Canadian Pacific Kansas City Ltd (CP) 2010 Q1 法說會逐字稿

Good morning. My name is Sara and I will be your conference operator today. At this time I would like to welcome everyone to Canadian Pacific's first-quarter 2010 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions)

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

Thank you, Sara. Good morning and thank you for joining us for our first-quarter conference call. The presenters today will be Fred Green, our President and Chief Executive Officer; Kathryn McQuade, our Executive Vice President and Chief Financial Officer; Ray Foot, our Group VP of Sales; and Brock Winter, our Senior VP of Engineering and Mechanical. Also joining us on the call today are Ed Harris, EVP and Chief Operations Officer; Jane O'Hagan, Senior VP Marketing and Sales and Chief Marketing Officer; and 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 that this presentation contains forward-looking information. Actual results may differ materially.

The risk, uncertainties, and other factors that could influence actual results are described on 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 2.

Finally, when we do go to Q&A in the interest of time and in fairness to your peers, we will be asking you to limit your questions to two. If you have additional questions you can requeue and, time permitting, we will circle back.

Here then is our President and CEO, Fred Green.

Good morning, everyone. As you have seen, we have kicked off 2010 on a positive note and delivered adjusted EPS of CAD0.60 or an 88% improvement over Q1 2009. As we suggested on our January call, our goal was to be agile and nimble, to respond to the uncertain and volatile market; and I'm very pleased with our performance in this regard. But I am not satisfied, as we have more to improve upon.

Looking at the quarter, we sustained our improvements in train productivity. We calibrated our resources appropriately to meet our commitment to service reliability and our productivity objectives. And we posted another strong quarter in train safety performance.

Additionally, we strengthened our bench with the addition of Ed Harris as Chief Operations Officer, and the promotion of Jane O'Hagan as Chief Marketing Officer. You will hear more about our future plans from both Ed and Jane at our June 2 Investor Day. But for our Q1 results, I will turn it over to Kathryn, Ray, and Brock to report on our performance and the current market. Over to you, Kathryn.

Thank you, Fred, and good morning, everyone. Through Q1, we have continued to do an excellent job of managing costs and driving productivity. The hard work we did through 2009 set us up well to respond to market demand while realizing operating leverage as volumes recover.

As you know, we transitioned to US GAAP January 1; and many of you attended our March call which outlined the major differences. So today I will be speaking to earnings in US GAAP compared to 2009 US GAAP numbers.

Let me start on slide 6 with a reconciliation of the GAAP/non-GAAP earnings we refer to as adjusted earnings. Our reported net income was CAD100 million or CAD0.59 per share. When we take out FX on long-term debt and other specified items, our adjusted earnings increase to CAD102 million or CAD0.60 per share. On the quarter, the adjustments from GAAP to non-GAAP had no impact on our operating income.

Turning now to slide 7. We sustained the cost efficiencies reported in previous quarters and our operating ratio improved to 82.4%, an impressive improvement of 570 basis points over first-quarter 2009. Expense per GTM, excluding fuel and the impact of FX, improved by 11%. Cost management continues to be a priority as we bring resources back to meet demand level changes.

The Canadian dollar was stronger this year versus last year and reduced (technical difficulty) CAD0.03 to CAD0.04 in the quarter. We should expect to see a continued FX headwind as the Canadian dollar is expected to remain strong. Our rule of thumb remains one-cent strengthening of the Canadian dollar decreases EPS for the year by a penny.

Looking at the top of slide 7, I will focus my comments on the percentage variances of FX-adjusted performance. Total revenues were up 14% reflecting higher volume, cost of mix, and fuel surcharge revenues. You'll hear more detail about our revenues from Ray.

Productivity gains kept our operating expense increase to only 6% while supporting a workload increase of 15%. Operating income of CAD205 million was up 78%. Interest expense and other was down 1%.

Income tax expense before FX on long-term debt and other specified items increased principally on higher earnings, with an effective tax rate of 26%. Adjusted earnings doubled on the quarter; and diluted adjusted EPS was CAD0.60, up 88% from 2009.

All in, a very solid first quarter as the team did a good job in leveraging the uptick in volumes to drive productivity improvements.

Now let's go through each of our line items starting with compensation and benefits on slide 8. Average expense (technical difficulty) employees for the quarter were within expectations at 13,800. This is 4% below first quarter '09 even with the 15% increase in workload. Higher volumes were offset by crew efficiencies and reduced employee counts year-over-year saving CAD5 million on the quarter. This compare will become more difficult as we start lapping our 2009 cost efficiencies later this year.

(technical difficulty) to the second quarter, the projected volume levels, we expect expense employees to hover around 14,000. Incentive compensation was up CAD16 million when compared to 2009 first quarter, which had no bonus accrual. If volume remains strong I expect similar accruals quarterly.

As a reminder, we began accruing incentive compensation in the second quarter last year. Therefore this quarterly differential will lessen.

Stock compensation increased (technical difficulty) CAD13 million due principally to the issuance of new PSUs and SARs in the quarter and a change in life assumptions of SARs on existing awards. Going forward, a good rule of thumb is for every one-dollar increase in stock price, compensation expense increases CAD1.5 million.

Pension expenses for the full year will be approximately CAD37 million, up CAD15 million or approximately CAd4 million per quarter. Wage and benefit inflation was CAD5 million.

Including an FX tailwind of CAD18 million, comp and benefit was up CAD11 million or 3%.

