Canadian Pacific Kansas City Ltd (CP) 2009 Q1 法說會逐字稿

Good morning, Ladies and Gentlemen. Welcome to the Canadian Pacific Railway 2009 First Quarter results Conference Call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session with instructions provided. (Operator Instructions) I would now like to turn the conference over to Janet Weiss, Assistant Vice President Investor Relations of Canadian Pacific Railway. Please go ahead.

Thank you, Luke . Good morning, ladies and Gentlemen. Thanks for joining us for our 2009 First Quarter teleconference.

Presenters today will be Fred Green, our President and Chief Executive Officer, Kathryn McQuade, our Executive Vice President and Chief Financial Officer, Marcella Szel, our Senior VP of Sales and Marketing and Brock Winter, our Senior VP of Operations. Also joining us on the call today is Brian Grassby, our VP and Comptroller. The slides accompanying today's teleconference are available on our website.

Before we get started let me remind you this presentation contains forward-looking information. Actual results may differ materially. We make reference to assumptions used in our guidance and we provide sensitivities to these assumptions in the appendices which can be found in the last section of the presentation material.

The risk, uncertainties and other factors that could influence actual results are described on Slide one 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.

Following the presentation, we will conduct a question and answer session. Please feel free to queue up for questions now or at any time by pressing star followed by the one on your touch tone phone. Here then is our President and CEO, Mr. Fred

Thanks, Janet and good morning, everyone.

Today's CP reported adjusted Q1 EPS of CAD0.34 reflecting impact of a very difficult environment for many of our customers and therefor CP. Volume decline in negative mix more than offset some very good cost control efforts.

For clarity, our car loads were down about 19% but in combination with some unprecedented decreases in long haul traffic, our revenue ton miles were down a remarkable 22% on the quarter. I'll note that until our long haul volumes return, you should expect the car load to RTM negative differential of nearly 4% to continue.

From an operations standpoint, after a difficult start to January, we moved into a positive operational rhythm which improved strongly through the quarter. Brock will speak to the performance trends which we're seeing. Kathryn will show you a break down of our financial performance and you'll see that from a variable cost management perspective we delivered a very strong quarter. Marcella will show you that our disciplined approach continues to drive price improvements.

Back in the third quarter of 2008, I noted the emerging trend of economic contraction. As a result we began preparing for tougher times and we introduced our E3 program which accelerated efficiency and cost control efforts, primarily in operations.

We initiated a fixed cost program to lower our structural cost and committed to a path of cash preservation and balance sheet strength issuing equity in January, monetizing assets in March and trimming back our capital program. These actions were put in motion to weather the economic storm.

The assessment of our fixed cost structure is redefining our key business processes. This entails major change, and the transformational impact will take longer to mature. The change has started.

Processes under way using various vehicles including working notice to phase out approximately 300 supervisor positions. In addition we are consolidating support yards and pursuing a smaller network of high productivity mechanical shops. Brock will define more details on these opportunities.

I'll now turn it over to Kathryn who will walk you through the quarter, breaking out our financial performance, providing an update on the DM&E where I'm pleased with the progress, Kathryn.

Thank you, Fred and good morning, everyone.

This was a tough quarter for us financially as we were hit hard by unprecedented volume declines which were magnified by the loss of our coal and potash business. We did an excellent job of managing costs and driving productivity gains by successfully removing train starts, mobile assets and employees at a pace similar to or greater than the volume decline; however, despite these actions, first quarter results were challenged as some of the benefits were not felt in the financial statements until February and March.

Turning now to Slide six, I'll take you through the Income Statement. Everything we speak to today is on a pro forma basis with 2008 numbers inclusive of the DM&E as if it had been consolidated for the whole year. Revenues were down 13% including a foreign exchange tail wind, without FX, revenues were down 24%.

Declines across-the-board in volume, negative mix impact and lower fuel surcharge revenues were partially offset by core pricing gains and FX.

Operating expenses were down 8% including a foreign exchange headwind. Without FX, expenses were down 18%.

Fuel price declines and variable cost reductions in line with volume decreases were the primary drivers. Below the line, interest expense increased primarily due to foreign exchange with three quarters of our debt denominated in US dollars. Without the impact of FX, interest was slightly lower.

Tax expenses fell dramatically on lower earnings. We also recorded an CAD11 million benefit from a BC tax credit which essentially matched the same reductions last year. Absent this one-time impact and other specified items, the effective tax rate for the quarter was 28%. With our estimate currently -- we estimate currently now that our effective tax rate for the year will be between 26% and 28%. Adjusted EPS came in at CAD0.34.

Now I'll take you through each of the expense line items starting with comp and benefits on Slide seven. Volume related efficiencies including reduction in overtime reduced compensation and benefits by CAD24 million and we expect to continue matching employee counts with volume trends moving forward. Incentive compensation declined CAD10 million due to a lower bonus accrual and lower stock based compensation.

These reductions were offset by the cost of the total returns swap which followed the rule of thumb I mentioned last quarter. During the quarter, we issued new performance share grants and at the same time made our TRS more effective. The rule of thumb no longer applies and we are essentially matched moving forward.

Pension expense is lower than last year and will continue to be for the remainder of 2009 due to a higher discount rate at the end of 2008. Wage and benefit inflation added CAD10 million due to contracted wage increases for our union workforce. Despite the large foreign exchange hit of CAD21 million, we still ended the quarter down CAD7 million.

Moving now to Slide eight and fuel expenses, which were down CAD73 million due to lower fuel prices and consumption. Price saved us CAD104 million while consumption declined 17% and reduced expenses CAD49 million.

Our hedging program cost us CAD9 million quarter-over-quarter while our winter fuel plan which positions fuel in Northern Ontario for use in the winter months cost us CAD11 million. The lower fuel price was partially offset by a large foreign exchange headwind of CAD53 million.

In US dollars, our all in US fuel price per gallon was $2.04 down 32% and was down 38% to $1.86 without the impact of hedging and winter fuel. Our fuel surcharge program remains our primary strategy for managing fuel price volatility. Having said that, we do have a portion of our business such as regulated grain that is not responsive to changes in fuel prices in the short-term.

April 1, we began a mechanistic hedging program that will build throughout the year and by the start of 2010, we plan to have approximately 10% of our consumption covered.

Moving to Slide nine, equipment rents were up CAD4 million. We saved CAD12 million by quickly removing freight cars and locomotives from active service through lease returns and by reducing the number of foreign cars online by 30%. Moving forward, equipment rents will be managed aggressively as leases come up for renewals.

We are also improving our pipeline processes and reducing cycle times to reduce our overall fleet requirement. Brock will give you specifics in this area.

The savings generated this quarter were offset by lower car hire receipts from other railways and FX. Without the CAD10 million foreign exchange impact, our equipment rents would have been down CAD6 million or 12%.

Finally, on Slide 10, you will see that materials, depreciation, and purchase services would have been substantially down absent the significant impact of FX. We did see lower material costs due to lower asset maintenance while purchase services was down CAD3 million due to lower volumes and casualty costs.

