Canadian Pacific Kansas City Ltd (CP) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Canadian Pacific's fourth quarter and full year 2008 results conference call. (Operator Instructions) Following the presentation, we will conduct a question and answer session. I would like to remind everyone that this conference call is being recorded on Tuesday, January 27, at 11:00 a.m. Eastern Time.

I will now turn the conference over to Ms. Janet Weiss, Assistance Vice President Investor Relations of Canadian Pacific. Please go ahead Ms. Weiss.

Thank you, Luke. Good morning, ladies and gentlemen. Thanks for joining us for our 2008 fourth quarter teleconference. Presenters today will be Fred Green, our President and Chief Executive Officer; Brock Winter, our Senior VP of Operations; Marcella Szel, our Senior VP of Sales and Marketing; and Kathryn McQuade, our Executive Vice President and Chief Financial Officer. Also joining us on the call today is Brian Grassby, our VP and Controller.

Before we get started, let me remind you that this presentation contains forward-looking information. Actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described on slide 1, in the press release and in the MD&A, filed with Canadian and US securities regulators. Please read carefully as these assumptions could change throughout the year. All dollars quoted in the presentation are Canadian, unless otherwise stated.

This presentation also contains non-GAAP measures. Please read slide two. Slides are available on our Website, so please feel free to follow along. Following the presentation, we will conduct a question and answer session. (Operator Instructions) Here then, is our President and CEO, Mr. Fred Green.

Thanks, Janet and good morning everyone. This quarter, our adjusted EPS was CAD1.15, down 4% versus the fourth quarter of 2007. The quarter proved to be challenging with global market uncertainties triggering some sharp volume reductions. Many of our customers leveraged the holiday period with extended shutdowns affecting the last few weeks of Q4 and early 2009. Our recent efforts have been strongly tilted towards efficiency and cost control, while ensuring that our safety performance continues to be the best in the industry. We're firmly focused on managing variable costs, reducing our fixed costs, pricing for value and remaining flexible so that we can respond to marketplace changes for new opportunities.

This quarter, the operations team did a good job not only adjusting our plan to match market conditions but also progressing our execution excellence for efficiency or E3 initiatives. Improved train productivity even as volumes declined, with GTM's on the core operation down 10%, the train miles, which drives expenses, down even more by 12%. As Brock will expand upon, we've also been quick to adjust resource levels in light of the declining volumes. We peaked at over 1,450 temporary layoffs just three weeks ago. We can't control the volume demand, so we're focused on what we can control and I'm pleased with the early results.

I'll now turn it over to Brock, Marcella and then Kathryn to take you through our results in more detail.

Thanks, Fred. In Q4, we focused on improving our fluidity and productivity and the implementation of our E3 initiatives. These initiatives are giving us the flexibility to react quickly. We're continuing to adjust for volume changes and I'm confident you'll see further improvement in our fluidity and cost containment and evidence that our E3 initiatives are working. Our early recognition and response to the unfolding economic conditions has positioned us well to respond to whatever the current economy may bring. In addition, this flexibility will improve us -- will provide us with the ability to respond quickly when the recovery occurs.

Looking more specifically at our results, let's start with safety on slide six. Our safety results for the year for the core CP operation were excellent. Our FRA personal injury frequency improved by 30%, the fastest rate of improvement in the industry. And we continue to be the industry leader in train operation safety, with an improvement of 9% in FRA train incident frequency. With respect to the DM&E, I am confident that our safety integration plan will drive solid results. In Q4, we completed an important first step, starting with the safety orientation training of all of our operating managers.

Please turn to slide seven. With respect to our fluidity metrics, we're reporting up to December 20. This is due to our decision to take extended shutdowns over the holiday period. We made this decision given the volume trends and outlooks we were seeing.

Train speed improved by 10%. We attribute this to the action we have taken to run longer trains to reduce starts, as well as the volume softness. Yard dwell improved by 7% due to the proactive action we took to store cars and our continued focus on disciplined execution of our integrated operating plan. These actions allowed us to reduce our active cars online by 10%. Car miles per day improved by 4%. Upon the result, as it shows we are taking out train starts without compromising velocity.

We've had some weather challenges coming out of the holiday shutdowns, including prolonged periods of cold weather with temperatures below minus 35 Celsius over large segments of the network. With some areas as cold as minus 45 degrees. However, our fluidity trends are now back to pre-holiday levels. We will continue to improve the reliability of our delivery services, allowing us to commend value for the services we provide.

Turning to slide eight. As I told you last quarter, we're aggressively attacking the operational cost control opportunities given the continued slowing economy. We started our E3 initiative back in July when we felt the economy was becoming increasingly uncertain. We have hard wired specific initiatives that will create sustained value to ensure that we have the flexibility to be more responsive to adjust our costs quickly. There are some time lag issues with those initiatives given the dramatic drop in volumes in the month of December but they are starting to bear fruit.

In the face of declining volumes, we have tied up over 270 road and yard locomotives, representing 15% of our fleet. We have stored over 15,000 rail cars or roughly 20% of our fleet. And in an unfortunate but necessary step, our temporary layoff of crews and maintenance staff peaked at 1,450 and today sits at just over 1,000. This is about 10% of our unionized train crew and maintenance workforce. We're sizing ourself to meet the volume and we continue to do that week to week. I'm very comfortable that we have the focus and discipline to do this throughout 2009 and our Q4 results very clearly demonstrate that.

As Fred mentioned, we improved train weights, driving a 3% improvement in our scheduled services and a 2% improvement in our bulk trains, even in the face of declining volumes. Our intermodal train density, in terms of seat per FEU, improved by 3% as we more precisely match rail car capacity to the mix of domestic and marine container business and improved intermodal train utilization. And our AC locomotive miles per day improved by 3%.

And there is more to come, as we turn over every stone. We have been analyzing every locomotive shop and major yard facility to ensure they are needed. I expect that we will have opportunities in these areas on a short and long term basis. We continue to adjust our IOP to drive reduced train starts and train miles while still delivering a consistent and reliable product to our customers.

We're taking a very balanced approach to managing total costs, to get the best bottom line result while improving service levels. A good example of this is our application of lean management principles to the export grain cycle, where we drove a 25% reduction in cycle times. A better product and less assets required. And we're applying this approach to other areas of our business with intermodal up next.

I'll close with the observation, that while we don't know exactly when, the volumes will turn for the better at some point. What we do know is that our cost control initiatives will allow us to be nimble and will in no way impede our ability to ramp up quickly. We have the mobile assets and crews readily available to reactivate when the economy recovers. I look forward to reviewing our performance with you next quarter and I'll now turn you over to Marcella.