Moving now to slide 9 and fuel expense, which was up CAD11 million or 6% on higher volume and price. Higher prices increased the fuel line CAD29 million as our all-in costs were $2.44 per gallon, up from $2.04 a year ago. Consumption due to higher volume was partially offset by an 8% improvement in fuel efficiency, increasing the fuel cost line only CAD8 million.

Our hedging program is now in place and the year-over-year net hedging benefit was CAD7 million. Foreign exchange was a tailwind of CAD21 million.

Turning to slide 10, purchased services and other was down CAD12 million or 6% due almost entirely to foreign exchange. This is a very diverse line item and has a lot of moving parts; and the graph on the slide will provide some indication of the major components.

Our safety programs combined with milder winter conditions allowed us to continue to improve our casualty costs which were down CAD4 million. As a reminder, land sales have been moved from other revenues to this line item. First-quarter sales were light; but we still expect a typical annual run rate of CAD30 million to CAD40 million. It will likely be concentrated in the latter half of the year.

On slide 11, the remaining operating expense lines were all favorably impacted by the change in FX. Materials were down CAD13 million. Again, the milder winter conditions and lower equipment repairs reduced material usage.

Depreciation was up CAD5 million due principally to capital additions. Lastly, equipment rents decreased by CAD17 million due to the turnback of freight car and intermodal equipment during 2009. Again these quarterly benefits -- the quarterly benefit from this should narrow as we lap 2009 savings.

Overall, we are seeing good operating leverage associated with adding cars to existing trains. We also had positive mix this quarter, which is the reverse of what we saw in Q1 2009. As the year progresses you will see the mix impact return to more normal levels.

Slide 12 shows the strong operating efficiency we realized this quarter, with an 11% increase in revenues -- absent FX and fuel surcharge -- and only a corresponding 3% increase in expenses, exclusive of FX and fuel price. As is the case with railroads, costs come back in step function. Clearly we are seeing the most leverage early in the recovery.

We continue to sustain and leverage our productivity improvements. However, we will face tougher compares as we begin to lap last year's improvements.

Before I wrap up, let me highlight our cash flow results on slide 13. Q1 was a very strong quarter with CAD51 million free cash flow. Our cash position remains strong and we plan to pay down the 2010 debt maturity of CAD350 million in June from cash balances.

In conclusion, we have momentum with strong cash flows in 2010, and I'm pleased with the continued improvement in financial performance. Our financial position continues to strengthen as we sustain our productivity initiatives and show good operating leverage as volumes return.

We look forward to sharing more with you on our longer-term plans at our Investor Day in June. With that, I will turn it over to Ray for the marketing section.

Thank you, Kathryn, and good morning. Starting on slide 16, in the first quarter, volumes were up 1% over Q4 2009. This represents the third consecutive quarter of increases as demand continues to improve. On a year-over-year basis, total carloads were up 8%, with each business group registering an increase over 2009.

Revenue ton-miles, or RTMs, were up a strong 17% compared to Q1 2009 with fertilizers, industrial products, and forest products accounting for most of the carload versus RTM differential.

Our reported revenue is up 6% versus Q1 of last year. On a currency-adjusted basis, the increase was 15%. On top of volumes of 8%, fuel surcharge revenues generated approximately 3% of the gain; and price and mix were 4%.

I will now walk through the markets, give you comments on the quarter, and provide some insight on the remainder of the year. For clarity, I will speak to currency-adjusted revenues from here on.

Grain revenues were up 4% and volumes were up 2% on the quarter. Our US franchise saw strong demand and increased volumes year-over-year, which was partially offset by lower volumes in Canada resulting from weaker cross-border and winter rail movements.

Moving to coal, volumes were up 7%. Strong Chinese steel production fuelled demand, and export volumes increased by more than 30% over last year. In the US, thermal coal was down due to outages at US receivers and winter impacts on parts of our franchise.

Overall, coal revenues were down 1% on the quarter due to lower revenue per unit from shorter Canadian length of haul and carryover of the 2009 Final Offer Arbitration Export Rate changes.

Turning to sulfur and fertilizers on slide 19, volumes were up 78% on the quarter while RTMs were up 101%. We saw the return of international buyers to the market for potash and as well as robust domestic demand.

We were well positioned to respond to the improved demand, enabling an increase in revenues of 72%. Given its length of haul, gains in export potash contributed to the significant improvement in RTMs.

In our merchandise portfolio, revenues were up 23% while volumes increased by 14%. There is continuing strength in our energy-related shipments. Ethanol facilities are running near full production, and we are seeing increased single-line movements to the northeast US, one example of where we are leveraging our extended network.

Automotive also continued to be strong, with manufacturers continuing to rebuild inventories, increasing long-haul imports and cross-border shipments.

In other merchandise sectors such as forest products and metals, we saw only modest volume improvement. RTMs were up more than units in both our industrial products and forest product segments. In FP we saw more pulp production move in longer-haul domestic lanes. And in the industrial products sector, the combination of new, longer-haul business in ethanol and a reduction in short-haul Sudbury Basin traffic due to the Vale strike contributed to positive mix.

Now turning to intermodal on slide 21, units were up 2% and revenues were up 11%. Our domestic business grew year-over-year, improving in each month of the quarter. Imports through the West Coast grew significantly as Canadian retailers replenished inventory. West Coast strength was partially offset by continued weakness at the Port of Montreal and some loss of short-haul northeast US business.

Turning to slide 22, I will run through our views on the balance of 2010. In grain on the Canadian side we can expect strong market demand for the balance of the crop year, particularly off the West Coast, in line with the Canadian Wheat Board's sales expectations. For new crop, we are modeling normal production and exports, which means we will face tough compares in the second half.