Before I move away from expenses, I would like to summarize some of the puts and takes in our operating expenses quarter-over-quarter on Slide 11. If you remove inflation, lower fuel prices, and the effects of 2008 harsh winter, you will see that the expenses we could control were down by CAD96 million before FX, excellent measure of how well we are adapting our operating plan to match volume decline.

When compared to the volume impact on revenues of CAD224 million, we removed over CAD0.40 of expenses for every dollar we lost in revenues. As a percentage of operating expenses, I estimate that 40% to 50% of our cost base is variable in the short-term. In reality, everything is ultimately variable. It is just a matter of how long it takes to remove the cost and we are now pursuing the next tranche of structural cost adjustment such as consolidating work in yards and mechanical shops.

Now, turning to Slide 12 and an update on strengthening our balance sheet. Even with our lower earnings, cash flow from operations was essentially flat to Q1 2008, reflecting our focus on cash. In February, we raised equity by issuing 13.9 million shares generating CAD489 million in net proceeds.

On the capital front, we have lowered our 2009 spending plan even further to between CAD720 million and CAD740 million, and in late March, we closed on the partial sale of our interest in the Detroit River tunnel partnership, subject to regulatory approval. We will retain all operating rights but our smaller ownership position will change the accounting treatment from consolidated to equity interest. The gain of CAD0.35 to CAD0.40 from the transaction will be recorded in the period we receive approval.

Quickly touching on the DM&E. We are pleased with the property and our transition plans and synergies are ahead of expectations. We have successfully integrated our financial systems and are on track to introduce the operating systems by the end of the year.

We have maintained a firm committment to improving the safety results and as you can see in our operating stats, we did show marked improvement in Q1. To date, we are ahead of target on capturing many of the identified synergies on both the operating and revenue sides of the business.

To conclude, our focus on controlling near term variable cost has been extremely successful, and we are taking steps to realize the next tranche of savings in medium and longer term cost. Our focus on reducing structural cost through sustained process improvement will take longer to realize but is a big step towards organizational changes that will insure that we are leaner, more efficient Company coming out of this downturn. We remain vigilant on cost control and have a strategies in place to drive long term sustainable improvements.

With that I will turn it over to Marcella for our marketing review.

Thank you, Kathryn and good morning.

In the first quarter we felt the continuing impacts of declining volumes. Freight revenues were down by 24% before foreign exchange. These declines, as Kathryn mentioned, were unprecedented and extreme in many of our key business segments. Despite the impacts of this recessionary environment, we are delivering steady price results and value through new and emerging opportunities.

Turning to Slide 16. Total car loads were down 19%. Among the largest declines were metallurgical coal with car loads off by 30%, automotive declines of 43%, and potash, especially export, down by 17%. To put this in perspective, in March, we moved 11 export potash trains to Vancouver, in normal times, we run the same volume over the course of three to four days. These large scale volume declines along with uneven changes in our business groups is the mix. RTMs fell by 22% largely reflecting a decline in average length of haul.

With respect to our pricing strategy, our strategy was to deliver 4% to 5% and this is what we achieved. Negative mix of 3% to 4%, given the volume declines and uneven changes in segments, somewhat offset price. Fuel surcharge revenues were down by 6% due to fuel price changes.

Turning now to an overview by market starting on Slide 17. First, grain. The bright spot in our portfolio. Canadian grain was strong, with revenues up by 17% FX adjusted. The large crop of 54.5 million tons and exports of 27 million tons supported a strong export program and resulted in several weeks of record deliveries. On the US grain side, shifts between exports and domestic movements combined with reduced commodity prices caused farmers to hold their product. Looking forward, we continue to model normal volumes for the 2009-2010 grain shipping season.

On Slide 18, coal quarterly revenues were down 23%. This reflects the overall reduction in demand for metallurgical coal, linked directly to the declines in worldwide steel production. RTMs were down by 26% reflecting the change in mix with the reduction in Canadian export shipments and growth in US short haul. We have modeled 2009 coal volumes to be lower than last year. Note, April month to date car loads for export coal are down 55%. As well, tax just announced coal sale expectations in the 18 million to 20 million ton range. We will adjust our model further.

And as you all know, our tech export coal contract expired March 31. Commercial terms are not yet settled and the status is confidential between the parties. Until resolution, we will not comment to respect that confidentiality.

In the US side, our new thermal coal business commenced as expected which is added additional car loads, about 10,000 units in the first quarter. Due to their short haul nature, about 50 miles, these shipments have reduced the average revenue per car in coal overall.

Sulphur and fertilizer on Slide 19 revolves largely around export potash sales. As I said up front, the volume decline in this segment was extreme. In fact, month to date April potash volumes are down 85% over last year. International and domestic buyers continue to defer purchases as fluctuations in commodity prices impact the demand for crop nutrients. We do remain confident in the fundamentals of this portfolio.

Turning to merchandise on Slide 20, car loads declined by 25% this quarter. The ongoing effects of the recession continued to be felt across the portfolio. Demand changes are evident in all sectors. Revenues were impacted by declines in steel production, construction, plastics and chemicals as well as automotive.

Some bright spots emerged were ethanol, condensates and LPG, but clearly not enough to offset other volume declines. The outlook in major markets remains uncertain and dependent upon economic recovery. Stimulus packages in both Canada and the United States should incent increased infrastructure spending and drive improvement although timing is unclear.

Finally, intermodal on Slide 21. Revenues were down 19% in the quarter. By retail inventories and reduced consumer demand have forced volumes down. The majority of this decrease was the result of import and export unit changes on the quarter.

Looking forward, it's unclear what the retail sales outlook will be through the balance of this year. Any change is dependent upon recovery of consumer confidence. Overall then, the revenue and demand picture so far in 2009 has proven a challenging start to the year.

Finally, on Slide 22, a few important areas within our sales environment are delivering some good wins. We are delivering results in non-traditional areas both relative to current and future environments. For instance, we are progressing our condensates used to dilute oil sands bitumen. We have doubled this business in Q1 and expect to continue growth throughout the year.

Wind energy, which emerged as new business for us in 2005, is now positioned to grow by more than 300% in 2009 as we offer end-to-end transportation solutions.

The third area of focus is our new Kansas City gateway and growing the long haul business in this corridor.

To sum up, we will aggressively manage our commercial strategy and maintain pricing discipline. Now over to Brock on operations.

Thank you, Marcella.

This quarter the emphasis has been twofold, first containing variable costs by adjusting quickly to changes in volume trends and second, benching our E3 initiatives and other new opportunities for efficiency in a lower cost operation. Clearly we have had some dramatic but temporary mix changes this quarter that has impacted RTMs to a greater extent than car loads and GTMs but we've had good success in managing our costs while accelerating performance throughout the quarter.

More specifically, let's start with safety on Slide 24. Our safety results were mixed. Our FRA train incident frequency improved by 28% on CP and by 7% on the DM&E. For the core CP operation we continue to be the industry leader in train operation safety. Our FRA personal injury frequency was up by 20% on CP but improved on the DM&E by 43%. I'm encouraged to see that our best-in-class safety approaches are driving some early benefits on the DM&E and to CP from significantly reduced casualty costs.