Thank you, Brock and good morning. The fourth quarter delivered 10% freight revenue growth over Q4 2007. A very good revenue result. Foreign exchange, contributing 9% of this lift, our underlying performance reflects a story of strong price offset by lower volume. Through a consistent focus on value, we delivered very solid price results, both on the quarter and most importantly, through year-end contract renewals, which I'll discuss shortly. As you would expect, however, a weakening economy hurt volumes.

So turning to slide 10. The graphic illustrates the car load impact of the deepening recession and a very sharp decline in December. On the quarter, CP core car loads, exclusive of the DM&E, were down year-over-year by close to 11% and 17% in December. The addition of two months of DM&E car loads leads to a net 6% decline in volumes.

Now, on to revenue performance for the quarter, on slide 11. Despite Q4 volume challenges, revenue edged up 1 percentage point before FX. The breakdown is as follows. Strong price results took us up by just over 8% with fuel representing about 40% of the improvement, including a short-term lag benefit of just over CAD20 million. This benefit neutralizes the impact incurred during the first half of the year. The impact of the Canadian Transportation Agency's retroactive adjustment to the grain revenue entitlement had a negative 2% impact on the quarter. Volume and mix took us down close to 10% for core CP. The consolidated DM&E results provided a 5% revenue lift. And finally, FX was close to a 9 point gain. This leads to the all-in reported freight revenue growth of 10%.

Turning to Slide 12, I will now take you through an overview by market area. I've included an extra column this quarter that shows the impact of the DM&E. I will focus my comments on the foreign exchange adjusted numbers including DM&E revenue.

So starting with grain. Grain revenues were up 8%. Volumes, exclusive of the DM&E lift, came in flat. In Canada, a strong crop, improved pipeline performance and other price gains including seasonal pricing offset the impact of the retroactive reduction to the grain revenue entitlement. Grain volumes for the year ahead are a strong positive. Canadian grain production is now estimated at 54 million metric tons for the current crop year, up 4 million from earlier projections. In our US grain territory, there are near record crops.

In coal, despite downward pressure on volumes, Q4 revenues were up 3%. The improvement reflects price, as well as additional DM&E volume. For the year, Teck coal volumes were up about half of the 1 million-ton increase previously expected. This was due to a mine outage and a weaker market in Q4.

Looking ahead, Teck recently announced an expected reduction of their overall 2009 production. This clearly reflects the uncertainty surrounding the global steel market. And as I indicated last Fall, we have anticipated coal volume to be lower than in 2008. And as for the April 1 contract renewal, negotiations continue.

In the sulphur and fertilizer portfolio, revenues were down 11% during the quarter. Falling global demand and crop prices, as well as a potash mine strike, impacted potash and chemical fertilizer volumes. Indications suggest the market to be slow for the first half of 2009. We remain confident in the fundamentals, however and we will be flexible to capture the potash industry's expected recovery later in the year.

Forest products revenues declined by 22% this quarter. With US housing starts pointing to the 550,000 unit range, continued uncertainty in this sector is to be expected.

Industrial and consumer products continued its strong performance, with 21% revenue growth demonstrating a good finish to the year on both price and volume gains. The results came from the added DM&E volumes, growth in energy and fuel, and continued strength in pricing. Given the decline in oil prices, as well as falling commercial construction and industrial production rates, future sector growth is uncertain.

Automotive revenues were down only 7% on the quarter, despite a 27% decrease in car loads. Average revenue per car was up 45%, reflecting mixed changes and improved price and fuel recovery from contract renewals I mentioned last quarter. For the year, I expect to see continued weakness, as recent US auto sales point below 11 million.

Finally, intermodal revenues were down 3% in the fourth quarter. Price and fuel improvements were offset by volume declines. Looking forward, lower GDP forecasts will mean lower volumes. The size of the decrease is unclear, given the significant uncertainty in the retail sales outlook.

Now, over to slide 13. I expect that our focus on value within our pricing program will continue to deliver solid results. Our renewals came in close to 6% for the quarter and 5% for the year, in line with expectations. With respect to committed price lifts for 2009, we said in November that we had over 50% booked. With progress since then, we are now at just over 60%, excluding the Teck coal contract. I expect also that our fuel program will continue to deliver in this volatile market based on our improved quality and coverage. In the face of economic challenges, my team continues to identify and capture new opportunities, such as [diluwin] and expanded canola crush capacities.

The overall demand picture is very uncertain. Commodity markets and consumer production cutbacks, along with falling volumes, confirms a challenging year ahead with the timing of recovery as a big unknown. I will caution you that early January volume trends are also a reflection of slower start-up post-holiday shutdowns and the impact of severe weather. These trends are now showing some improvement.

To close, as Brock has highlighted, we will be positioned and responsive in areas that show the earliest recovery. Now, over to Kathryn for the financials.

Thank you, Marcella, and good morning everyone. This quarter, the economic slowdown reduced our volumes by almost 11% before the inclusion of DM&E. Operations responded quickly to the rapid decline by reducing headcount, consolidating trains and tying up assets. At the December -- I mean at the November analyst day, I spoke to three strategic priorities. First, financial conservatism. Second, producing free cash flow. And third, balance sheet strength. Now, I would add the importance of flexibility. We've worked hard to develop plans to allow us to anticipate and respond quickly to changes in the economic environment and our success this year depends on our ability to swiftly react to market changes and seize opportunities.

Now, let's start on slide 15 with the income statement. This quarter includes the DM&E results for one month on an equity basis and two months on a consolidated basis. We have provided you a full year 2008 restated for consolidated DM&E to help with comparisons next year.

So, let's start with the income statement. Total revenues increased 9%, with 8% of that increase driven by FX. Strong pricing, fuel recovery and the DM&E revenues more than offset lower volumes and the negative impact of the Canadian Transport Agency or CTA's grain decision.

Reported operating expenses were up 13%, or 5% before FX, with most of the increase due to the inclusion of the DM&E. Operating income was flat. So without the benefit of FX, it would have been down 12%. Below the line, the DM&E was only classified as equity for one month, leading to a 15% decline in this line item. Interest expense and other was up by 14%, with FX adding 11% of that, while income tax expenses fell by 10%, with an effective tax rate of 25%. Overall, adjusted diluted earnings per share for the quarter was CAD1.15, down 4%, with an operating ratio of 76.5%.

Now, let's turn to each of the expense lines and a more detailed look at the variances. Starting on slide 16, comp and benefits were up CAD41 million. With volumes falling sharply, we quickly adjusted our IOP and made the tough decision to lay off employees, as many as 1,450 at our peak. Since many of these temporary layoffs occurred late in the year, the full impact of these savings are not fully reflected in the fourth quarter. However, these actions did reduce expenses CAD11 million. We have provided employee counts with and without DM&E. The core CP quarter end headcount shows a reduction of nearly 700 employees. With the layoffs occurring late in December, the fly sheet count does not fully reflect the impact of all the layoffs due to the notification periods and outstanding vacation entitlements.