In the US, poor corn quality from the 2009 harvest has created uncertainty around volumes in corridors until new crop. The initial USDA Planting Intentions Report shows increased corn and soybean acreages in our territory and reduced wheat acres. We expect US demand should be similar to last year in the second half.

Looking to coal, there are positive signs in the met coal market with the growth of Chinese imports. And we are modeling current volumes to continue in line with Teck's forecast. On the thermal side, we believe we should see volume improvements in Q2 as receivers come back up.

In the fertilizer segment, export demand looks to be strong through Q2; but after that, demand visibility is limited. On the domestic side, weakening grain prices may temper short-term demand; and there is currently no clear picture for the fall program.

In merchandise, ethanol and autos will continue to be our bright spots. In ethanol, the compares will get tougher as we lap increased production rates in the second half.

Overall, US auto demand is forecast in the 11.5 to 12 million units range. If those sales occur, Q1 volumes should be indicative of the run rate for the balance of the year.

In our other merchandise sectors we expect growth to be modest, in line with US GDP.

On intermodal we expect modest growth. The Canadian economy is starting to show some signs of improvement, and this should result in growth in our domestic and Port of Vancouver volumes. Port of Montreal volumes should stabilize as we move forward.

Moving to price, we announced a new one-year agreement with Teck for the movement of export coal. Teck pricing as previously indicated will be at similar levels to current rates. However, if Vancouver volumes fall short of target levels, a higher rate will be realized.

All other renewals during the quarter were in line with expectations, coming in just under 4%.

As we mentioned in Q4 there were headwinds that resulted in Q1 price coming in flat. They were the regulated grain adjustment of negative 7.4%, the Teck FOA outcome, and a few large multiyear contracts with fuel-inclusive indices.

Looking forward, we continue to target 3% to 4% on renewals; and we expect price results to turn positive. We will remind you that the regulated grain impact will be felt until August 1; and the fuel-related indices will be felt through the remainder of the year.

To summarize, I am pleased that we're seeing some volume momentum. Q2 will show strong year-over-year improvements in carloads, driven by bulk growth due to potash and coal lapping some very easy 2009 comps. Intermodal and merchandise will show modest improvement.

In the second half of 2010, we face some tougher compares, and there is certainly uncertainty to the timing and rate of recovery in various sectors of the economy. We're well positioned to participate in any volume recovery and continue to pursue new opportunities across a broad variety of markets.

We will continue to target 3% to 4% on price renewals. Finally, we expect that the noticeable difference between the increase in RTMs versus carloads in Q1 will diminish as we start lapping the bulk recovery in the second half.

Now, over to Brock.

Thank you, Ray. Good morning. Q1 was another in a series of very strong quarters for us on operating performance. We have proven that we are nimble to size up or down in line with the volumes.

The productivity improvements we have achieved over the past 15 months are sustainable. And we see further opportunities for gains in both efficiency and service reliability.

Looking more specifically at our results, let's start with safety on slide 25. Our FRA train incident frequency improved by 31%. We continue to be the industry leader in train operation safety.

This is driving significant benefits in reduced casualty costs. Our FRA personal injury frequency was up by 15% and we will continue to be focused on improving for the remainder of 2010.

It is a Railway Safety Week in Canada and a good reminder of the importance of working with our employees and the communities we operate in to continuously improve the safety of our operation.

Turning to slide 26, we saw significant recovery in volumes in Q1, particularly in March. And we are pleased with our ability to handle it cost-effectively. We have proven over the past several quarters we can effectively deal with volatility.

With respect to our performance, train speed was off by 3%. This was due to the mix of more bulk trains, supply chain issues at Port Metro Vancouver, and heavy snow conditions in the Midwest United States.

Despite that, our productivity metrics show the good operating leverage we're achieving from the consistent execution of our integrated operating plan, continued implementation of our long train strategy, and intense focus on asset utilization.

GTMs increased 15%; but our train starts only increased by 6%. Our cars and locomotives online were up only 8% and 3%, respectively. As a result, train weights improved by 8% and train lengths were up 10%.

Fuel efficiency improved by 8%; and our car and locomotive miles per day both improved by 3%. This all translated to our expense per GTM improving by 11%, excluding fuel and the impact of FX.

Admittedly, 2009 compares are relatively easy as the benefits of the actions we took in response to the precipitous decline in volumes were not fully realized in Q1 of last year. We expect more modest year-over-year improvements as we start to lap those actions.

We have done a good job meeting customer needs for reliability through the efficient callback of resources and the execution of our operating plan. And we continue to make progress on our last-mile/first-mile initiatives.

Please turn to slide 27. In summary, we are delivering strong operating leverage with higher volumes and continue to lead the industry in train safety performance. With the execution of our long-train strategy, focus on network balance and fluidity, we are committed to providing a reliable service.

We see even more opportunities for growth and efficiency through enhancing service quality going forward. We continue to demonstrate our ability to be flexible in implementing sustainable improvements in volatile markets, and we're ready to call back more resources as required.

Finally, I am pleased to advise that we have a tentative three-year contract settlement with our Canadian Maintenance of Way Employees. The Memorandum of Settlement will be sent to the Union membership for ratification in early June and is a mutually beneficial deal, consistent with the pattern we've established with other Canadian Unions.

Safety, providing a reliable product, and cost control will remain our key focus. I will now turn you over to Fred for the wrap-up.