Please turn to Slide 25. We have a slow start in the first two weeks of January from our decision to take extended shut downs over the holidays. We made this decision given customer shut down plans and the volume trends we were seeing. We've had some bumps in the road from the usual winter challenges but we've made the necessary adjustments and have now hit our stride.

Train speed for the quarter improved by 7% with disciplined execution, reduced train starts, and lower volumes all contributing to this. Our performance ramped up through Q1 and month to date April, we are improved by 16%. Yard dwell also improved by 6%, a good result given the action we have taken to reduce road and local train starts and we continue to demonstrate improved performance with month to date April improved by 10%.

Active cars online fell by 15% and month to date April our performance has improved by 23%. The fluidity we are creating through execution excellence of our scheduled railway is allowing us to bounce off the challenges we have faced on the RTM mix issue that Fred discussed.

Looking at some key month to date April productivity measures, it is clear that our cost reduction actions are working. Our GTMs are off by 29% but train and crew starts are also down by 29%. Train weights on our schedule service are up by 4% and our pre-utilization has improved by over 20%. We are driving significant productivity improvements, even at these reduced volumes and we will continue to do so.

Turning to Slide 26. We're aggressively pursuing every operational cost control opportunity available given the slowing economy. We have tied up over 350 road and yard locomotives representing over 23% of our fleet. We have stored 16,000 rail cars or roughly 26% of our fleet and in an unfortunate but necessary step, our temporary lay off of crews and maintenance staff today sits at 2,400. This is about 23% of our unionized workforce. And we are pulling other levers to reduce the cost of the remaining workforce such as elimination of overtime with the exception of emergent situations. We're sizing ourself weekly to meet demand and I'm satisfied that our actions are delivering results. During the quarter, we've reduced train miles and train starts by over 19% in lock step with the volume reduction in GTMs.

Turning to Slide 27, as Fred mentioned, changes to our fixed cost structure are already under way. We've been analyzing our ability to consolidate locomotive shops and yards through increased productivity and centralization of work. We've made good progress and we've already restructured mechanical operations in Southern Ontario and Vancouver. Through IOP redesign we have pushed more volume into our most efficient processing yards allowing us to close several satellite yard operations in recent weeks, including our self-pump operation at our Winnipeg yard. And we have more opportunities under consideration.

We also have several yield and productivity improvements designed to improve cycle times and reduce assets and key pipelines. We started with covered hoppers, our largest fleet, where we've implemented a new grain supply pipeline model that has improved cycle times by over 35% between prairie elevators in Vancouver and we're using the same lien Management techniques and processes to redesign our West Coast international container pipeline which draws upon our second largest rail car fleet, the objective is to improve the efficiency of the entire supply chain by reducing loading containers on the dock, balancing inbound and outbound trains and improving equipment cycle times.

As E3 and the broader implementation of business process changes occur, I expect we will hit and surpass our E3 target of CAD100 million in cost savings while still delivering a consistent and reliable product to our customers.

Let me close by saying that our variable cost control initiatives and our disciplined execution of our IOP are paying dividends. And when the economy bounces back, we have the mobile assets and storage and crews and lay off status to quickly respond. I believe we will have a stronger operation for this and will come out of this downturn with the ability to generate even more productivity as the volumes return.

We are being methodical in implementing game changing sustainable improvements that will better position us to serve our customers and with a lower variable and fixed cost structure. I look forward to reviewing our performance with you next quarter and I'll now turn you over to Fred to wrap up.

Thanks, Brock.

Ladies and Gentlemen, our efforts to manage variable costs and lower our structural fixed costs are progressing and they're consistent with my committment to execution excellence and running a lower cost scheduled railway.

Operationally the railroad is running well. We are achieving price improvements consistent with the value that we are creating for our customers. We continue to take actions to strengthen our balance sheet and preserve cash.

We're experiencing extraordinary volume volatility and this is clearly created some short-term challenges. Our actions are timely, decisive, and balanced, respectful of those affected both our people and our customers, they are oriented to positioning CP for the economic recovery.

So, on that note, Operator, please open the lines and let's have some questions.

Thank you, (Operator Instructions) Your first question today comes from Walter Spracklin of RBC Capital Markets.

Thanks very much, good morning guys. Just on understanding the sensitivity around the coal, perhaps we could talk a little bit about the volume side and Marcella, you can chime in as well in terms of what your expectations are for the balance of the year. We've heard from tech, they're talking 18 to 20.

Obviously there's probably some customer deferrals in the first quarter with the pricing rollover. How much of that do you expect was or in the first quarter how much do you expect was in fact deferrals and how much was actually lower demand and should we see going into the second quarter and the balance of the year a little bit of a seasonal pick up because of the rollover effect?

Walter, this is just quite frankly a mystery at this point. We do not know the answer to those questions.

They're fair questions but those questions will be answered largely by our client and our client is obviously working in the marketplace to establish what it is they can do and win. For context though I will say to you in the month of April in the first 22 days, our metallurgical coal volumes are down about 55% versus April of last year so obviously there's been some modest decline relative to Q1 activity, but we just don't know how to calibrate the actions in the marketplace that our client is taking to try and secure committed volumes at prices that are good for them and as a consequence we're pretty much at the mercy of whatever it is they do, we will ultimately move the coal, we hope, but we can't predict it. There's no way to predict it.

And I guess the same thing applies, that is my next question on Potash, Potash is talking 6 million tons now for the rest of the year again, I guess somewhat cloudy in terms of uncertainty around how that breaks out for the remainder of the year?

Potash, I think you've seen some things as recently as this morning from Potash Corp. with Bill Doele's comments. They clearly are very, very upbeat on the opportunity to return to a pretty rapid pace in the second half of the year.

Again it's not for us to put the words into our clients mouths, so whatever they say, we have reason to believe that there is emerging now a new base for the export price and that's pretty attractive relative to history, maybe not quite as high as last year, and I guess we, like you, are optimistic that this sector will land some time in the next who knows, three, four, six weeks at the outside and that we should be moving quite a bit of potash from now right through, arguably, the end of the year or maybe starting in four, five weeks or whenever they get all that sorted out.

And Fred, understanding that there is a sensitive time, negotiations are confidential but is there anything you can give us just in terms of sort of color, maybe timing? Are things going a bit better on these negotiations with tech or are they going worse or are we looking at potential FOA? Anything you could give us would be appreciated.

Walter, it's Marcella speaking. We are in negotiations and as I said we do have to respect the confidentiality of negotiations. You ask about an FOA and let me say this, FOA is obviously available to tech at any time. They have triggered it in the past. If they do trigger it it's a matter that's confidential, we would not speak about that in any event. I will say the parties both of us both tech and CP have expressed a preference for negotiation and we are inactive negotiation as we speak.

Last question here is just on price renewals, Marcella, 5% to 6% or 4%to 5%, that's great. I'm just wondering on renewal business in the last say month or two, are you seeing renewals below that trend, understanding that's an average trend for the quarter but I'm just talking specifically on recent renewals, how is that going particularly given the current climate that's out there?

