacted by that at all.

Thank you.

Thank you. The next question is from Matt Troy from Citigroup. Please go ahead.

Yes, thank you. First question is on rail reregulation for Hunter. Was just wondering what your conversations and presence tells you in Washington as it relates to potential legislation, either introduced or pending. What are the one, two or three key variables that are being tossed about there that you see as emerging as kind of sticking points or focus issues in 2009. Obviously legislation is kind of like calling the jury, very difficult to do. Could you just given your thoughts vis-a-vis what government involvement in the rail sector might look like three, five years out?

Well, I think this. It's not something I lay awake at night and worry about. I do think that we're going to see some changes. From an AER perspective, I'm not involved directly in this process a lot, but I do think there is some encouragement, encouraging signs as far as dialogue between rails and members of Congress about this legislation that's been talked about, that deals with antitrust and deals with bottle neck and some of those issues. And I would say from a strictly a CN perspective, now, that's not something that we have a lot of concerns with. The threat of full reregulation, I think is very low, particularly in these times. I mean, I think that the administration is going to be very, very careful to not go in there and tamper with something that I happen to think is working pretty good. I think rail reregulation has been extremely successful. Some of the things that maybe have not worked so well or some of the shippers are making some complaints about, there might be some adjustments to the surface transportation board where maybe potentially it's easier for a shipper to raise an issue about rate issues, but I don't think you're going to see major changes that are going to have big impacts on rail in that time frame.

I appreciate it's a difficult issue but one certainly we're all focused on so I appreciate the thoughts. A follow-up for Jim, if I could, on the pricing story. Another focal point amongst the investment community is what kind of legs the pricing story has. Could you just help us maybe from a mix, simple mathematic perspective, independent of your ability to go out and negotiate price on a spot contract in any given month, if I look at the traffic base, what percentage of it, roughly, directionally, is under traffic or excuse me under contract that contains some kind of multi-year escalation clause that would give you a buffer and what percentage is roughly contracts that come up every 12 months, or more spot oriented where it is a tougher and more recurrent negotiation year in, year out, just directionally how that falls out might help us base our pricing expectations better. Thanks.

If you include in the calculation the Canadian regulated grain piece, probably about 15 to 20% of our traffic is on what I would call tariff. Which we can either adjust or adjust by itself in the Canadian grain area, and the rest is under what I would call contract. And we do not normally have what I would call long-term contracts. The average length of our contracts is two years and that contract is very simple and straightforward. That I sign a two-year deal and it has an escalator in there on a straight percentage and what we've been talking about is that if you sign a contract today and it's the same commodity I moved last year it's going to be 4.5% higher to move it this year and it's going to be 4.5% higher to move it the following year and that's as simple as it gets.

So relatively straightforward and there is a built-in buffer there to the extent you have multi-year contracts that have a baked in escalation.

Yep and as I said it's only two years, and when it's that short of duration you can make them short and sweet. They're all covered by fuel surcharge. And it's just a straightforward deal that we and the customers understand and respect.

Great. Thank you for the color on both questions.

Thank you. The next question is from Scott Group from Wolfe Research. Please go ahead.

Hey, guys, good afternoon. Just a couple of quick points of clarification. Jim, did you give the split between price, fuel and mix and then Claude, the $46 million of EJ&E, is that all one-time acquisition stuff or is there any ongoing expense in that $46 million?

Okay, on the price, fuel and mix, let me take fuel first. Fuel was a negative to revenues this quarter of roughly 8%. Price was in the 4 to 5% range. And mix being a positive, roughly 3%. Principally due from a revenue standpoint, on an exchange adjusted basis, if you take out fuel, our average revenue per car was up 11% and the biggest volume declines were in the two shortest tall businesses, automotive and metals and minerals, so we had a very good positive on the mix side there.

Yeah, Scott, on the transaction expense, it is the accumulated transaction expense from the time we started negotiating to the regulatory process of getting the EJ&E approved. So those expenses have been accumulated over the last year and-a-half or so. And we have to expense them as of closing under new accounting rules. So in that sense they are non recurring.

Okay. That's helpful. Claude, just want to get your sense, any other opportunities out there to monetize some lines like you did with Go and then as that cash builds up, wanted to get your sense on timing for when you think you could start doing share repurchases again.