Thanks, Brock. Let me wrap up by saying that last year we demonstrated our ability to react to the declining market. This quarter we demonstrated our ability to react to a market rebound.

As Ray highlighted, we still have very limited visibility into demand beyond Q2 and are fully cognizant that markets are likely to recover in fits and starts. You can expect us to continue to quickly adjust resources up or down in response to demand.

We are proving CP can be nimble, and we're well positioned to realize operating leverage as volumes recover. We've made good strides on productivity, and our next opportunity is fluidity and asset utilization.

I will close by saying that I am looking forward to having a more fulsome discussion with you at our June 2 Investor Day when we will discuss how we will deliver additional fluidity, service reliability, growth, and of course value to our shareholders. With that, I will turn it over to Sara to address any questions you may have on our Q1 update.

(Operator Instructions) Walter Spracklin, RBC Capital Markets.

Thanks very much. Good morning, guys. Just wondering, Fred, you have in the past sounded somewhat more bearish or cautious about your expectations for a rebounding economy. I got the sense you sounded not quite as cautious anymore. Is that a good read?

Perhaps give us some color about what you are hearing from your customers in terms of their expectations for the rest of the year.

Well, Walter, I think the key thing is that we are not a homogeneous market, right? So the things that we have been apprehensive about -- and I think it's important to understand the big rebound on volumes has largely been in the bulk commodities that Ray described I think pretty effectively.

If one looks at things like housing starts I think they actually declined in March. If you look at the auto numbers at 11.5, 12 million units, that is versus 15, 16, 17 million in the past.

So we are pleased with the recovery, but the vast majority of the big volume recoveries have been in the bulk markets. And as Ray said, both merchandise and intermodal we expect growth, but modest growth; kind of GDP, GDP-plus a bit, unless it is supplemented by our initiatives.

So am I delighted with the speed of the bulk recovery? You bet. We had no way to predict that.

The issue that we all face is simply the sustainability of the demand. Will it be volatile? I would guess it probably will be a bit more volatile than history says.

So we're delighted, but Walter, the reality is we don't really know what's going to happen beyond the second quarter; and I don't think our customers do.

Okay. Second question here. Just on the Teck one-year push forward here, a lot of differing opinion out there as to whether this is a good thing or a bad thing.

I mean, there's two ways to look at it. One is that -- are you getting close to a multiyear deal and then you just had some things to [clue] up and wanted to give yourself some more time?

Or is this a function of you still couldn't come up with agreement and you're going to lock in or continue on what has been a fairly onerous terms from the prior FOA; and you're going to extend it for another year? How do we look at this one-year extension?

Well, in a word -- because you gave me a choice -- it's a good thing. Walter, I think what we feel comfortable with is that the quality of the dialogue, the constructive nature of the dialogue, was very encouraging between the parties (technical difficulty) led us to collectively believe that we ought to get something done so that we could sit in a room together and try and find a good long-term solution for both entities.

So I think that is the summary position; and everything else is just color that everybody can have opinions on. But proof will be in the pudding. We will see what we can collectively come up with. And I am an optimistic that we will find a good solution for both companies.

Matt Troy, Citigroup.

Yes, think you. I was just wondering if you could help me in terms of the incremental operating leverage going forward. You have obviously had a very nice recovery on the bulk side of the business. But obviously with intermodal lagging a bit you could see some better leverage in the back half of the year.

How should we think about just -- obviously the very strong margins you posted this quarter, but potentially what the incremental contribution of a further volume recovery might look like in the back half of the year? Would it come at a higher rate?

Matt, it's Brock. I will just comment from an operational perspective. As we have talked about in the past, our intermodal trains, frankly we have still have a considerable amount of capacity that remains on those existing trains. So at this point, we could see adding more volume to those (technical difficulty) without having to increase our overall train starts.

So from a pure operational perspective, we're in good shape to take (technical difficulty) incremental volumes on without adding a lot of extra train starts or crew starts.

I think -- Matt, it's Fred. Just to complement to that, we see three (technical difficulty) right? So with the work that Brock and his team have done with regard to creating the ability to handle 8,000, 10,000, 12,000 and even 14,000 foot intermodal trains, that is the surplus surge capacity that we have to take those things on without the train starts.

On the merchandise side, we clearly have capability across the breadth of the merchandise business to fill out trains. And I think we will see increasing opportunities as we go forward to perhaps even consolidate trains as we move into our fluidity and asset utilization aspirations.

But remember, on the bulk side for the most part we have maxed out most of those trains. And every one of the incremental tons that comes our way on the bulk side generally will trigger a new train start. So that is probably the breadth of the portfolio for you.

Thanks. Brock, what would be the incremental length you could add? I know it is dangerous to work in the law of averages across a network-based business. But on the international side, is it 5%, 10%, in terms of train length that you could expand without having to change the schedule?

Or is there directional guidance you can help us there in terms of (technical difficulty)?

Yes, at least that amount.

Okay. Last question would be just on PTC. We're hearing obviously from a lot of carriers updated numbers with respect to anticipated PTC investment. Any update to your outlook in terms of expected total spend and what might be deployed in 2010? Thank you.

We commented in the past and it hasn't changed; around CAD250 million. Still early, but around CAD250 million. And about CAD15 million in 2010 that we have appropriated for this year.

All right. Thank you.

David Newman, National Bank Financial.

Morning, folks. Impressive results.

Thank you.

I would like to ask a couple of questions about culture change and the refocus CP has on costs.

