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Canadian National Railway Company (NYSE:CNI)

Q2 2009 Earnings Call

July 20, 2009 4:30 pm ET

Executives

Robert E. Noorigan – Vice President, Investor Relations

E. Hunter Harrison – President, Chief Executive Officer

Claude Mongeau – Executive Vice President, Chief Financial Officer

James Foote – Executive Vice President Sales and Marketing

Analysts

William Greene – Morgan Stanley

Edward Wolfe – Wolfe Research

Walter Spraklin – RBC Capital Markets

Christopher Ceraso – Credit Suisse

Jacob Bout – CIBC World Markets

Thomas Wadewitz – J.P. Morgan

Jason Seidl – Dahlman Rose

Bill MacKenzie – TD Newcrest

Matthew Troy – Citigroup

David Newman – National Bank Financial

Cherilyn Radbourne – Scotia Capital

Randy Cousins – BMO Capital Markets

Ken Hoexter – Bank of America

Operator

CN's second quarter financial results conference call will begin momentarily. I would like to remind you that today's remarks contain forward-looking statements within the meaning of applicable securities laws. Such statements are based on assumptions that may not materialize and are subject to risks, described in CN's second quarter 2009 financial results press release and analyst presentation documents that can be found CN's web site and such actual results could differ materially. Reconciliations for any non-GAAP measures are also posted on CN's web site at www.cn.ca.

Welcome to the CN's second quarter 2009 results conference call. I would now like to turn the meeting over to Mr. Robert Noorigan, Vice President, Investor Relations.

Robert E. Noorigan

Good afternoon and than you for joining us for CN's second quarter 2009 financial results. I'd like to remind you again about the comments that have already been made about our forward-looking statements.

Joining us today is Hunter Harrison, our President and Chief Executive Officer, Claude Mongeau, Executive Vice President, Jim Foot, Executive Vice President of Sales and Marketing, and also joining us today for the first will be Luc Jobin, our Chief Financial Officer and Executive Vice President.

After the presentation we'll take questions from those of you who are listening on the phone. To identify yourself, when you're asking the questions and in order to be fair to everybody can you limit the number of questions that you ask to two or three. With that, it's my pleasure to introduce CN's President and Chief Executive Officer, Hunter Harrison.

Hunter Harrison

Thank you everyone for joining us. This afternoon, let me make a few overall comments about the, pretty pleased with what I thought was a pretty stellar performance when you consider the challenging environment that we experienced in the second quarter.

A couple of highlights, our revenues were down 15%. That's based on ca loads being down 22% and our revenue on ton miles being down 14%. And I would call to your attention, I know most of you are aware of it now, that we have started to publish on a weekly basis our revenue ton miles in addition to carload numbers from the AAR. I have never been a big believer that car loads were a great proxy for revenue performance and I have brought that to some of your attention and your response was, well if it's not a good practice, give us something else.

So we now try to provide you with revenue ton miles and you can see that the second quarter, the difference between the car loads at 22% down but the revenue ton miles only about 14%, and I think that you will find over time that it's even a broader spread there.

The operation ratio came in at 67.3%. Once again, considering the down volumes that we've experienced pretty good performance there. Our EPS was at $0.82 adjusted for the tax benefit that Claude will talk about further, came in at $0.76.

But what I really wanted to talk to you about and emphasize to you is Slide 2. I think it would be the key metrics are the keys to being able to produce this performance in this environment. Claude and Jim will have some comments and I'll have some comments at the end about a little bit about what we see in the future to the best of our ability. It's tough to call, but these metrics will be extremely important as we enter that kind of environment. Let me call a few to your attention.

Two that are not listed here was our road crew starts were down 23% year over year with the ton miles being down 15% and our yard crew starts which surely indicate the impact of smart yard and some of the rationalization that we have seen driven were down 32%. That is performance that you do not see very much.

Our gross ton mile per train mile, effectively our train size improved 3%. The cars per yard switching hour which are one of the key metrics which allows the yard crew starts to be down, was down 20%. Our dwell time in the terminals improved 9%. Our gross ton miles per available horsepower was improved 2%.

Car miles per car day made a nice move up of 17% and to some degree that was driven by the improvement in train velocity improving 14% up to 29.2 mph which I think is probably the best quarter that we've ever experienced.

So overall, outstanding performance, and I would bring to your attention that in trying to make these types of improvements, it's much easier when you're volumes are rising and improving than it is when you're going through downward cycles that we are now, so you bring back "normal" volumes that we were experiencing prior to this recession that we're experiencing would even improve further.

So I'll have some additional comments at the end. As I mentioned to you, let me have Claude go through some of the financial and the revenue experience.

Claude Mongeau

As Bob said earlier, given that Luke stepped in as CFO in early June, I actually oversaw two months of the quarter and he did only one, so I win and I guess the opportunity to do this report which will be my last one as the CFO. I'm very pleased indeed to give you this report because we turned in very, very results in spite of a very challenging economic environment.