Walter on the quarter we achieved renewals in that range, in the 4% to 5% range as per our strategy.

Okay. That's great. Thanks very much for your answers.

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

Good morning, everybody. How is everyone?

Just great, Jason.

Quick questions on sticking on the coal topic. It sounds like obviously some of the expectations sort of were below your internal plans. Can you give us like a magnitude of how much lower they were below your internal plans?

Jason? I think we gave you the numbers, as we know them. Tech came out with an estimate of sales in the 18 to 20 range. We told you that in April we had further volume decline over Q1 and that's probably just about as good as we could do to give you a sense of what the volumes look like.

It might be worthwhile just for a little color, we've said this in past years that it's important to refresh people's memory that you have to calibrate their sales numbers as conceivable you could have almost 1 million or 1.5 million tons of coal that are sold and moved through inventory or sold from inventory or get moved but don't get sold, so there's at least 1.5 million incremental or differential that's possible, not necessarily will happen but possible between what we could move and what gets sold.

Second thing to remember is when they give the tech coal group gives their broader scope of what they're going to do, it also would include some amount, it could be modest, 1 million tons or whatever, out of northern mines so it's important that whatever they say take into consideration both alternate modest but alternate sources of coal as well as the inventory issues.

Okay, that's good enough, and turning to the fuel impacts on the revenue side, you called it out on the slides, on the cost side and I think you said, if I'm correct, that excluding foreign exchange revenues would have been down 24% so it looks like it gave you what, about CAD140 million on revenues?

Look at the fuel revenue decline based on the price of the fuel obviously brought our revenues down by about 6%, Jason.

Okay. That's perfect for me. I appreciate the time as always.

Thank you.

Your next question comes from Bill MacKenzie of TD Newcrest. Please go ahead.

Thanks. First question on fuel. Just wondered if you could talk a little bit more about the cost per gallon.

I guess two things. Can you just elaborate a little bit more on the winter fuel program and what exactly that is and secondly, the CAD1.86 after the fuel program and after the hedges just seems a little bit high to me.

The other rails have been coming in around CAD1.40, CAD1.50 a gallon and I'm just wondering if there's anything different in terms of the way you guys buy fuel, if there's sort of more of a time lag in terms of when we see a fuel prices move versus when it hits your expense line.

Okay, first of all, this is Kathryn. I'll talk to the winter fuel.

Because winter requires a different blending of your fuel, we actually kind of pre-buy and position the fuel across our system to insure adequate supply and this is something that happens every year, but because of the way that fuel prices moved rather dramatically from when we make the purchases which are in the fall versus when we use them in the wintertime, it actually impacted our average price more than what you'd seen in the past.

In terms of our CAD1.86, I think one of the things that you have to keep in mind is that we buy a good portion of our fuel in Canada and the taxes in Canada are higher than the taxes in the US, so that does add to the overall price per gallon for CP.

Are there any, I mean you talked about the forward buy on the winter fuel program. Is there any forward buying that goes on in the balance of your business that would explain some of the difference or is that not an issue?

Nope.

Okay.

Another question I had, has to do with the initiatives to attack the fixed cost structure and I was just wondering if you guys could elaborate a little bit more on the timing in terms of how long you feel it will take to get through the initiatives that you have on the drawing board and secondly, if there's any dollar targets that you could provide in terms of how much savings you'd expect to see over time?

Bill, it's Fred.

I hesitate to try and be too specific and this is consistent with exactly what I told everybody at the Investor Day and again on Q1 that we have undertaken the work and we're quite pleased with the work that's been progressed to this point.

We believe that there are substantive opportunities. I did say in my comments that the first phase of the benefits of that will be reflected in 300 supervisory FTEs being phased out and remember that when you're changing business process, it's very important that you don't take the people out and then have the thing fall apart. Our challenge is we need to fix the processes. We've identified the opportunities. We got the beginning of the work undertaken right now, so what we've done is advised the people that at the end of that work period, those positions will be eliminated and there will be no severance cost of course because they're being given working notice of that, and so I would suggest to you that with regard to the 300 FTEs that we're speaking about, at least this portion of the restructuring effort, you should expect to see those starting to kick in largely in Q3, arguably right through Q2, maybe even Q3 of next year, and some could drag out depending on the seniority or how long the people have been with the Company out into Q4 of next year, but that fits perfectly with the length of time it will take us to make these changes. These process improvements and the IT support systems that will go with them.

So really what you're thinking about is probably between four and 20 months, most of those changes will be nicely implemented and the jobs will be phased out in that period of time with no severance payments.

Okay, great and anything else on some of the other initiatives on the fixed cost side? I mean, it's the timing for some of these initiatives similar to what's happening, what's phasing out some of these people or are the broader fixed cost initiatives going to take longer than that?

So Bill, it's Brock. Maybe I could give you a little color on the two examples or actually three examples I provided and one of the things we're doing as Fred mentioned is we're taking a very deep dive and I talked about this in November and all of our locomotive repair facilities.

That work is still under way and we continue to look at the analysis but we have decided that we can move a number of locomotives that we currently repair today at our equipment facility in Vancouver and we're going to move that approximately 175 locomotives that assigned to that facility to another location. That allows us to shrink the operation in our equipment facility, expand a more efficient operation in our A-list facility here in Calgary and that will be implemented over the course of the next 120 days. We will maintain a very small facility in Vancouver to repair local locomotives, for example, four axle units but the big six axle units that are repaired would be moved to another location.

Similarly, you will see we've taken the opportunity with the downturn in automotive in Southern Ontario, we've been able to restructure our car repair scenarios in Southern Ontario. We think the action that we've taken there, not think, it is a permanent and we will be implementing that fully with permanent layoffs over the course of the summer.

The other thing we've seen with some of the reduced volume in our IOP redesigns is we've been able to push a lot more volumes into our highly productive hump locations, for example, allowing us to shut satellite yards in certain locations and there's a couple in Manitoba and again we've been able to push that volume into our Winnipeg yard, close our hump operation in Winnipeg and shut some satellite yards that are outside of the Winnipeg yard area, and that process is ongoing as we speak, so that maybe gives you a flavor, Bill, of some of the actions we're taking in the medium term.

Bill just maybe put a bit more color on it and think, if you're trying to think of a structural way to think about what we're doing, my earlier comments were kind of the-- I'll call it the supervisory, the management infrastructure and that gave you a little bit longer time horizon. Brock is providing what I would call the shorter term of the fixed cost adjustment so he's gone out and begun a process where we are consolidating whether shops, car shops, locomotive shops or even yard activities.

When you deal with those types of vehicles, or those types of facilities, you are dealing of course with our contracted employees and we have to work with the bargaining agents to do the appropriate things to make sure proper notice is given so Brock referred to 120 days and what you'll see when we make those kind of major structural changes it will always be about 120 day notice necessary to the affected employees and that leads to at the end of that notice is when we can begin the actual implementation of what we have proposed to implement.