DM&E and foreign exchange each added CAD12 million to the comp and benefit line. Stock-based compensation expense increased to CAD7 million, due primarily to our total return swap, which was partially offset by lower stock option expenses. Sensitivity for the TRS, for the first quarter 2009, is for every CAD1 our stock price closes the quarter below CAD41 on the TSX, expenses increased by about CAD1.3 million. On the upside, for every CAD1 the quarter end price closes above CAD41, there is a reduction in expense of CAD800,000. Rate increases and inflation were partially offset by a reduction in incentive compensation for a net increase of CAD9 million. And finally, a 2007 restructuring adjustment of CAD11 million, combined with some other small items, increased the quarter-over-quarter variance by CAD12 million.

Looking at slide 17, fuel expense was up CAD43 million. The largest driver was foreign exchange, which added CAD31 million, while our hedges cost us CAD12 million. The incremental DM&E expenses added CAD7 million. Lower consumption due to lower volumes reduced our fuel expenses by CAD22 million. The year-over-year decline in fuel price saved us CAD4 million. While we did have lower WTI, our refining margins increased this quarter. Finally, the one-time Minnesota tax credit in 2007, combined with some other miscellaneous items, were a head wind of CAD19 million.

On slide 18, we outline our hedge position in Q4 and through 2009. Let me remind you, the purpose of our hedging strategy is to protect against fuel price volatility on the book of business that is not fully responsive to fuel price changes in the short-term, such as Canadian grain. Our primary protection for rising fuel remains our fuel surcharge program.

Now turning to slide 19. Purchased services is up CAD20 million. Again, foreign exchange and DM&E expenses being the largest contributors. Casualty costs were higher by CAD4 million and the net of multiple other items were down CAD3 million, showing some early E3 successes.

Turning now to slide 20 and the remaining operating expenses. You will note, that absent the impact of including the DM&E and FX, our initiatives to drive cost reductions are working. Material expenses were down CAD2 million, despite the addition of DM&E and FX impact. We saw lower material usage across all areas of operations, with major reductions for locomotive and freight car repairs. These reductions did not impact asset reliability as we continue to see improved locomotive availability.

Equipment rents were up only CAD1 million, including a large FX headwind. Managing our active car counts and aggressively reducing train starts reduced leasing costs, even as we saw higher per diem rates. Depreciation increases were driven almost exclusively by the addition of DM&E expenses, which also reflect the adjustments associated with purchase accounting. We also saw a slight net decrease even after the impact of our capital programs, again reflecting some early E3 successes.

Slide 21 gives you some examples of the diverse portfolio of our initiatives. At our quarterly calls earlier this year and at our analyst day, we spoke to the need to address the economic uncertainty by aggressively managing costs and reducing capital. While there is a lot of noise in our financials this quarter due to FX and the inclusion of DM&E, I am pleased to see that our focus on cost containment can already be felt in every line of our financial statements. These programs and process changes are now getting legs, so we see opportunities for continued improvement going forward. This is even more challenging in this volatile economy but these programs are designed to transform our cost structure, not just cut temporarily in this down economy.

Turning now to slide 22 and the full year results. 2008 has been a wild ride. The volatility in both FX and fuel was significant. In fact, the impact of FX in the first nine months was essentially reversed in the fourth quarter. Total revenues were up 5%, with freight revenues showing solid pricing gains. Improving fuel recovery and the inclusion of DM&E for two months being tempered by a 2% volume decline. Reported operating expenses were up 9%, with fuel contributing 75% of that increase.

Casualty and the incremental DM&E costs also added to the increase. Net of both taxes and the associated interest expense, the DM&E added CAD0.18 to EPS, which exceeds our original expectation, which we had given you earlier last year at CAD0.15 to CAD0.17. On an adjusted basis, diluted earnings per share was CAD4.06, with an operating ratio of 78.6%.

Now, let's turn to slide 23. Free cash flow ended the year a strong CAD232 million, which is above our previous guidance of about CAD150 million. Our cash capital program ended the year at CAD1 billion, including the DM&E on a full year basis. On an accrued basis, capital was approximately CAD1.1 billion, due to the decision to finance locomotives through a capital lease. Our expectation for 2009 capital remains at the CAD800 to CAD820 million range including the DM&E, a reduction of 20% over 2008. And this is consistent with our analyst day presentations.

Finally, I would like to touch on the DM&E integration. It has been almost three months since we took over the property and I'm pleased with our progress to date. We remain focused on our transition plans, which include safety processes and planned capital improvements, information system rollouts, training and communication of these changes to all employees. To date, we have found no surprises and a very engaged workforce. We continue to be ahead of our planned synergies. I will now turn it back to Fred.

Thanks, Kathryn. Let me wrap up by making the following comments. 2008 was challenging, with volatile fuel and falling traffic volumes pressuring earnings. Midyear, we recognized the economic uncertainty and took aggressive action to create more flexibility within our operating plan and at the same time, launched a new set of efficiency initiatives dubbed E3. This quarter, we also gained control of the DM&E and began the transition process. During the final two months of consolidation the planning and execution have been flawless.

Looking forward, economic uncertainty is obviously a key consideration in 2009. Our focus, in these uncertain times, is on managing costs, both fixed and variable, ensuring we continue to price for value, and maximizing our strategic and operational flexibility. We have a strong franchise in an industry with tremendous long term potential. We've preserved our options for future growth and are addressing our short-term challenges. The team understands the challenge and is very focused on our immediate tasks. With that, I'll turn it back over to Luke and open the call to questions.

Thank you. (Operator Instructions). Please limit your questions to two. We will take questions from analysts until five minutes to the hour and then we will go to media. One moment please for your first question. Your first question comes from Bill Mackenzie, TD Newcrest. Please go ahead.

Thank you. Just maybe starting with the DM&E. I'm just trying to get a better handle on sort of the timing of the profitability in the quarter. I'm just looking at the equity pick up that you had for the sort of one month this quarter versus the three months last year. And even though you only had it for one month, it was only down 15%. Is the profitability sort of heavily, heavily weighted towards October in the quarter or was there just such a significant improvement year-over-year?

One of the biggest things, in the first quarter, there was a tax adjustment as well and of course your equity income is net of taxes. So part of the good performance of the DM&E was driven by a tax credit.

Can you quantify that?

This was the short line tax credit that was passed into law in October, so it was roughly CAD6 to CAD7 million.

Okay, thanks. And then just a couple of questions on cash flows. Starting with the working capital for the year, I think it was CAD130 million that you've invested in working capital and I'm just wondering how we should look at that in 2009? Is that an item that's going reverse or is this related to the DM&E or what should we expect from a working capital perspective in '09?

I think with respect to the working capital that you're referring to, a big part of that is CAD120 million repayment of the accounts receivable securitization. So you should not see as much movement in 2009.