First of all, in terms of cost reductions, do you have any sense of how much was attributable to the weather and better conditions, versus initiatives you may have undertaken to improve the operations? In other words, how much of the OR improvement is sustainable in your view? I know it is a hard question to answer, but just to kind of get a sense of it.

Well, I think the vast majority is due to the initiatives that Brock and his team put in place on productivity. Yes, there is some kind of decent winter; but I think you recall last winter we didn't hide behind that or Q4. So our view is this is sustainable.

Okay, and Fred how low do you -- in the past you quoted numbers in the past, but given the focus on cost reduction, how low do you think you can go on OR once you get some volume recovery? (multiple speakers) volume recovery, but when you get there.

Really what we -- when we get to our June 2 Investor Day and we start to talk about what we think we can do over a longer time horizon, I think that would be an appropriate place for us to try and give some better direction in that regard.

At this point in time, we're going to kind of stay focused on the shorter term.

Okay. Second one, maybe Kathryn. You had a CAD100 million cost reduction program which I know is partly volume related. But do you have a sense on how much was achieved in the quarter through facility consolidation, mechanic shops, and the centralization of functions or other initiatives? And what your headcount plans might be as you look in the second half of the year?

Okay. I did mention that we are expecting our expense employee counts to remain around 14,000.

Okay.

So that we don't see any major changes there. In terms of our structural cost initiatives, I am going to kind of repeat what Fred said just a while ago. I really think you have to put everything in context from a structural cost perspective; and that will be some of the focus of our June Investor Day.

So stay tuned for that because I think it will provide a little bit more color for you.

Excellent. Very good results.

Thank you.

Edward Wolfe, Wolfe Trahan.

Just before you jump in, just want to remind everyone we're going to try to limit it to two questions a person in order to give everyone a shot at asking questions.

Sure. Thanks. It's Scott Group in for Ed. Morning, everyone. Just real quick first, Ray, I heard you talk about a plus-4% price and mix. Can you break that out between price and mix?

Yes, what I said further, Scott, was I said that if you looked at price on a same-store basis on the quarter we were basically flat. So the mix is the 4% component.

Okay. Within that flat, can you break out what was the regulated grain and what was the Teck? What is a good core run rate once we get past those issues?

Well, what we have said in the past is that the regulated grain number is about a negative 7.5% adjustment. We have given you numbers in the past in terms of what Teck has been.

Try to stay away from predicting what the future is going to be in terms of numbers. What I can tell you is that we lap the Teck impact in Q2; so we expect to go positive in that quarter.

We lap the regulated grain on August 1. And then the indices that we have talked about we lap going into 2011.

So while I'm not going to be specific and predict the number, I would expect that our change will sequentially improve as we move forward.

Okay, great. Then I understand the message of the tough comparisons going forward. Can you just give a little bit more color? Is it just that the year-over-year comparison is tough? Or are there cost reductions from last year that are reversing and coming back?

Then maybe with that, Kathryn, you talked about how costs come back in step functions. Where are we in that process? How much capacity is left before volume-related expenses really start ramping up again?

Well, that is a lot in that question. But I think Brock answered that in terms of a lot of the step function. It will depend on the mix of the traffic that comes back. So you add train starts as the bulk comes back; but we have plenty of capacity on our merchandise and intermodal trains.

So when you are looking at those types of costs, I think we have given a lot of clarity there.

In terms of anything reversing from last year, we really don't have any knowledge of that. The sustainment of our cost initiatives are only going to get better as volumes improve. That is on those volume variable ones; and then we will provide more detail on our structural cost initiatives in the June meeting.

Okay, great. I will get back in queue. Thanks for the time.

Chris Ceraso, Credit Suisse.

Good morning. This is Allison Landry in for Chris today. Could you guys remind us how much of your business is subject to the fuel indices that you were just talking about?

Fuel coverage overall?

No, I think Allison's question (multiple speakers) the RCA (multiple speakers).

No, so I think -- exactly, exactly.

Well, we have about -- what we said in the past is about 10% of legacy fuel contracts in place that would be subject to those fuel-related indices. Now, we have fuel increases on almost every contract we have in place.

Okay.

So, Allison, just to make sure we're all talking the same language, what Ray's reference is, is that there is a 12-month time lag on a handful of contracts because the RCAF is a retro-looking inflationary vehicle. Whereas others are on a 30, a 90 day, or shorter terms adjustment.

So just to give you clarity, the grain as an example is a retroactive adjustment. That is why we saw that 7.4% negative last year. It was almost all fuel and (technical difficulty) same on the indices that we were referring to.

And last piece, Allison, sorry; just to make sure everybody is clear, is that -- and that is why Kathryn has put in place approximately a 10% hedge or vehicles to ensure that we don't get caught with this intra-year movement of prices.

Then just in terms of you guys posting really good cash flow numbers this quarter, can you talk about what you see in terms of future share repurchases and evaluating your dividends? I know some of the other rails have talked about taking a closer look at that throughout 2010.

Well, yes, having strong cash is a nice problem to have. So as Fred and I look at how we best return to our shareholders, we will look at all opportunities including high-return capital projects that could potentially provide some very quick paybacks as well.

So we still are focused on our balance sheet and continuing to improve that, as well as looking at however we can best return to the shareholders.

Okay. Thank you so much for the time.

Ken Hoexter, Merrill Lynch.

Great. I just actually want to follow up on the leverage question a little bit earlier and the amount of capacity left. I don't think you mentioned how many locomotives, cars, you still have in storage.