So you're going to see variable cost activities moving literally day-to-day and Brock talked about the fact that we have 2,400 employees affected with short-term layoffs. Then you're going to see these 120 day notices as the kind of short and medium term activities and you will then see the more structural changes that I'm describing which will take anywhere from four months to maybe a year, year and a half to fully implement in the fashion that we think it will probably unfold.

Okay, that's great and just one little follow-up to that. For the 120 day initiatives, are there any kind of preliminary headcount estimates in terms of what those initiatives could save?

I think at this point in time, we've given notices of that nature I'm going to say about 120 people?

Yes.

About 120 of those positions are permanent layoffs that will occur in the places that Brock has described and in the 2,400 that we've mentioned are temporary layoffs that we believe a good portion of those are clearly related to volume. Obviously there maybe some efficiencies we can discover through doing things wiser that may not have 100% of those people come back but with the attrition that we have that should suit our purposes just fine.

That's great. Thank you very much.

You're welcome.

Your next question comes from Cherilyn Radbourne of Scotia Capital.

Thanks very much and good morning.

Hi, Cherilyn.

Just wanted to ask a question, in respect of the way you've now resized your car fleet locomotive, the unionized workforce, are you now sized appropriately for weekly car loads kind of in the range of 40,000 to 44,000 which seems to be where we've settled out in the last five or six weeks?

Cherilyn, I'd like to separate the two subjects. On the locomotive side I'm really, really pleased with the work Brock and his team have done. We've done a very good job of taking locomotives out and I think the number today is approximately 30% so our RTMs are down 30% in the first 22 days of April and our locomotives are down 30%. That means they're parked or turned back or whatever the case maybe, it means we're not maintaining them.

On the car side I'm pleased but not as pleased and the reason I'm saying that is it's a pretty precipitous decline that we've experienced particularly in the last three or four weeks and the ability to get the cars out fast enough has been a bit frustrating for me. So we're back in that I think today was about 42,000, you're correct, and I sure like to believe that we're going to need to take more cars out to drive the miles per day up because it's all about asset efficiency so on the locomotive side our miles per day are actually up relative to last year, despite the fact that our business is so far down. That's attributed to getting the assets out fast enough and on the car side we haven't been able to take as many out as I would like to take out and we need to spend these assets more quickly so I'm not satisfied at 42,000 and I can assure you that people in car management and operations know that I'm not satisfied, so my expectation is we'll find a way to get more cars out and we need to do it reasonably quickly.

Okay. And then are you still struggling to the same extent with kind of a lack of visibility from your customers, not a lot of lead time from them and sort of the week to week gyrations in car loads or has that settled out a little bit better as the years progressed?

Well, I think, Cherilyn, the key thing there is your early assessment is correct. Our clients, and this is no disrespect to them, they just simply don't know. Their markets aren't clear to them so they can't be clear to us so it is somewhat volatile by sector.

On the other hand I would suggest to you that if you look for instance at our seven day average, we monitor daily seven day month to date and I'm very unhappy with the numbers but I'm satisfied that our GTMs basically on a month to date number is very similar to our seven day average so it appears as though and I say appears only based on I really don't know, it appears as though we've kind of flattened out on the decline, and granted, at huge numbers and my expectation is that we absent any huge surprises on a particular sector that we hopefully will start now to see some step function improvements as some of the items like potash kick in or met coal picks back up and we should see some step function improvements.

Okay, last one for me, just where is the CapEx cut coming from?

CapEx, we have been very very disciplined in trying to stick to the core engineering dollars, so when we first took our original tranches out, we trim back some of our IT spend, some of our discretionary spends on lands and facilities and anything to do with cars basically. We trimmed a lot of that stuff out.

We also can avoid a lot of overhauls on locomotives of course because they're parked and we don't need them right now. We'll protect their ability to come back into the business so we've trimmed out a little bit further on the overhaul side based on the number of parked locomotives and we've trimmed very very gently on a handful of the engineering program where we had for instance double track, we might have left the track at a somewhat slower speed given that we're running so much less tonnage and will be running somewhat less tonnage, I hope not today's these numbers.

So we're very comfortable that we've protected it because the most important thing we can do is keep that engineering backbone safe and keep it at a reasonably high speed as in what it is today and that insures we have a great quality of product for our clients.

Okay, thanks very much. That's all my questions.

Your next question comes from Matt Troy of Citigroup.

Yes, thanks. Was wondering the cash flow side if you could just give us an update on your pension outlook and any funding requirements you might have this year?

Sure. And I will refer you to our MD&A because I think we have some pretty good disclosures there as well, but what we're seeing in terms of our cash contributions for 2009 is actually lower than where we were at the end of the year. We're seeing that 2009 would be in the CAD100 million to CAD150 million range and just to put that in perspective we were CAD95 million last year, so not a significant impact at this point and of course, we have not made a determination on whether we're going to do an updated valuation and we will really decide that once we see what's happening on the legislative front in terms of permanent reform. And as you probably know, we've been very active in that and we should have more clarity as to whether there is any legislative change for permanent reform by the end of the year.

Yeah, I ask the question in the context of the capital budget reduction. If the pension funding requirement is down versus initial expectations or earlier expectations, CapEx is down, you should have some more cash to deploy I was just wondering what your strategy in general with capital will be over the next 12 to 18 months in light of these changes both on pension and CapEx?

Well, I think we're trying to be flexible and again kind of determining what's going to happen in terms of our pension reform but I know that Fred and I are looking at reducing the capital but we're also looking opportunistically if we have some immediate pay backs in some capital programs we will actually add back into the capital so we're trying to plan for the worst and be flexible for the upside.

Matt, I want to reinforce that literally, within the last 48 hours, I have been sitting right at this table with people who were bringing forward programs that were not in the capital program but I can tell you if we got a one year pay back we will spend the capital just reinforce Kathryn's comments that in times like this having a good strong balance sheet is very very important so we are trying to be prudent, trying to be very methodical.

The market will turn up. We don't know when, so as a consequence we will preserve our strength until such time as we see the evidence of the sustained pattern moving up and then we can of course always ramp up capital spending reasonably quickly if it's suitable.

Got it. Next question would be on the tech issue and I certainly respect the confidentiality. I just want to make sure I understand the framework correctly as I understand it now that you've gone past the 3-31 contract, there's essentially two routes you can continue to negotiate a tariff rate would apply or you could go into some kind of FOA with the 60 day process at the end of which we could have a resolution. Is that the two options, do I understand that correctly or what's the framework and timeline we should be looking at for this process?

Matt I think the way you describe the auctions is correct and in terms of timeliness it really depends on the negotiations.

So that 60 day clock would only start ticking if they were to file or move towards the FOA option?

That's correct.

And last question for me, just a quick refresh. You talked about the negative mix impact of shorter haul domestic US coal. Could you just refresh on the coal side how much of your business is export versus domestic in terms of the profile of your coal book?

What we have in the US between the US and Canadian side obviously the US side has grown with the addition of the new business that we have there so it breaks up about 85, 15%.

Okay. Thank you very much.

Thank you.

Your next question comes from Chris Ceraso of Credit Suisse.