Okay, great. And then just finally on the pension situation, could you tell me how much was expensed in '08? What your expectations are for '09? And then, if you could quantify what -- this will be out later but if you could just quantify what the size is of the pension deficit both on a solvency basis and an accounting basis at the end of the year?

Okay. Our pension expense was about CAD45 to CAD50 million this year. And we don't anticipate seeing large increases in that next year -- or 2009. In terms of our pension deficit, that will be dependent upon our valuation. If we do a valuation at the end of the year.

Bill we've provided the sensitivities, I think it's in the press release, if I recall correctly. So, you can get a pretty good feel for the numbers we're providing at that point.

Yes, I can see that the cash contributions and the sensitivity you guys have provided has been great the last couple quarters, very helpful. But I'm just wondering, in order to come up with those, you have to have made some assumptions on what the solvency deficit would be at the end of the year.

Again, the solvency deficit is dependent upon whether we do a valuation at the end of the year. It also depends upon smoothing, non-smoothing, so there's a lot of moving pieces. And until we understand the exact implications of the temporary regulation and everything, that whole insolvency issue is still a moving target.

Okay, thanks very much.

Your next question comes from Tom Wadewitz, J.P. Morgan. Please go ahead.

Yes, good morning.

Good morning, Tom.

So, just one follow-up on the pension side. It looks like the cash contributions are pretty big numbers. When you're looking at the factoring those in, you've got a nice cut in CapEx, as well, so that helps you. But do you think you'll be in a position to generate free cash in 2009 and 2010 or is that probably a bit too optimistic given what seems to be a pretty meaningful pension headwind on the cash side?

For -- when you look at the range of what we're seeing in terms of pension contributions, it is only about CAD60 to CAD100 million, so that is well within our capabilities of our existing cash flow and with the reductions in our capital as well. So we don't see that as an issue. We also don't really, we're giving sensitivity on 2010 but there are so many moving targets, as well as whether the government will provide any permanent relief on contributions for pension plans. So at this point, all I'd really like to speak to is 2009.

Okay. Let's see. In terms of the outlook for demand, one of the things that we would hope to see at some point, some of the plants that have been shut down and extended holiday shutdowns, maybe you see some relief on some of that capacity coming back online. So Marcella, is there any sense you can give us on early indications from customers of mining or manufacturing capacity that would come back online and what the timing for that might be?

Tom, it's Fred. I think the very broad view is that we just don't know what the volumes are going to be going forward. So to your specific question, what we can tell you is that the coal mines are back up and running. We can tell you that the -- a number of the forest products facilities that had shut down have stayed shut down largely. We can tell you that the auto production tends to have been very slow to come back up but some is starting to come back up.

So unfortunately, those are very qualitative statements but I just have to stress, we just don't know. The customers don't know. That's the problem we face. It's not that we don't want to tell people. It's just that the customers don't seem to know yet what they can expect. And as a consequence, we're -- our program is all about nimbleness and agility and how do we respond when the customers go. What I can tell you in a very broad way, is the first couple of weeks of the year, which looked awful, that's not at all reflective of what's happening of late. The numbers have come back to the point that they're clearly down versus last year but nowhere near what we experienced in the first two or three weeks.

Okay. So, you'd have a pretty good degree of confidence that the December/January numbers were probably the low point and volumes may not look very good going forward but they probably don't look as bad as what you saw at kind of December/January?

The answer is I don't know but that seems like a reasonable hypothesis at this point in the year.

Okay. And then, if I can have one more quick one for -- on pricing for either you Fred or Marcella. As your number that you talked about in fourth quarter was very solid and a little better than the full year repricing number. So that's obviously good to hear. But I'm wondering, on current contracts, is there any kind of wavering in what you can get on pricing or what you are willing to do relative to significant customer weakness that would indicate that pricing outlook maybe needs to decelerate a bit? Or do you think that you're just able to pretty much maintain this really constructive rate that you've had for awhile on pricing?

Tom, our approach is consistent in all of our market conditions. And we're looking to price based on the full value of our product offering. As you noted, Tom, much of our pricing occurred in very tough times, November/December and some going into January. And we've been able to maintain pricing and I would expect to continue to remain at the level that I had indicated in November, which is a 4% to 5% price range on renewals.

And Tom, if Marcella starts to waiver I'm going to be there to help her.

I'm sure you will. Okay, thank you for the time.

Your next question comes from Jacob Bout, CIBC World Markets. Please go ahead.

Good morning. Question on contract renewals for 2009 and 2010. Maybe you can comment on the percent that is complete at this point outside of the metallurgical coal and the potash contract?

So as I mentioned in my remarks, Jacob, we have 60% of our price lift, which is complete for 2009. If you look at it a different way, which is to say how much of our contracts are completed, overall as opposed to just a price lift, that range goes up to 80% for 2009. I'm not providing an outlook for 2010. It's too early at this stage.

And then, just on the metallurgical coal contract, are you still looking for price participation and a five year contract like you did on the last one?

Jacob, it's too early to say. We're in the middle of negotiations and I just can't make any comments as we're having those negotiations. We will update you when we know.

Okay. Maybe talk a little bit about the impact of declining fuel prices has been on your end market and just how competitive trucks have been for your book of business?

In terms of the declining fuel markets, in terms of overall price, what that does is take the total price that the customer sees down, obviously. Which is one of the reasons why I believe that we've got continuing strength going into the marketplace. In terms of looking at it from a competitive rail to truck issue, you've got to remember that the bulk of CP's business, on the intermodal side particularly, as long haul domestic is about 1,900 miles. And that's not a space where trucks are typically competitive. Now, having said that, when I look at some short haul business that we do, which is truck competitive, which is the Montreal/Toronto lane. In that lane, our volumes held flat, which I think is a pretty good result in this particular marketplace.

And what do you attribute that to?

The strength of the value of the rail service to our customers and being competitive in the market.

And maybe just last question here for Fred. Since the analyst day that we had in November, how was the outlook change for you and for your end markets?

I think, Jacob, the extreme drop-off that every railway experienced kind of post-Thanksgiving, US Thanksgiving and really into the first couple weeks of January, just reinforced the work that we had done starting last July on E3 about the importance of nimbleness, the importance of being very quick to respond. You heard Brock taking out 1,450 people, unfortunately, and now some have come back, and parking locomotives. So I think, if anything what it's done, is reinforced, for me, the importance of being flexible, to use Kathryn's word. Of being nimble. And really staying on top of the marketplace because literally things change week to week. And it doesn't give me -- I don't have any further insight into what's going to happen with regard to volumes over the course of the year. There's no way to gather that. What's important is to control what you can control, be as nimble as you can be. And early evidence is that we're performing quite well in that regard.