And then if you think about length of trains, what length do you think you can continue to add cars on to the back of those? Maybe you could start with what is still in storage (technical difficulty) and furloughs and employees.

Okay. Ken, it's Brock. On the furlough side we are sitting at about 500 people currently in furlough right now mostly in Canada. In fact, we're doing some hiring in the United States as we speak.

In terms of railcars, we're sitting at about 8,400 railcars in storage. We have approximately 130 locomotives in storage; and that is a combination of yard, 4-axle units, and 6-axle units. So again we are in good shape.

And with regards to surplus, if you will, or available capacity in that regard, we have no issues with regards to corridor capacity or yard capacities.

And as Fred mentioned, with regards to asset utilization and spinning our current assets in place, we feel we're in good shape to handle any growth in volume.

You saw the chart that Ray put up in terms of comparing volumes in '08 to '09 and '10. We're nowhere near the types of volumes we saw in '07 and '08. So I've got great confidence that we've got the capacity available, Ken, to meet any of our customers' growing volumes.

I think, Ken -- it's Fred; I will just jump in and reinforce a key point that Brock said. The fleet is what it is. I would love to leave them all in storage and utilize the fleet that we have, be it locomotive or cars, more effectively than we have been able to in the past.

So not only do we have that surge capacity still in storage, but my expectation is that we will move our assets more quickly going forward, creating capacity.

Quick one for Ray, I guess. The move to quarterly pricing, is that going to impact do you think the flow of potash at all?

Well, it's hard to say. I think, Ken, what we said is we have got pretty good visibility through the second quarter. We expect the run rate to be consistent.

Beyond that we really don't have any visibility on volumes or how that might change going forward. So I can't give you any more color than that at this point.

All right, great. Thanks for the time.

Randy Cousins, BMO Capital Markets.

Morning. Ray, I wonder if you could comment on exactly what is going on in Montreal? Are you being -- is your intermodal business into Montreal, particularly the cross-border stuff, being impacted by the high dollar or some of the corridor initiatives of the eastern US railroads?

Well, first of all if you look at the numbers, Randy, there is no question that the Port of Vancouver strengthened more than the Port of Montreal. So you look at the whole European situation versus the Asian situation, and there is definitely a change there.

If you look at our numbers, I think it's important to look at there is really two components to our quarter. So January and February of 2009 were actually our strongest intermodal months. So when you look at the month of -- January and February were the strongest. When you look at the month of March, we were up 13% on intermodal volumes; and we've continued to see that into April, running at 10% or so.

So I think that we think that the volumes have started to stabilize at Montreal, and we're actually seeing some positive changes there. So that should spell some improvement going forward.

I should also comment that we have let some short-haul business go through the eastern ports, as I mentioned in my remarks. So, that is impacting our number there as well.

My second question has to do with the productivity. You guys had an extraordinary improvement in labor productivity year-over-year. But you talked about tough comps.

Sequentially from Q4 to Q1, if I have done the numbers right, based on expensed employees, it is about a 2% productivity improvement. And if I look at Kathryn's guidance for Q2, I am looking at a 3% productivity improvement.

Sequentially can you guys continue to sustain 1% to 2% productivity improvements in terms of GTMs per employee? When do you run into the limit?

Randy, it's Fred. You know, I'm reluctant to get into that at this point in time. I think we're in a pretty important transitionary period with massive volume swings, more than anybody else, 25% and 30% changes by month.

And obviously an aspiration is to do exactly what you are describing. I think by strengthening the bench and bringing some of Ed's experience onto us with risk regard to asset utilization and yard productivity, things that neither Brock and I had that kind of background, I anticipate we will be able to move in that direction. But I'm a little reluctant to start putting numbers on it just yet.

Randy, I will just add as I usually do -- it really depends. And it depends on the mix of the traffic, because just as we spoke earlier, you have different leverage if it is merchandise and intermodal traffic coming back versus if it is bulk.

So the amounts of productivity are always going to depend on how the business and where the business comes back.

Okay. Thank you.

Scott Malat, Goldman Sachs.

Thanks. I just wanted to risk another kind of capacity question, but maybe more specific with met coal. We saw the demand really picking up. Just wanted to understand the ability to keep up with the rising production levels there, and how much capacity we have for met coal.

Scott, it's Brock. As I think both Fred and Ray commented, we would love to handle more coal, so we've got no issues with regards to increasing our capacity. Again, in the supply chain there's many partners.

But from our perspective, we are well positioned to handle as much coal as our client would like us to ship.

Is there some lag time there? Does it take a month to ramp up capacity, or is it just real time?

Well, I think depending on the volumes, obviously, we do have some coal sets that are available to us today. We have the locomotives and we have the people.

I guess if it got to a point where we need to go out and acquire more coal sets, that might take a little longer. But we don't anticipate that as an issue right now.

But I would say that the assets that we have available to us we can get in place very quickly.

Scott, this is Kathryn. I remind you also the chart that (technical difficulty). We are still not close to the volume levels of 2008 and 2007. And also during that time we had our West Cap project going and have completed that. So we have a lot of track capacity in place and we are just anxious to use that capacity.

All right. That's really helpful. Then the other thing, I was just hearing some talk about potential for thermal coal shipments out of Canada for test burns in Asia. Just any thoughts on that or insight to potential there?

We are not familiar with that. I am sure they will pursue any market they can get. Obviously, we service the vast majority of the coal, so if it is going to be involved, if we're going to be involved, we will find out about it when the customer is ready to tell us about it.