There are potentially other opportunities. Go has as a direction to own more of its corridor, so we are willing partners to sit down with them where it makes sense and so we will continue to pursue that in Toronto. Similarly in Montreal it is possible that the agency there would have an interest in at least one line, which is basically dedicated to commuter services. So when the opportunity presents itself, we are certainly willing partners with those agencies. And as it relates to the use of cash, as I said, at the moment in the current environment, we are focusing on using that cash to deal with our debt maturity and to improve our balance sheet. As the economy improves and we have more visibility, our use of cash policy will return and we've consistently said that our focus after we invested back into our business is to grow the dividend and use excess cash to do share buybacks.

Okay. That's very helpful. One last quick one if I can. On the salary and benefits line, I think you said headcount was down 4% excluding the acquisitions. Any sense seasonally if that should go up or down from here, and then on the comp per employee, if you could kind of quantify how that's coming down between lower overtime, lower incentive comp or any other benefits or parts there. And thanks for the time.

Let me talk on the headcount a minute. We try to focus on the net bottom line and I can give you a couple of examples where we're going to bring in people. I talked about the in-sourcing and IT. We are going to have a joint project with Via in Canada to improve the infrastructure of our physical plant which will allow them more frequencies, so we'll be spending a lot of money. But in all those cases, there is funds coming in that will offset as a pass-through so the net-net effect will be to continue to lower our expense. I know of no case where the headcount will be increased that will increase our expenses. Claude, you want to touch on the other?

No, I think you framed it perfectly, Hunter. As I said in terms of year-over-year basis, if you look at it FX adjusted, about half is the benefit of lower overtime. The benefit of lower workforce and the other half is stock-based compensation and incentives.

Okay. That's helpful. Thanks, guys.

Thank you. The next question is from Ken Hoexter from Banc of America. Please go ahead.

Hi, great. It's Ken Hoexter from Banc of America, Merrill. Just to follow on that question for a second, on the employee counts, do you anticipate with volumes down at these mid-teen levels, can you increase that employee count declines to something greater like 8, 10% to keep in line with the volumes or do you not want to take out that level of head count on a non-acquisition basis?

We have kept in mind as you can see in our presentation, for instance, our road crew starts are down 20% and our train -- and our yard crews are also down in the range of 20%. Now, not all of these employees go home. Some of them stay on a furlough board or on a spare board and so if you're looking at the actual headcount as reported, you don't see the numbers but you're seeing some of the expense benefit in the labor and fringe line. So expecting that overall headcount would come down percent for percent in line with volume is not our target. But focusing on using our employees productively, getting them paid for work that is for others and reducing overtime, and asking our employees to take vacation ahead of time and all of these things is why we were able to bring our labor and fringe benefits down 10% during the quarter.

Okay.

Let me just add to that. We do not and we're not in the position that we have to get in a desperate mode here. I mean, we're pretty -- I'm pretty happy with this quarter. I don't want to be in a position that we've spent substantial amounts of money to train employees and then a year later we turn around and lay them off and lose them and then a year later we have a snap back of the economy and we've got to go out and rehire again. We're going to keep all our options open and we watch very closely and look at the sensitivity and the risk analysis of whether we should -- and so far we have been able to avoid any massive layoffs.

They've been selective. We've given people opportunities to do something elsewhere we can bring work in-house, where we could send a taxi cab home and use an employee to haul a crew or something like that. And so to some degree our employees are very appreciative of that, that we're trying to do what we can to take care of our own to the extent we can. And so you'll see and to some degree you don't see some of that sensitivity in those numbers.

Okay. And then if I can -- thanks, Hunter. If I could follow up with Jim. I think, Jim, you mentioned on the coal, steam coal, I think you said something in there about increasing on shipments or even exports. I'm just wondering if you could clarify that. And as far as also pricing on the coal side, I thought one of your mines was with Tech. Are you also in negotiations with Tech as CP is or is that on a different contract? If you could focus on the volume.

We are not in negotiations with Tech, that's a different deal they have with a different railroad. Our US coal business as I said is doing very good and that's the new mines that are being developed in the Illinois basin. Williams & Energy down there as well as the new coal business we're handling now with EJ&E. So our US coal business in the quarter was very good and I would hope that that business, which is steam coal, will continue throughout the year to be strong. The Canadian franchise, as you know is metallurgical coal for export, which is dependent upon steelmaking activity in Asia and that is still down, but we would hope that with the economic stimulus package, especially in China that's more focused on infrastructure development, that steelmaking activity may come back soon and we may begin to see some ramp-up in the met coal business as well.