So, reading between the lines here, obviously, it's a cost cutting measure. What are you looking at specifically on cutting operating costs? Because if I look at it from an operating cost per GTM, not seeing the type of decline, which I thought I would see on a year on year basis.

Jacob, I don't know what draws that conclusion. That's the kind of thing we should probably take off line. I can tell you that Brock can give you a strong list of the things that are being done and have already started to have some results. So maybe, Brock, just help Jacob a bit.

Sure. Jacob, as we talked about in November, we've been very aggressive, number one, in reducing our train starts, reducing our train miles. In fact, we were down pretty much 10% in the fourth quarter. And obviously, folded it up in the first three weeks in January, down in excess of 20% in our train starts and train miles. Similarly, on the headcount, reacted very quickly. When the coal mines went down, we reacted and laid off approximately 300 people on our coal route to deal with that. On the auto business, as the auto assembly plants announced shutdowns, we took our train services down dramatically. And we talked extensively about applying our distributed power models, extending our trains, particularly on our bulk business but also applying that to our merchandise and transcontinental intermodal business. So again, Jacob, the real trick here for us is, as Fred has mentioned, is to be really anticipating some of the volumes and taking our costs out, our variable costs, as quickly as we can to match those drops. Of course, it's not all variable but to the extent that we can reduce those variable costs quickly, we're taking that action very quickly.

Jacob, I'd like to add something, this is Kathryn, as well. One of the things that happened was the rapid drop-off right at the end of the quarter. And as I tried to indicate, Brock took quick action. Your GTM's went down right away but some of the cost savings won't be felt until the first quarter. So part of it is just when you've cut it off and how quickly you can do it. But when you have literally the cliff happened right at the end of December, that matching of expenses directly on a month to month basis is very difficult.

Okay, well thank you for that insight.

Your next question comes from Edward Wolfe, Wolfe Research. Please go ahead.

Thanks, good morning.

Good morning, Ed.

(technical difficulty) [Just to] Tom Wadewitz' question of the cash impact. You had said something about CAD60 to CAD100 million for the pension over the next couple of years, each year. How does that compare to what's in the release of the CAD95 to CAD150 million -- or the CAD150 to CAD195 million contribution for '09 and the CAD295 to CAD345 (inaudible)?

Sure, Ed. It was CAD95 this year, so I was looking at the year-over-year increase. So CAD150 minus CAD95 is CAD65, so that's -- that's actually CAD55. So that's essentially how I got that. So I was looking at the incremental increase of what we are seeing.

And the difference is obviously in the release between the '10 and '09 on the incremental the next year?

Yes.

Ed are you there? Operator?

Hello? Hello?

Hello?

Can you hear me?

Now we can.

I'm sorry. I asked about the income statement impact from the expensing of the pension in '09 and what your assumptions were. Are you giving any guidance as to what that might look like?

We're not giving any direct guidance yet because the valuation hasn't been completed but we will not see -- because pension accounting is very different from how you calculate your contribution, the cost of asset smoothing and discount rates, we do not anticipate any increase in pension expense in '09.

Okay, I know you've mentioned that it's early on Teck Cominco. Peabody today announced that the coal year is going to be late this year. Is it your sense that everything is getting pushed past April in terms of timing though?

In terms of the coal negotiations, Ed?

Yes.

Yes, we're seeing a lot of different news out there in terms of when the negotiations have started, will start and that they would likely be pushed back. So my information is the same as yours. Sorry, Ed.

Your next question comes from Walter Spracklin, RBC Capital Markets.

Thanks very much. Can you hear me? Just on the pension contribution, when we're looking at your 2008 free cash flow, CAD232 million, obviously it's going to be weaker in 2009 with the slowdown in volumes and the economic activity. Assuming that you did a 10% assumption for growth in your equity and real estate markets for '09. My question is essentially if we are not -- if we don't see that 10%, and of course we can do the sensitivity, but if that doesn't come up and you have lower free cash flow growth and you've got a bit of a shortfall there, what's your plan in terms of financing '09? And then going into 2010, where there's an even more significant ramp-up?

Okay, for one thing, the assumptions on what happens in '09 does not impact the 2009 pension contributions. That will have been set for what happened in '08. So we have no risk in terms of the required contributions in 2009. That will have a direct impact on -- whatever the equity markets and the assets perform in '09, will have an impact on our 2010 contribution. And again, that right now is going to be a potential function of relief from the federal government, as well as the equity markets performance. So that's why all we can do is provide you sensitivity based upon what we think are reasonable returns, history shows reasonable returns on the assets are, and continue to see what the government will do in terms of permanent relief.

What I'm asking, though, is that understanding the sensitivities that are there, the question is, if we weren't to get that increase and you don't get the relief from government, you gave us that range, so if that were to happen, do you have the facilities in place right now that gives you a little bit more lending capacity to be able to finance any shortfall if that were to happen?

Absolutely. We still believe we can fund them through cash flows from operations. Absent that, we have a great syndicate. We have good head room on our debt facility. So we don't see any immediate issues in terms of meeting those obligations.

Okay. Perfect. That's exactly what I was looking for. Just on impacts of a few items. And I don't know if, Marcella, you could quantify or not, or perhaps Kathryn. On the fuel surcharge side, I see a lot of your peers have been reporting benefits from the two month lag effect. Just wondering if you've had -- what that impact in terms of an EPS amount would have been in the quarter from that -- purely from the lag, not from the surcharge.

Walter, I'll just remind you, in my remarks, I commented that the lag benefit this quarter was just over CAD20 million in terms of a pure number. So that's about CAD0.10.

And then on foreign exchange and the CTA ruling on an EPS after-tax, did you look at (technical difficulty) on an EPS basis for the after-tax impact of foreign exchange and CTA?

The impact of those two actually would offset each other. So, in fact, when you took the benefit coming from the foreign exchange and the CTA, they actually wash each other out.

They're a wash right there. Okay. And lastly, just on your tax rate, it came in very low in the quarter and then even for the year down well below what you had normally been, call it 29% or north of 30% that you would typically guide us. I think it came in at just over 23%. When we're looking at 2009, what kind of tax rate should we assume in our models for 2009?

Yes. It will not be as low as it is in '08 and we're looking at probably the high 20, 28% to 30%.

28% to 30%. Perfect. Thanks very much. That's all my questions.

Your next question comes from Jason Seidl of Dahlman Rose. Please go ahead.

Hi, guys. Sorry. Real quickly, Marcella, I think you talked about some pricing renewals about 5% for the year. Did I hear you correct, saying you got about 6% in 4Q?

Yes, that's correct, Jason.

That's surprising that you saw an uptick in pricing renewals. Is that just commodity specific mixes that you renewed in Q4 compared to the prior nine months?

Yes, that's right. It has to do with the contracts that came up in that period of time. A few of them were legacy contracts that we had the opportunity to reprice, some old ones, and specific commodities.