Thanks, it's Chris Ceraso. Fred, I think one-time you mentioned to me that you thought that the increased discipline among the management teams at the railroads and the resistance of fighting with each other over price was really the key to the industries pricing renaissance, but with that as back drop have you seen any kind of changes in behavior over the last few months given some of these volume declines that would suggest that that discipline is starting to shake a little bit?

Well, Chris, I would characterize it slightly differently. The way I would characterize it is that the improvement in the quality of the product today versus what it was five, six, seven, 10 years ago has afforded us the ability to go back in the marketplace and repatriate business from trucks, repatriate business in a fashion that when you go to sell, you sell on the quality of the car, the quality of the service offering, the relationship that you have. You're not limited. You're still price competitive but you're not limited being price oriented so that's a slightly different characterization but I think it's an important one as we all have improved the product offering of the sector to enable us to be much more effective.

Now with regard to your comment I would say that everybody is working hard to make sure the railways are busy but we will always have as we always have had skirmishes on the border with somebody who is interested the business we have or we have or we want from them, but I haven't seen any silly deterioration into forgetting the fact that we are offering great products that allow us to command good value.

Okay. Can you give us an update on the activity in the oil sands?

Well as you probably are aware in the oil sands there's been a lot of stopping of the upgrader activity particularly because of the price of oil that's gone in there; however the part of our business that continues to grow as I mentioned is the condensates that go in. The bitumen is still being produced, the bitumen moves by pipeline and it needs condensates to dilute it to move it out of the pipeline so that business is really growing for us and I'm really pleased with that type of business.

So Chris just for clarity in case that wasn't clear, the construction materials on the inbound side have obviously slowed down as some of these major companies have either deferred or slowed down their construction. The facilities that were already under construction are largely being completed and as Marcella says the volumes of bitumen coming out and therefore the needs for condensate to dilute that product continue to be strong and it's been a big growth area that Marcella and Ray Foot's team have successfully participated in.

On a net basis though, is the level of activity for your railroad in that region higher or lower?

On a net basis it's lower because of the product that was going in because of all of the construction activity is no longer going on, and the condensate side is growing.

Okay. Last question, we've gotten some mixed signals from different carriers in different industries on the level retails, or I'm sorry, the level of inventories and you mentioned in your comments that you're seeing high retail inventories. Can you give us any color on which types of retailers or in which regions you're seeing inventory pressures?

I think the retail inventory issue is across the board with our retailers that we serve and it's not so much that it's an absolute high number. It's a high number because the sales have dropped, so against that as they reduce their inventories with sales going down, the inventory still has not settled out to the level of sales and it is across essentially most of the regions with all of our retailers.

Chris, we should, I think Marcella probably mentioned it, I apologize, but my recollection was that I know this, that the domestic activities within our intermodal business are actually, they're not good but they're not anywhere near as bad as the international side, keeping in mind a lot of the international movement that we experience particularly off the West Coast is largely that general merchandise stuff that you would find in those retailers whether it's Canadian Tire or the Wal-Marts or Targets in the States. And so what we are seeing is that the domestic activity is okay relative to the other, but the retail restocking of inventories clearly seems to be slowing down.

Okay, thank you very much.

You're welcome.

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

Great. Good morning. Earlier you had mentioned the DM&E, you thought that some of the farmers were holding some of the crops. I'm just wondering, any impact from the floods and what percent of the volumes are now coming from DM&E on the grain side as that grows into your business? Thanks.

Well, Ken, it's Brock. Maybe I'll just give you a brief update. From the DM&E perspective we are seeing grain held on the farms. The grain isn't moving. From a flood perspective on the DM&E, we're not being impacted on the DM&E from a flood perspective.

We are seeing some minor impacts in our North Dakota franchise but we're moving product and it is tenuous now, but we continue to move fairly currently on all of our products through North Dakota but we're watching it very very closely. We do have -- continue to see plans in place as that water continues to rise and I can tell you that they're expecting some cresting in the next two to three days on our main lines through North Dakota but as I've said we've got great contingency plans for rerouting traffic and/or detouring traffic over other carriers that's had no material impact on our moving of product.

Ken I'd just like to add to what Brock has just said that because there was a lot of events warning of the flood a lot of the grain was moved out of the region before the waters hit. That was a very purpose full action on the part of the sellers and the railroad.

Great. And then I think earlier, you had I think it was Kathryn was talking about the average number of employees and you ran through a bunch of numbers about what had been, or maybe it was Brock, taken out since the quarter ended. I just want to understand the average during the quarter was only down about 1% or less than that.

Just want to understand I think you said there were employees that were taken out but are they kind of in furlough so they're not counted in the actual reduction number and when to do those grandfather out and actually become off the books?

Ken, I think there's a lot of puts and takes here so I think maybe the simplest way for those of you who try to model what's going to happen going forward is to just give you an absolute number. Obviously we don't know what's going to happen with regard to volume, but remember two things.

The first of which is the numbers that tend to be there are mid month numbers, sometimes we provide the end of month number as well. There has been a big difference between the first quarter RTM reduction which was 22% and the numbers that I mentioned earlier where we're running at 31% RTM reductions in the first 22 days of April. As a consequence between mid March and today, which is kind of five weeks, we have in fact had another substantial series of layoffs, so that's why we're up at 2,400.

Now, if you just park all that for a moment and say if you go to the absolute number of "expense employees," probably not a bad number to model, all subject of course to major volume increase or decrease, but if you model a number around 13,750, that would be a ballpark number, we think, absent any new news, that you could probably count on certainly through Q2 and may well be the number for the balance of the year unless we see the recovery that we hope and expect that we will see.

Don't forget that in addition to that as we move into Q2, our capital employees start to come on and that number probably would be around 2,000, 2,100, a little less than last year because our capital programs are a little bit less but the addition of those two numbers for the total of all of our railway, including the DM&E, right?

Yes.

Would give us that number. That work for you?

It does. It's helpful, thank you, Fred. Just to take a step back I guess if I look at the car loads relative to the earnings decline and relative to some of the others that have reported CSX volumes were down 17%, earnings down 22, CN your peer down 16% on volumes EPS down 15%, Fred, where is the disconnect? Is it in the profitability of losing some of the longer haul, the biggest profitable stuff being the coal and fertilizer commodities that were lost and so therefor it's impacting revenues more or is it the lack of ability to adapt that cost because you were focused on the DM&E acquisition? Where is the bigger differential?

I think, Ken, the thing that somehow didn't translate for everybody, the publicly available information is car load so you quote those correctly.

The important information is the revenue ton miles, because it is the revenue ton miles that generates your revenue, so the fact that car loads are down, every other railroad that's reported to my knowledge would show that their car loads are down X%, but the revenue ton miles are down less than that, by anywhere from 3% to 5% less based on the fact that in their particular circumstances, the average length of haul increased.

In our situation, we were down 18% or 19% on car loads but down 22% on RTMs which basically implies of course that the length of haul in our case got shortened. Now it got shortened partially because we had the extra short haul coal but that's pretty insignificant in the big picture. It got shortened because a lot of our long haul business was what got contracted and the potash business which was down what was it, 70% in the quarter was down 85% in April is great long haul 1,200, 1,300 mile business, so we have somewhat of a unique situation in that our length of haul translating into RTMs is substantially different than what has occurred elsewhere. It will also rebound equally quickly when those long haul corridors come back.