Thanks.

Thank you. The next question is from Bill MacKenzie from TD Newcrest. Please go ahead.

Thank you. First question has to do with pensions. Claude, I appreciate you don't have to file an updated actuarial evaluation until I think it's the end of 2010. I'm just wondering if you have an update on the solvency position of the pension that you could provide.

Our pension fund is in a surplus position from an accounting standpoint as we reported, and also in a surplus from a going concern actuarial standpoint. From a solvency standpoint, we would have a deficit at year end. But there is a lot that is going on currently at the Federal Government level to provide for flexibility in terms of how you measure solvency deficits and how if you have one, how much time you have to actually fund any shortfall. We feel pretty good about the situation of our pension plan last year at 11.8%, in fact, 11% decline. They were absolutely in the top 5% of investment managers. And our pension plan is in very good position. We've always been contributed even when we had a surplus and intend to continue to do so on a responsible basis going forward.

Could you tell us what the surplus was when you did the last actuarial evaluation?

You know what? I forget. We could give you that offline. I want to say $600 million but you should ask the question offline to --

Okay. That's great. Thanks. And then just following up on the rolling stock, I may have missed it but I think you gave us the number of the cars that are currently in storage. I was wondering if you could repeat that, the number of cars you have in storage, the number of locomotives you have in storage, and how much of the fleet has come off all together as a result of leases that have sort of rolled over and haven't been renewed relative to commitments for cars or low locos you may have made prior to the overall downturn in the economy.

We are constantly looking at sizing our fleet in line with the business volume. You cannot gain as much velocity as we have in the quarter without taking additional cars over and above the downturn into storage. So at the end of the quarter we had roughly 22,000 cars stored. Throughout the year, we have been scrapping cars that are old and we don't see a need for, and we have also been returning leases that come up for maturity. On any given year, CN would have in the range of anywhere from 3500 to 4500 cars that become due for lease maturities, and that's on purpose. We've always had staggered leases that allow us in any given year to return and shed excess capacity, and that's what we're doing as we speak. On the locomotive side, I think we have -- Hunter may have the more exact number as of today, but I think at the end of the quarter we had something like 160 locomotives stored and we have been similarly getting rid of excess locomotives, the older, less fuel efficient and less reliable units have been either sold or scrapped on an ongoing basis over the last several months.

The number I gave you were year-over-year comparisons. And on the rolling stock side, I think that number is about -- was that 122,000, now it's like at 91 and to Claude's point, a lot of those cars are being monetized, scraps, parts, cannibalized and all. The locomotive number is down over 400 year-over-year of active locomotives, and I tell you, I'll just give you a staggering number, just to show you that these are ongoing improvements. This is not just year-over-year. When I got to CN, we had 1900 active locomotives. Since that time, we've made $8 billion in acquisitions and acquired locomotive fleets from those carriers that would be -- would put on a pro forma basis our locomotive count above 4600 and today we're operating with less than 1400 locomotives. That gives you the order of magnitude of what is available from a locomotive productivity standpoint when you put all these together.

That's great. Thank you. Just one last question, Claude, kind of a housekeeping question on the tax rate. I'm not sure if I'm doing my numbers just right for the three adjustments this quarter, but it looks to me like tax rate came in around 28%, if I'm doing the math right, on an adjusted basis. Does that sound right? And seems a little bit low. Just wondering if there's anything to that?

No, I think 28% for this quarter is a good number to use and obviously our baseline ETI varies over time and 28, it's a little bit lower than our longer term guidance which we discussed with you prior of around 30%, but I don't think 28% is a bad number to use for 2008.

For 2009?

For 2009. I'm sorry. Yeah. Thank you, Bill.

Great. Thanks very much.

Thanks, Bill.

Thank you. The next question is from Randy Cousins from BMO Capital Markets. Please go ahead.

Afternoon. Jim, I guess a quick question. You mentioned the positive tone in the domestic and you also pointed out I think Vancouver is down 20%. Could you give us a sense of what actually happened to your domestic carloads, or domestic boxes? Were you actually up in the quarter? Could you give us a sense of what the mix is domestic versus international so we could get some sense of your sensitivity to what's happening in terms of import volumes.