Could you give us some color on the specific commodities?

No. I think I'll just leave it at that.

Okay, fair enough. Also, a question on the DM&E. Obviously, we saw the renewal of the short line tax credit. Does the integration of the DM&E into CP's network impact their short line status in the eyes of the STB and the government?

Yes, it will.

So you're no longer going to be receiving those tax credits then?

There's still some question as to if we'll qualify in some future years, but I would say longer term they will not.

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

Thank you.

Your next question comes from David Newman, National Bank Financial.

Good morning folks. Just in terms of the DM&E, now that you've folded it in, is your currency exposure going to be roughly CAD0.02 in earnings for every CAD0.01 change in the Canadian dollar? In other words, it probably is not the CAD0.01/CAD0.01 now?

Actually, it still is the CAD0.01/CAD0.01. We've really balanced off the debts and the property, as well. So it is CAD0.01 to CAD0.01. But what you saw in the fourth quarter this year is, any time FX moves so rapidly within the quarter, that sensitivity will be off a little bit.

Okay. And just on the DM&E in terms of bottom line, regardless of the accounting thereof, to Walter's question, how much would that have contributed in terms of the bottom line in the quarter?

In the quarter, I gave that in my speech. It came in at CAD0.18.

CAD0.18? Okay, very good. And on the top line, with the grain obviously adjustment, was it CAD23 million that you adjusted, because I noticed you trued up your provision up to CAD33.8 million. So what was the net top line impact on that?

The entire -- we were accrued in 2008 for the total amount.

The CAD33.8 million?

The CAD38 million.

Okay, including the penalty?

Yes.

Now, the penalty flows through cost versus the top line, correct?

No. We flowed it through the top line.

It went through revenue.

It's a negative revenue.

Okay, so the full CAD38 million would have gone through in Q4 or --?

No. A portion of it was accrued prior to the fourth quarter and then CAD23 million occurred in the fourth quarter.

Got it, okay. And just the flex in your business in terms of labor, you were down 1,450 at one point and now you're down a 1,000. How much can you right size the headcount? And as you're looking to Q1, what would be the net benefit year-over-year from the 1,000? Does it look -- it looks to me like about CAD15 and CAD20 million. Am I in the ballpark? And how much flexibility do you have to right size the headcount to the volumes?

Well I'll let Brock talk to the right sizing. I think they've shown a lot of flexibility there but I think you're in the ballpark in terms of what you were quoting on a cost per FTE.

Okay, very good.

Yes, and just on the numbers, David, our running trades, they make up about 5,000 employees in total. And our maintenance folks on the mechanical side make up about 2,000 employees. So, let's call it 7,000 would flex with volume and of course there is some fixed expenses on maintenance, etc. But again, I think the real flexible group is really our running trades that really match with train starts. There is some little less maneuverability on yard crews but on the road crews, they flex with train starts and train miles.

So, what is the maximum amount that you think you can flex the system to, if volume stays relatively at present levels? Is what I'm asking. Could you go north of 2,000?

David, I really hesitate to speculate. It really is just math, if you're not having train starts, you clearly won't keep on that number of running trades employees. And a proportionate number of mechanical employees who are repairing the locomotives can also be laid off. So, on those two areas, which is what Brock spoke to, clearly there is almost a direct correlation between activity and the numbers of folks you need. It becomes increasingly more difficult when you get into some fundamental base level you can get to. And certainly on the maintenance of the infrastructure, that's a more difficult task because you clearly will be wearing out less activity but you have certain minimum requirements with regard to inspections, etc.

Makes sense and last one if I may. Just on the price renewals, does that include regulated grain? And how much cover would you have for 2009 if you include the regulated grain in terms of revenue that you feel pretty comfortable with right now?

So on the -- I talked about two different ways of looking at it. So when you look at it in terms of the total book for 2009, the 80% that I referred to, that would include the regulated grain in there. We have an index increase which would be coming in July.

Okay. And 60% for the actual other part, right?

Say that again?

And 60%, I think, in renewals. Correct?

Yes, 60% on a price lift.

Very good. Thank you.

Thank you.

Your next question comes from David Feinberg, Goldman Sachs. Please go ahead.

Good morning. Can you hear me?

We can. Thank you, David.

First question for Kathryn as it relates to cash flows. You talked about '09, any contingent payments for the DM&E that may get triggered here in '09?

No.

And I think at your analyst day it was you or a member of your team had talked about the possibility of CAD50 million of land sales in '09. Is that still on the table?

Well, we're still actively selling land. It is moving with the economy to some extent but we're still looking at that range at this time.

And then in terms of your debt maturities, I just wanted to confirm. You paid down the bridge financing you had in place and there are no debt maturities in '09, is that true?

Other than some small little capital leases but yes, generally for '09, we have no need to renew any debt.

Great. As a follow-up to the question on the foreign exchange sensitivity, outside of the actual every CAD0.01 change in the FX gives you a CAD0.01 change in -- it's annual EPS first of all. Correct?

Yes, that is correct.

Can you give us a sense in terms of just overall book of business, US versus Canada, how that breaks up on a revenue and expense item?

I'll let Brian do that.

Yes, I think it ranges during the year but I think you can use both revenues and expenses are between 30% to 35% based in US dollars.

Great. And then turning to compensation, I just want to confirm, you talked about the increase in stock-based comp year-over-year. That was just related to fluctuation in the stock price. Correct? It's not that you had granted any additional stock-based comp year-over-year. Is that the right way to think about it?

That is correct. It is almost entirely -- the increase was due to the total return swap that I gave complete sensitivities around. And then there was actually some reduction in expenses due to stock option expense being lower.

And then as it relates to wages and benefit increases, whether it be your unionized or your non-unionized workforce, are there any scheduled increases that we should be baking in here in '09 and when do they start to flow through?

Well, on the unionized side, it's a range between 3.5% and 4% for '09.

Okay.

The non-unionized side, David, we've made the statement that there will be no increases to the compensation of the supervisory, manager, executive salaries, at least until we see the results of the second quarter. And at that point in time, we'll pass judgment on whether the original planned increases can be applied or not.

Great. And then two questions for Marcella. Thank you. Marcella, you talked about the difference between your book of business and your contracted book of business. Excluding Canadian grain, which is you're getting your price list from the government, can you give us a sense in terms of the tariff business and how that's pricing in '09 over '08? Are the price increases there comparable to the contracted business? Are they different? If so, where?

When I spoke about bulk numbers both the 60% and the 80%, they included the contract and the tariff business, David. We approach the tariff business in exactly the same way we approach the contract business and I include it in my results.

Okay. And then one last question for Marcella, as it relates to your coal business. We've heard some reports that, overall, Canadian Pacific has become a little bit more competitive within the coal market excluding the Teck Cominco business. Can you comment on any new coal business that may have come up for bid in '08 that CP won? What contributed to Canadian Pacific winning that new business? And what type of pricing you might have seen on those contracts?