So is that helpful, Ken, to understand why those--?

That's exactly what I was asking I appreciate that. Thanks, Fred.

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

Yeah, good morning.

Good morning, Tom.

Fred? I have a follow-up I guess to the I think the framework that Ken was asking about in terms of understanding I guess the drivers of the bigger difference or the greater pressures on your business.

Is your bulk export business which really is seeing this tremendous weakness which you obviously don't control, is that just so much higher margin than the other part of the book that that also is a big effect on the way your profitability shows up?

It's not high enough margin in my opinion.

Clearly, but I mean, would it be fair to say that if you looked at profitability of bulk export potash, export coal, there would be a pretty significant differential in the profitability on that business say versus your forest products or industrials, whatever other items are perhaps now down sharply?

You know, Tom I can't go there, but I think the key thing is just get that RTM message clear in everybody's minds that when you lose 22% of your revenue generating workload, clearly, there's going to be an impact and attribute to everybody else who has done a good job taking out their 10% and 15% and 12%, 13%, 14% RTM impact but there's a big difference between 13% and 22%.

So from our perspective we think we're doing the right things, we're also at the same time lowering the fixed cost side of the business on a more long term sustained basis which will lower our overall cost base and make us more competitive in the long term, but, when you have these kinds of dramatic swings, you really do have to stay focused on taking out the cost that you can control and not moving into panic mode and doing silly things that can hurt your franchise in the long term and we think we're doing those.

Right, okay, when we look at the second quarter and you're talking about first three weeks of April which obviously that's just not necessarily what the full quarter is going to look like, but are you thinking that earnings which are typically up pretty meaningfully sequentially are going to be down meaningfully? Because the comments in the RTMs in April versus First Quarter are pretty negative.

Well, first of all, we're not giving guidance, Tom so I won't talk about earnings but let me put it in perspective for you that the two busiest months of 2008 for the Canadian Pacific Railway were April and May, and of course today, we're in the depths of arguably both some combination of the global recession in the North American recession and some unique situations like potash, so as a consequence you've got this kind of extreme situation where you're taking literally your busiest month, April, and you're comparing it against the depths of what's occurring in the global marketplace. So that's why I believe we're seeing the increment from the Q1 average RTM reduction to the 31% I referred to.

Now, I can't predict with certainty obviously what's going to happen through the quarter. What I can say to you is everybody following the Company should believe that April, we're already well through it. There's not evidence of an immediate turn even on some of these big bulk commodities so May will probably be a little bit of a challenge as well with regard to the spread that I just described but I would also ask people to pay attention to the fact that we have had substantial improvement if you look at Brock's slides with regard to the April performance, we are matching train mile to GTMs reductions. We are matching if you look at locomotives parked, locomotive miles per day up, so Brock and his team have put an awful lot of cost reduction acceleration initiatives in place and obviously our challenges in April and May maybe to tread water and those things will benefit us in a bigger way coming through that. Is that helpful, Tom?

Yeah, that's helpful. I guess I still don't have a sense of whether it's reasonable to think that there's any sequential improvement let's say margin instead of earnings or whether that would just be a pretty tough thing to do given that your comments on RTMs in April.

I don't, I'm not going to do earnings outlooks but let me maybe add one more dimension that might be a little bit helpful for you and that is simply that the earnings, if one was to break them down by month as opposed to the quarter and the whole, did improve as we progress through the month as a lot of our cost savings initiatives started to kick in. So, I guess I'm hopeful that the run rate coming out of the quarter will be better going forward but you have to take into account that the deterioration in the month of April from a volume perspective has been substantial so that may or may not manifest itself in earnings improvement.

Right, okay, great. Fred I appreciate the comments. It's helpful.

Okay, Tom.

Your next question comes from Randy Cousins. Please go ahead.

Afternoon. I wonder if you guys could talk about the relationship between fuel and revenues. Last year, you got crushed by the increase in the price of fuel because your surcharge systems weren't working as efficiently.

Here we've had a massive reduction in the price of diesel and the price of oil and yet I look at the change in your fuel as a percentage of revenues so in the last year was 20%, this year it's 16.2%, and if you compare your own results with Canadian National which again has some FX stuff rolling through their numbers, their numbers went from sort of 20% of their revenue down to 16.2% and a point of fact on the cost of fuel basis, you paid as much for fuel almost paid as much for fuel as they did, but CAD800 million less in revenues but I guess I'm trying to understand, I would have thought there would be a bigger reduction in your relative fuel cost versus revenue given the pain you took last year and could you comment on a go forward basis?

Randy, I think the easiest way to deal with that is to think about kind of a stacked bar. On the bottom end we said we have the winter program, we have a place in Northern Ontario and we used unfortunately we had to use, the expensive fuel that we had bought during the fall. That's just how it happened. It was inventoried in the fall to protect our needs and that was expensive, that was nearly CAD10 million.

Second, we had a hedge program in place that has of course expired but I think that was about CAD9 million, and--

CAD20 million.

And about CAD20 million worth of the fuel increase was due to those two items so if that helps to reconcile the numbers then that's probably a starting point for you.

But again, it's like my understanding is last year, because you guys said basically it's a CAD0.01 change or CAD1 change in oil had a CAD2 change in oil had a CAD0.01 change to earnings sensitivity and I think it was a CAD1 crack spread had a CAD0.02 change so those numbers don't apply?

Well, I think the model is changing, Randy. The third thing I should add to what we described is on January 1st, in an effort to be aligned with the immediacy of the responsiveness, to fuel changes, we altered our program from a 30 day lag to a 15 day lag, so obviously when the price goes down, we will give that back more quickly and when the price goes up we will get it more quickly.

In this particular period the price went down a little more quickly and so there's probably another CAD5 million there so I think probably what we should do is just take it off line and we'll revise the sensitivity if you're having trouble tracking it.

Randy, this is Kathryn. I think if you give Janet a call we can kind of walk you through it, but there are a couple puts and takes.

We did have some tail winds, if you look at the price list versus what Marcella had in terms of lower revenues there was a price lift but the hedge in the winter fuel ate into that as along with some other items, as well as our consumption which was down 17% versus GTMs being down a little higher than that.

Okay, and then the other thing too is I guess it was Brock, I think mentioned it, or maybe it was Marcella, you guys talked about the Kansas City gateway.

I wonder if you could give us some sense as to what's happening there right now and what do you see the opportunity over the balance of the year or is it just the economic conditions are just so weak there's no opportunity to take advantage of right now?

No, Randy. The better way to look at that as you'll recall what we said we wanted to do at the DM&E, the first thing we would do is get in place the systems necessary to make that a very very successful integration so a lot of those are thinking systems followed by the IT systems, SAP, the payroll system all of which happened by the way in January and now the operating systems are being rolled out.