I think domestic volumes were down just slightly which is a good news story I guess in this environment. So down just a little bit. And normally the answer that I give you is that it's 50/50 on the intermodal business, 50% overseas and 50% domestic, and that's probably -- that's still a good number.

Okay. And then just on the revenue side, I was -- the revenue for grain and fertilizer was 2705 on an arc basis and I think it was 2664 in Q4. I wonder if you could speak to exactly what's happening in terms of the grain revenue, is that a mix issue? And then I guess as we head towards the CTA is going to come out at some point or other with a review of what it's going to do in terms of grain rates. Can you give us some sense, is this how we should think about the grain rate for the new year, for the new crop?

On the average revenue per car, you know, I'd have to take a look at it. I'm not sure if you're looking at it on a currency adjusted basis or not. Our grain revenues in both Canada and the US were up, in the US slightly more as we have a tariff system down there and we raised that tariff higher than the regulated adjustment allows for in Canada. Going forward into this year, what the government will establish as the escalator, we're not sure, because it has -- it factors in fuel. We don't have fuel surcharge on that piece of business so that goes up and down with fuel.

So is fuel going to be a negative on the regulated rate or is it going to be a positive for the new crop year?

It will be down just like our fuel surcharge is. It's the equivalent -- it's baked into the rate and it's the equivalent of our fuel surcharge, so as fuel has come down significantly, less than half of what it was a year ago, we would expect that the regulated grain rate would come down as well.

One last question for Hunter. You guys obviously manage your costs on a holistic basis and so clearly there's some puts and takes here as you work the system. I wonder, normally when you think about railroading, it's a fixed cost, it's a heavy asset business and at some point or another your volumes come off. Notionally, you tend to think that you just can't get the costs out. Looks like you guys have done a very, very good job in the first quarter of matching the downdraft in volumes in terms of costs as well. Can you give us some sense of now that you've gone through Q1, and as you look to the balance of the year, can you match cost reductions to whatever the downdraft is in volume or do you -- at some point or another, where do you run into that fixed cost base where you just can't get the costs out?

There's a point there where you can't track. I mean, obviously the worst case scenario is where you've got one train start from A to B and the capacity is 100 cars each way and business goes down 10% and it's hard to cut train starts. But having said that, I mean, we have learned and I have -- it's taken me 46 years to convince some people of this, that people don't understand pipeline management. And it's very, very sensitive issue, and as we've learned to manage pipelines better, every time you take capacity out of the pipeline, the pipeline goes faster up to a point and as assets turn quicker and people turn quicker, and there's some things that we've learned that I very frankly think others don't buy into or don't accept or don't know, but some of this is a learning curve with our people, and once you get over the hump with the learning curve, people see the results, it's not a case of debate. They become inspired and can produce all -- I was going to say all American -- all Canadian results, all North American results.

So is it safe to say then that if volumes are off 10% you can take 10% out of your, X fuel costs.

If I was trying to give you some order of magnitude now, I would say that if we saw another downturn, God forbid, that our business, ton miles were off, 15%, plus, this gets more difficult all the time. You're right. I mean, we got -- it's a high fixed cost business and there's just certain things you can't get rid of but I certainly don't think that we're approaching that point yet.

I'll try to sneak a last one in. In terms of earnings, I know you guys aren't giving guidance, but you come out with a strong first quarter. You've had earnings that are flat year-over-year. Volumes are down 15%. If the volume levels stay where they are, could you still have flat earnings year-over-year?

I think what you have to appreciate, Randy, is the fact that in the first quarter we were benefiting from an FX which came down from parity last year to $0.82 or in fact closer to $0.80 during the quarter, so that gave us on the order of 10% earnings. That shock absorber will go down in the last quarter. But the other aspects of our business are pretty much intact.

Okay. Thank you.

Thanks, Randy.

Thank you. This concludes today's question-and-answer session. I would like to return the meeting back over to Mr. Harrison.

Well, thanks very much, everyone. I'm very pleased that this group could produce the type of results we produced, and hopefully by the time we talk again, there will be some smoke has cleared, and we have seen whether we're at the bottom and what the top line brings in the third and fourth quarter, and hopefully then we can provide some more specific guidance than we've been able to today. Thanks a lot.

Thank you. The conference has now ended. Please disconnect your lines at this time and thank you for your participation.