I can. And I just want to remind you David that I did comment on that in our analyst day, where I indicated that we had been successful in winning a new short haul business in the United States, very short haul business, 50 miles. However, it's significant car loads. We won it on the competitive basis based on the service that we offer in the marketplace. We're always in the marketplace seeking to gain new business and we were fortunate being able to get this on our service.

And it's safe to assume that business was already existing, right? It's not a new haul. It was an existing haul that CP won. Correct?

Yes, that is correct.

And can you give us a sense maybe, how long was the previous contract in place for it before it came up for bid? Was it 20 year in duration, 10 year in duration?

I have no idea David.

Great. Thank you very much for your time.

Thank you.

Your next question comes from Cherilyn Radbourne, Scotia Capital.

Thanks very much. Just wanted to ask a first question on the DM&E. And wondered whether you could comment on how their volumes were affected in Q4 and the early weeks of 2009 by the deterioration in the economy that we saw late in the year?

Cherilyn, they had about the same impact in terms of a pattern on their car loadings as CP saw.

Okay. And I believe the EPS contribution that was given during the prepared portion of your comments was that the DM&E contributed CAD0.18 for the year. Is it possible to break out what the Q4 EPS contribution was?

I think it was around CAD0.5 to CAD0.06.

And does that include the CAD6 to CAD7 million tax credit that was talked about?

Yes. That would be an all-in.

Okay. Then in terms of the operational metrics that you presented in the slide presentation, the reduction in material usage that you talked about, just as a practical matter as a management team; When you look at your operating metrics, how do you separate the impact of much lower volumes versus the benefit of your efficiency initiatives to basically satisfy yourself that there is some benefit from the E3 plan in addition to what happens as a result of volume alone?

Cherilyn, the way that process works is we would break out, and you see it on the financial side, you it broken out with volume versus say foreign exchange versus price. Well, we do the same thing from an operations perspective. We're going to work our way through those numbers obviously and ensure that the attribution of any benefits that are flowing to the bottom line is appropriately linked to the efforts of E3. We've got a whole organization who have their bonuses tied to the successful delivery of that CAD100 million over a couple of years of economic benefit. So I can assure you, the executive committee literally reviews the linkage between activity and benefit of the E3 initiatives.

And let me just add something there. If you look at what we're going to track, what is sustainable is the productivity enhancements on the assets. So the way you track that is the ability to see your locomotive utilization numbers, productivity numbers, etc. Because at the end of the day, yes, we did get cost savings because Brock had tied up locomotives. We hope that those locomotives get back to use with higher volumes but we will look and demand the essentially even improved productivity from those locomotives. So that when he's bringing them out, they're at less than what it would have taken beforehand.

Okay. Thanks very much. That's all for me.

Thank you.

Your next question comes from Ken Hoexter, Merrill Lynch. Please go ahead.

Hi. Good morning. Fred, can you just kind of refresh us on the negotiation process with Teck? I know you declined to comment on the actual negotiations but what is the timing, as we get closer to the end of March, when we should start to expect to hear more details?

Well, Ken it's pretty straightforward. The contract expires at the end of March and hopefully, we'll have a contract in place to replace the one that expires. If for any reason we don't, that would lead to an arbitration process. And the arbitration process, I'll let Marcella comment, but it's pretty structured and I'm going to guess it's 50 to 60 days from the beginning to the end. But Marcella, please put some color on that.

I think Fred has got it right that it will take about that period of time for the arbitration should there be an arbitration to conclude.

All right, that's great. And then just to revisit, Kathryn, I know you've beaten this one down. But on the pension side when you jump up to another CAD200 to CAD300 million of incremental spend for your 2010 target. I know you wanted to try to stay away from 2010 because things can change so much. But then, looking at the CapEx figure and you decreased it down to about CAD800 million this year. How long can you keep it at those levels? Are you at maintenance, are you below maintenance when you're running at these levels or do you still have growth capital built in? I just want to understand what on the cash flow side you've got some levers to pull.

Yes, and I think -- it's Fred. The two things that are important there is that, certainly, if we have anymore ability to take the one offers, so real estate sales, etc. You would obviously try to expedite those as long as you're commanding value for them. Second, is from a capital perspective, we have contracted the capital by the CAD200 million. The majority of what's there is maintenance capital. There's still some room, as there always is, on discretionary capital in the sense of productivity and other initiatives. Obviously, you would like to pursue those because those are for the long term benefit of the shareholder.

You can actually trim back your other maintenance capital further if you want. It just has collateral damage. So we'd like not to get into that spiral but if one has to do it to survive a short period, you can. But you have to have compensating vehicles in place, such as slow orders or other mechanisms that allow you to perhaps preserve another CAD50, CAD100, CAD150 million. So we've tried to not go there. We prefer to not go there but we can go there if we ever get in that circumstance.

Okay. So the -- go ahead, sorry.

And this is Kathryn. I just want to add to that. If you think about your maintenance capital as well, the ability for us to generate cash flow will be based upon the volumes and the business environment. If the business environment is making such that the cash flow is not available, then you don't have as much tonnage going across. Therefore, you can start reducing some of your maintenance. So there -- it doesn't -- it's not a one for one but generally, what we would rather see is to see the maintenance up and with the volumes up. So that we're generating the cash flow and back to a normal operating level of volumes, which would make these pension contributions just marginally difficult.

Fred, if you could take a swag guess on kind of how volumes are running if you said some of the plants are starting to come back online, obviously December and January got a bit exaggerated, what would you say the run rate now would be based on what you're seeing as far as kind of some of the plants returning? I know you said forest wasn't but some of the autos were.

Well I think if you took just -- we kind of monitor things on a seven day basis. So as of this morning, we're probably in the 5% to 10% under last year range, probably maybe even 7% or 8% under. But we're in that zone and our challenge, Ken, is we can give anybody a point in time where we are. Our problem is, we're not sure if we can extrapolate that number out and say, "And that's what you can expect" because we just don't know.

Sure. My last is just on the headcount. I just want to understand this because it sounds like you had furloughed about up to 1,400 and now you're down to a 1,000. What happened? Did you bring those people back to work or is there a process you go from furloughing to laying them off? I just want to understand what's going on with the employee count.

Ken, it's two primary reasons. One, is we took aggressive moves when the coal mines announced their shut downs in southeast BC. Both on the train side, as well as our mechanical forces on that route. And the second issue, is we have recalled a number of running trades employees. Again, to deal with the winter scenarios. Again, to give us robustness in terms of our fluidity metrics, our on-time performance, our train speeds. And obviously, as we get through some of the tough conditions I referred to in my remarks, again we had extreme cold and again, extreme amounts of snow, if you will, in the P&W, in the Port of Vancouver, in the P&W area. And so, we brought back a few employees to compensate to give us that fluidity. So we will be able to flex those resources as required on the circumstance, on the railway or as volumes recover.