All right. Thanks so much.

Tom Wadewitz, JPMorgan.

Wanted to ask you to start with, I guess, a granular question on the yields. It's been somewhat difficult to forecast sulfur and fertilizer and coal yields.

Sequentially do you think they will be reasonably stable? Or do you think you are going to see a significant move up in coal and sulfur and fertilizer yields second quarter versus first?

Well, if we look at the distribution of the volumes, Tom, what we said going forward is that you will start to see -- coal should be at the run rates that you saw in Q1. The thermal business in the US will come back, though; so you'll see some short-haul movement start there.

On the potash side as we said, Q2 will look a lot like Q1. Beyond that, we have no visibility. So I think we've probably given you as much color as we could in the remarks we have provided.

Okay. Then the second question. I'm sure you want to save a lot of the details for your analyst meeting, but are there any initial comments you can provide -- whether it is Fred or I believe you said Ed is on the call as well -- in terms of the initial focus that Ed Harris is going to have?

Whether that is on car productivity, locomotive productivity, scheduled network, just any kind of high-level comments on Ed's initial focus.

Well, I think I made brief reference to it, Tom, in my last comments. That Ed brings a background that I don't have, Brock doesn't have, and we think that the next great opportunity for railway -- that frankly 70% of what we do is intermodal and bulk, so we don't practice merchandise as much as some others do. And Ed has got a deep background in yard productivity, yard asset utilization, merchandise trains.

Our expectation is that will be first and foremost on Ed's target list. But knowing Ed, it will include that and much more. And the collateral benefits of doing that we anticipate will also help us on asset utilization in our intermodal and bulk trains.

So I am going to let Ed get his feet on the ground, get familiar with it, transfer a lot of knowledge. And when we get to June 2, you will have lots of time to spend with both Jane and Ed.

Okay. All right. Thanks for the time.

Bill Greene, Morgan Stanley.

Yes, hi there. I just had a quick question if you have had many conversations with your shippers about their levels of inventory. Do you feel confident that there is a lot more to go in their ability to rebuild those inventories? (technical difficulty) along in what you look at in terms of the inventories? Is the restocking trade sort of over from your perspective?

Yes, Bill, it's Ray. As we are talking about it with our customers, their rebuilding has been in line with both increased sales and increased industrial production in the first half. Really as they look forward, they see that replenishment continuing through to the end of the second quarter.

Beyond that, quite honestly, in the discussions we've had, they really don't have visibility into the second half and what that might be. So they are not able to give us a lot of detail.

Obviously, the second half is going to be very much driven on what goes on with sales. You look at automotive as an example, huge amounts of inventory replenishment. If those numbers at the 11.5 and 12 million continue, then we will continue to see good volumes and shipments going forward. But there is a lot of uncertainty out there still.

Do you sense that your comments would change given the level of the Canadian dollar? If that moves significantly up or down would you change your perspective?

Not really. No.

Okay.

If you look at our segments, there has been a lot of movement in the Canadian dollar. Obviously you get into the housing situation and situations like that. But we haven't really seen an impact from that perspective.

Remember, Bill -- it's Fred. Just remember that the Asian economy drives a big part of our bulk commodities; and the Canadian dollar moving a couple of pennies is not making a big difference given the very high commodity prices by historic standards.

We've had the good fortune to be associated with a number of -- for instance in the auto business, vehicle models that are strong and robust. And again we are not seeing any evidence whatsoever that those volumes are going to be impacted by the high Canadian dollar.

Okay. Thank your for the time.

Jeff Kauffman, Sterne, Agee.

Thank you very much. In the interest of time, my two questions were actually answered already and I will hold off on the strategic questions to the June Analyst Day. So congratulations on the quarter, and thank you.

Thank you, Jeff.

Jacob Bout, CIBC.

(technical difficulty) of your fluidity data here. So you commented that the car miles per day you are seeing some improvement there. But when you take a look at terminal dwell and train speed on a year-on-year comp they are actually moving in the wrong direction. Maybe just comment a bit on that.

Sure, Jacob. It's Brock. Let me just go through the three metrics we publish publicly that you mentioned there.

So on the train speed I think I did address that situation. Again, that was the mix. Obviously bulk trains move a little slower than our merchandise and our intermodal trains.

You know, the DM&E this past winter, as some of our US friends know, that the Midwest, particularly South Dakota area, was a record winter in terms of snowfall. That did have a big impact on the fluidity of that particular network. But it is a network; and what happened on that part of the network did impact our terminals in the St. Paul area and Chicago area.

Those are the two terminals, frankly, where our processing times were driven up quite high and caused our overall terminal processing times to be higher than we would have liked them to be. So we knew where it was centered.

And on the cars on line side, as I mentioned, cars on line were up 8%. But volumes were up 15%. Really we saw good productivity and fluidity there.

Where we saw the -- let me say not the type of productivity on cars we would have liked to have seen, again it was on DM&E where we had more cars than we would have expected to have given the winter conditions that they faced on that particular property. I am pleased to report that that property has now got its fluidity back and we're seeing a significant reduction in their car inventories on that property.

So very isolated instances affecting each of those three particular metrics, Jacob, and I would expect to see improvement in the coming quarters.

Jacob, one thing I will add. The public metrics that you are looking at, the 2009 numbers for train speed do not include the DM&E as well. So they did join our train speed numbers January 1, and as they are a heavily bulk network, that does also change the mix and did lower the speed.

So I am not sure which train speed you are looking at. But if you are looking at the public numbers, do note that you do see a DM&E January 1 impact.