At the same time we're doing that, we've had a handful of operational synergies in the sense we found some fleets, locomotive end cars that we could work together very easy and get some early costs or expense synergies out of that but they weren't targeted because we didn't pursue those immediately until the opportunities arose, and then the third thing we looked at was at what point in time can we start the process of extending our hauls to reflect the new franchise that we have and those discussions are under way with the various connecting carriers. We've already migrated some and we'll migrate more but they come due when the contracts come due.

You can't just walk in and break a contract. You have to fulfill your commitments to them and as those pieces of business become available to the extent there's a longer haul available to us that's a better decision for our shareholders we will clearly see those.

The discussions are under way. We are progressing each of those as they materialize.

Okay, and then last question for Kathryn. I think you said that the tax rate for the full year would be 28%. Given it was so low in the first quarter, does that mean we should be modeling a 37% tax rate for the subsequent quarters? How should we think about this?

Well, what I did say is it will be for the year 26% to 28%. That is on earnings without the DC tax one-time credit and the FX, the effects of FX on our long term debt so to take out those other specified items and you will see, Randy that actually for this quarter our effective rate was 28%, so for the year, there's no big anomaly that would happen for the rest of the year.

Okay, great. Thank you.

Thank you, Randy.

Your next question comes from [Umar Alem] of National Bank Financial.

Good morning, just a few questions on behalf of David Newman. One thing just on the receivables you had about CAD569 million at the end of the quarter and I just wanted to get a sense if there was any risks to receivables or lengthening of the cycle or anything like that?

This is Kathryn. In terms of our accounts receivable, in fact our DSOs fell approximately two days from the end of the year, so we are actively managing our Accounts Receivable and do not have any higher risk in this environment and in fact are improving upon it because we have some very active management, so what you see in terms of the drop itself is really hand in hand with the volume reductions that are happening.

Okay, and another thing and on trucks, have you seen any, in terms of competition, them being able to take share back with the lower fuel, we've seen things in terms of excess supply with trucks?

No, we're not seeing it. I just reminded you that our business is a long haul business. For instance on our animal side, we average about 1,900 miles and of course over 45% of our business is on the bulk side which is not really truck competitive so we're really not seeing changes. We also have some truck competitive lanes, for instance Toronto to Montreal where in fact our volumes are stable. They aren't declining at all.

Okay that's good, thanks and finally just on the fuel surcharge, any changes, any significant changes in terms of how much you have on highway diesel?

Yes, we're converting I think we've told you before that we've been moving and migrating our portfolio on to a combination of highway diesel and one that has some form of margin in it so that we're managing the two things and we had, we're over 50% at this point and by the end of the year we expect to be over 75%, so we're very successfully migrating to this improved program.

Okay, thanks a lot.

Thank you, Umar.

Your next question comes from Edward Wolfe of Wolfe Research.

Hi, thanks, good afternoon.

Hi, Ed.

Talk a little bit about the drop in coal volumes, the export volume is down 50%. How much of this is pure demand and how much of this is contractual driven as you look at it?

Ed, I can tell you this that typically we see met coal volumes match the changes in the global field production, that is typically the connection. As to whether or not there's any connection to our negotiations I can't obviously comment on that. We're in our negotiations currently and those will unfold as they will.

And I guess Ed, the answer is we wouldn't know. We don't know. We're trying to move the coal as efficiently as possible and we have and will move everything that's presented to us.

Well I guess do you get a sense that there's some inventory at the ports they might have stacked up and maybe that's why it slowed down since the contracts come up?

I don't believe that to be the case.

No.

Okay, Fred, you mentioned on the potash side that you were hopeful that in two to six weeks we should see something start to ship hopefully. What gives you that sense? Is it coming from [Campitex] or somewhere else or what's your feeling?

Well, again, Ed, I want to be cautious. The worst thing a railroad can do is put words in the mouth of the shippers so Potash today came out with some pretty upbeat perspectives on kind of emerging through June and into the second half, an expectation that their volumes will start to move and they're a major contributor to the [Campitex] consortium, so I think rather than me speculate, I would just say to you that I'm trying to interpret the statements that I hear either publicly or privately from those who are trying to market that stuff on a global basis and certainly our perspective, at this point, with a combination of those sources would be that that we're all optimistic that we'll start to see a pick up in June and a good strong second half.

Okay, last question, Kathryn, can you talk a little bit about whether you've began the fuel hedging program and kind of what's in place so far if you have?

Sure, yes, Randy, we did April 1 begin our very mechanistic program and there's an illustrative, I'm sorry, Ed, sorry, there's an illustration in the back of our slides that shows kind of what it will build to through the year but what we'll be doing is buying strips, so this is really an averaging of our prices over a very long period of time and we will build in this very gradually month by month until January 1, 2010, we should have 10% covered by these strips of hedges.

Okay, so like a percent a month kind of thing?

Yeah, it's very small strips each time, so it's truly about taking volatility out and not about taking a price point of view.

Thanks for the time, appreciate it.

Okay, Ed.

Your next question comes from David Feinberg of Goldman Sachs.

Hi, most of my questions have been answered. Just a quick one and I apologize if you touched on this in the beginning, I missed the first part of the call, the regulatory environment in the US seems to be heating up a bit now. I know most of your network is located in Canada but wanted to find out if any residual impact or if you were at all involved in any of the discussion that may or may not be going on in Washington right now and what your sense is what a possible outcome would be particularly given the recent acquisition of the DM& E.

David that subject hasn't come up on our call but I think in very broad terms I would characterize it as first of all keep in mind 2/3 of our business is in Canada where we've worked hard to establish, and I think we do have, quite a stable regulatory climate. On the 1/3 that is in the United States, of course we are subject to whatever may happen in the United States. And the parties that are involved, we're working through the American Association of railways and those folks are representing us in any discussions that go on.

We're clearly very aware and we are optimistic that a fair and reasonable balance will be found in whatever legislative or regulatory outcomes are in the near future and I don't really think it's of much value for me to speculate other than to say that it's clear, I think, to everybody and in these volatile times with substantial volume reductions it becomes increasingly clear to people that it's important for the rail industry to have a good strong financial stable base and to earn their cost of capital and that I sincerely hope and believe that will be taken into consideration in any kind of regulatory or legislative change coming forward so that we can continue to reinvest in this business for the long term.

And just one follow-up. You talked about fair and balanced regulation. Any sense in terms of what that fair and balanced regulation looks like or maybe another way to think about it which issues are most important to you Canadian Pacific and BAR the group that's representing you as opposed to the shippers and how that might shake out?

Well, I think again, it's all very broad, David, but the shipper community seems to be interested switching and bottle necking and things like that, and I think our industry is very interested to making sure the uniform costing program reflects the long term costs and that any regulatory change that comes forward does not impede our ability to earn our cost of capital, and that's a pretty macro perspective but I think those are kind of the big issues.

Great. Thank you.

You're welcome.

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

Well very good. Thank you everybody for taking the time to join us. Bit of a tough quarter on volume but I hope that the answers you received and the game plan we've put in place with regard to managing those variable costs while driving down our long term fixed cost is something that makes sense to everybody. Thanks very much and look forward to talking to you again.

Ladies and Gentlemen, this concludes the conference call for today. Thank you for your participation.