Great, Brock. Thanks for the time guys.

Thank you.

Your next question comes from Chris Ceraso, Credit Suisse.

Thanks very much. Just one follow-up on the question about headcount. What do you pay folks when they're on lay off? Is there some benefit that still gets paid?

Essentially, no. It varies by craft but in general, no, we do not pay them when they're laid off.

Okay, so you get full savings from people when they're on lay off?

In general, that's correct.

I didn't see it anywhere in there but do you have a price per gallon of fuel that you paid in the quarter?

Chris, I think it's in there but if not we'll get the gang to call you right afterwards.

Okay, thanks. If I'm looking at expectations for volume that you're going to see over the next couple quarters, roughly how many points of volume growth on a non-adjusted basis, if I don't change the year ago number what is the DM&E worth in terms of volume?

I think that data is in the slide sheet where we tried to do the sensitivity and the pro forma for last year. But again, Chris, rather than try and wing it off the top here, why don't we get to you with exact numbers?

Okay. And the last question, any thought to revising down your assumed rate of pension return from 10%? I know some folks in industries have started to ratchet that expectation back.

Yes, I'll let Brian expand. That is not going to be the assumption that we have in terms of our accounting assumptions. But in terms of the sensitivity we tried to provide you for expectations on contributions, that's where we use the 10%.

Also the 10% was really around the equity return, not so much the fixed debt returns on the pension plans. But when we release our MD&A and Annual Report, we will outline, last year we used 8%. We're reviewing that now and we'll announce it when the MD&A comes out in March.

Okay. Thanks for the clarification.

Thank you, Chris.

Your next question comes from Arturo Vernon of Macquarie Capital.

Thanks. Good morning. Your debt covenants, how are you shaping up against them, times being what they are?

We are fine with our debt covenants. We have plenty of head room with them. So, we don't see any issues there.

Fantastic. That would include your revolver credit facility?

That includes all of our debt facilities.

And you may not be at liberty to comment but looking at '09, do you perceive that something would change from that judgment?

I certainly hope not. We're not anticipating it.

We all hope not, yes.

That depends on where the economy is going but no, we don't at this point see any problem.

All right that was it. Thank you very much.

Thank you.

Your next question comes from Randy Cousins, BMO Capital Markets.

Good morning/afternoon.

Good morning, Randy.

A couple of points of clarification. Kathryn, on your wage and benefits, you indicated that benefit increase was CAD9 million, offset by an incentive reduction. I wonder if you could give us a sense as to how much of the incentive reduction was?

I think it was about CAD4 million, Randy. And again, if you go back to the sensitivity, I don't have it off the top of my head but the CAD800,000 that I had given you on the TRS would be a good -- you can use that as what the net increase from the TRS was. And then whatever my net number was would be the difference in the incentive stock option expense.

Okay, and then thanks for the fly sheet. I think it's going to be very useful to all of us. But if I just compare the differences between sort of the reported '08 number versus the fly sheet issue, it looks like you had about CAD87 million in EBIT contribution for DM&E in 2008 on a sort of comparables basis, plus the two months you pick up in Q4. Can you give us a sense of sort of what you notionally would target in terms of EBIT growth out of the DM&E for 2009? And I recognize there's a lot of uncertainties here but you've got a lot of opportunities on the cost side and certainly there's a huge room for improvement in their safety performance.

Well, I can't argue with that, Randy, but what we're going to really try to do is get away from looking at the DM&E in isolation. Because at the end of the day, as we start looking at the synergies that we're going to get in terms of the DM&E, in terms of revenue growth as well as our cost synergies; it's all intertwined with our overall CP operations. So it is very hard to start to isolate the DM&E on a go forward basis, which is why we've tried to give you good consolidated numbers for 2008. So on a go forward basis, that we're looked at as a consolidated entity.

Randy, I would add that first of all, the importance of what Kathryn said from my perspective is, I don't want us optimizing the DM&E at the expense of the main railway. What we've said to them is, "Let's keep this isolated for a period of time" for the importance of two key things in our first phases. We need to get our financial systems in place, our operating systems in place, our safety systems in place first. We are already in the process of starting to generate the planned revenue synergies, which are longer haul, better synergies for the Company. And the third leg of that is the expense synergies, if you will or the benefits we think will materialize. But again, it's important to look at it through our lens as a holistic enterprise, not as an independent enterprise. So pretty quickly, as we start to migrate down this path, it becomes increasingly less relevant but is what "DM&E" and what is CP. It's all one enterprise, as Kathryn said.

Let me come at it from another perspective, then. In terms of achieving those, does the slowdown in economy or the constraints that you put on capital expenditure affect the timing of these synergies, the benefits that you've talked about?

Well, in terms of the capital expenditures, we are committed to the capital expenditures that were outlined in our safety integration plan. So you have not seen a cut back on those. So, that will be critical in terms of us realizing the safety benefits, as well as the safety programs themselves. So generally, I don't see--.

I think, Randy on the revenue side, whatever is moving today, if it's 95% or what was anticipated to move because the economy slowed down, then obviously, the proportionate amount of synergies will have to be deferred somewhat. But the principles of routings and longer hauls are all being migrated towards very quickly. On the expense side of things, there won't be much impact because we didn't count on anything in 2009. It was all about getting the systems and safety processes in place. And obviously, once they were in place, we anticipated they would generate some benefit. I can tell you we have had some early collateral kind of, not unplanned, but unorganized wins in the sense that they came from fleet economies or locomotive economies where we just started to work together and all of the sudden discovered the stuff that happened, that can happen without the systems that we see as prerequisite for most of the long term benefits.

And then, Kathryn, a final question. If you write a check for CAD100 million to put in your pension plan, is that a tax deductible expense to you? So, do you get some cash tax relief on that contribution?

We do, Randy.

And how much -- so if you put in CAD100 million, how much tax relief do you get on a cash basis?

It should be at your incremental rate of 30%.

So you put in CAD100 million, you're going to net basis about -- have to put in net CAD70 million worth?

That's right.

So all these numbers that you've quoted are pre-tax, right?

They are all pre-tax. They would be your straight pension contribution.

Great. Thank you.

Thank you, Randy.

Your next question is a follow-up from Edward Wolfe, Wolfe Research. Please go ahead. Mr. Wolfe, are you on speaker phone? Mr. Wolfe, I'll have to disconnect your line. Mr. Green there are no further questions at this time. Please continue.

Well, thank you very much, everybody. It's obviously been a tough quarter. But that said, the team has done a good job to address the variable costs and to do all we can position ourself for a good robust run at it in 2009. And we'll chat with you again the next opportunity. Bye now.

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