Thank you for that. My second question, just on the potash volumes, maybe you can talk a little bit about what you are seeing in the domestic market versus in the export market.

Well, as I said in my remarks, Jacob, the domestics have been pretty strong. In the first half we saw a lot of replenishment down into the North American market.

Going forward, we really don't have visibility into what the fall will look like. When you look at planting intentions, there is more soybean and corn in our territory. That usually means more fertilizer application. But we will just have to wait and see in terms of what is happening in that segment.

So the majority of the improvement we are seeing has basically been driven by the North American volumes?

No, we have seen big growth in the export market place. So when we look at our business, potash on the export piece makes up the majority of our volumes; and we have seen large growth there.

We have also seen growth in the North American market through the first quarter. We expect that to continue into the second quarter. It's really the second half where we don't have a lot of visibility into either of those marketplaces.

Okay, thank you.

Benoit Poirier, Desjardins Securities.

Thank you very much. Good morning. First question on the intermodal. When we look at pricing, I recall you mentioned a couple of quarters ago that pricing was a little bit more difficult. But when we look at the metric in Q1 in terms out of yield, it seems that the yield is better than a couple of other commodities.

Does it mean that pricing is slightly recovering for intermodal? Maybe could you also break down the performance between the domestic and intermodal? Thanks.

Okay. So it's Ray. First off, in terms of the differential that you are seeing there, a good portion of it is -- I'd mentioned that we have seen some short-haul traffic reductions in our mix. So you are seeing some longer-haul intermodal traffic, so that is going to change your breakdown between your RTM gain and your carload gain.

On the pricing side, I think we have been pretty consistent in saying that over the last several quarters on renewals we have been coming in on average in the 3% to 4% range. That is what we continued to see through the first quarter across our intermodal and other business. And it's what our target will be going forward.

So I think that that is that component there. And your second question again was?

The breakdown between domestic and international?

Domestic and international truck. So we have seen sequentially better growth on the domestic side. We have seen constant improvement from January to February to March.

The international side, as I mentioned in my remarks, we saw good growth off the Port of Vancouver. But relatively flat at the Port of Montreal.

Looking forward, we think that Vancouver will continue to be stronger than it has been. And domestic continues to see the sequential improvement through to and into April. So we are feeling pretty good about where those numbers are right now.

Okay. For my second question, when we look at the -- in terms of differential between the RTMs and the carloads, you mentioned that the gap should reduce going forward. But what kind of numbers we should expect for the year and going into the following quarters?

Well, obviously that is going to depend on what happens to the breakdown between the commodities, etc. So it's pretty hard to pinpoint exactly where it's going to be when we don't have a lot of visibility to the second half.

What we have seen is that we are returning to a more normal split in volumes and origin destinations between our bulk, intermodal, and merchandise business.

So as that bulk comes back -- just as we saw a reduction last year, we are seeing the increase this year. So it's a return to the more normal pattern and we should see that continue.

What we're trying to highlight is that in the second half of 2009 we had seen some good bulk recovery. So that spread between them will start to minimize as we get into the second half of the year

Okay. Thanks for the time.

Steve Hansen, Raymond James.

Yes, good morning, everyone. Just a quick one for me. One of your competitors recently talked about accelerating their CapEx budget in light of better than expected fundamentals. Can you just remind us what your intended spend level will be for 2010 and whether or not you might be inclined to increase it at this point?

Yes, I think our guidance is CAD680 million to CAD730 million. And just as I mentioned, as Fred and I are looking at our strong cash position, we will look opportunistically if there is any good projects that have a very rapid payback.

So it is what it is right now, but we will continue to look at what the needs of the organization are.

Okay. Thank you. Solid quarter.

Edward Wolfe, Wolfe Trahan.

Morning, guys, just real two quick follow-ups if I can. Kathryn, you talked about -- I think I heard something like a CAD4 million per quarter pension expense headwind. I think I remember that being closer to like CAD12.5 million last quarter.

Can you talk about the changes in the assumptions there, please?

There are really no changes in the assumptions. It really has to do with the US GAAP restatement; and it's very consistent with what Brock gave in the US GAAP. So back to that presentation and you will see that we are right on target with what we gave in that.

So under Canadian GAAP, the differential would have been greater. Under US GAAP, it is smaller.

That makes a lot of sense. Thanks. Then last one maybe for Fred or Ray. Back to the new Teck contract. I understand that the rates are flat. Can you talk though about -- if you can give any color on what the volume threshold is.

And then if there is a fuel surcharge in that contract or fuel recovery. And then lastly if there was any change in the mix in terms of the percentage of traffic you are passing off at Kamloops.

You know, I think we go back to what we told you in the press release as it relates to the prices which is that there is a target level. If the volumes on an export basis fall short of that, then a higher rate would be realized.

In terms of the mix of traffic, this might be right -- if you looked at the first quarter, that's the expectation that we would have, that that same kind of mix that we saw in the first quarter would continue through the remainder of the year.

Now I would just highlight for you that if you look at coal in total in the first quarter, those thermal short-haul movements in the US were down by about 8,000 carloads. So you have to factor that into that equation.

And yes, there is the standard fuel in the contract.

And I think the last part of your question was simply how much over Kamloops; and I think again Q1 is kind of representative of what one would expect on split.

Great. Thanks so much, guys. Appreciate it.

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

Well, very good. Thank you all for taking time to spend with us and we look forward to spending time on June 2 with all the interested parties. And we will see you all then.

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