Indeed, our volume of business came down a full 22% or 14% depending on whether you use car loads or RTM's as the proxy. Despite these headwinds, in a high fixed cost business, we came in with a reported EPS of $0.82 which is only 14% below last year. If I exclude the $0.06 of mainly non recurring tax benefits, our adjusted EPS was $0.76 which is roughly 16% lower than Q2, 2008.

This performance was achieved by maintaining solid pricing in the face of much lower volume and also much reduced fuel surcharge revenues. As Jim will explain to you in a minute, adjusting for FX, our revenues were down 21% but we were able to effectively match that with a 20% expense reduction on an FX adjusted basis.

This performance drove a 67.3 operating ratio, only one percentage point higher than last year. If you look at below the line, the only key item of note is the impact of the non recurring tax benefit on our effective tax rate which came in at 20% on a book basis. The Province of New Brunswick was the latest in Canada to enact a lower corporate income tax rate in Q2 and we still have the Province of Ontario which should announce the corporate income tax reduction in Q3 or Q4.

If the do, this will give us a $90 million to $100 million deferred tax recovery which would also bring our full year effective tax rate to around 20%. After that, going forward in 2010, pending no further changes our tax rate should come back up to the 29% to 30% range as we previously guided.

Turning to expenses, as I said we were able to reduce our cost structure by a full 20% on an FX adjusted basis. Clearly fuel expenses were the biggest driver with WTI at just $60 per barrel which was less than half of where oil was in the second quarter last year. This drove a 62% reduction in our expenses on an FX adjusted basis.

But the team also delivered outstanding productivity improvement to match our operations to the business level that we had during the quarter, all the while protecting service while they were doing that. However, key on those key statistics because they are remarkable.

On the productivity front, our yard troop was improved 20%. Our car velocity improved 17% to a record 210 per car day. Our train velocity improved by 14%. Train load improved by 3% despite a reduction in GPM of basically 15% and our locomotive utilization also improved 2% during the quarter.

Looking at it from a resource angle, which is the other way, crew starts were down 25%. Our locomotive fleet was down 25%. Our car fleet was down 20%. Our work force, if you adjust for the acquisition for the EJ&E was down roughly 7.5% on a year over year basis, and our overtime expenses were down a whopping 50%.

If I look at it by expense category, labor and fringe benefits expenses were down only 1%, but frankly, higher stock based compensation and also pension expense brought in a roughly 6% headwind. If I exclude these items, which are largely uncontrollable, our labor expense would have been down 7% to 8%, very much in line with our work force reduction adjusted for the close to 600 employees that we took on for the EJ&E CSQ.

Purchase, service and material expenses were reduced by a full 17%, reflecting much lower third party costs, less outsourcing and also disciplined cost management across the board. Equipment were up only 3% with the impact of lower lease expenses as the result of our velocity improvement being more than offset unfortunately by lower car higher income from the much reduced volumes that we have offline.

Casualty and other expenses finally, were up 2%, but they would have been down double digits if not for the legal claim credit which benefited us in 2008.

If I turn to cash flows, we also did very well with $463 million of free cash flow generated year to date. This is an increase of $238 million over 2008. This obviously includes the $150 million of proceeds from the sale of the Weston sub-division to Go-Transit. But even if I exclude this transaction, our free cash flow is $310 million, $88 million higher than last year.

This performance was achieved by pulling on all levers, in particular, strong working capital management. Just to give you one example, our collection cycle for receivables finished Q2 with a DSO of 24 days and that is despite a number of high profile restructuring during the quarter.

We continue to invest in support of our business. Net CapEx is just under $500 million. We are smartly targeting our CapEx expenditures on key projects basically focusing on productivity, safety and service. With the strong cash generation, we built up our cash balance.

At the end of the quarter, our cash balance was just slightly ahead of $410 million and the cash balance is there in anticipation of our August 1 bond maturity which will require $365 million. Once this is repaid, our next maturity is only in October of 2011.

Clearly in the current environment, we are focused on prudent financial management and maintaining the flexibility of our strong balance sheet. We will be able to reassess our use of cash when the economy starts to recover.

Let me just wrap up with a few words on the current outlook. Clearly we can be very product of CN's performance during the first six months of the year. We delivered solid results on both an absolute and a relative basis given what was arguably the worst downturn since the great depression.

Looking forward, we see some emerging signs of improvement in the environment and we are cautiously optimistic that business volumes have bottomed out. Hopefully, we will start to see a gradual recovery in the coming quarters shaping up.

In the meantime, our focus remains squarely on right sizing our assets and running a fluid network. With the significant shock absorbers of the weaker Canadian dollar, and lower oil prices behind us now, this is not time to let our guard down. We will remain steadfast in our disciplined approach, yet prepare ourselves to be able to profitably handle the rebound when it comes forward.

And with that, I'll turn it over the Jim.

James Foote

I'd like to go through the second quarter revenues and as usual I'll do that on an exchange adjusted basis. Total revenues were down 21%. Rail freight volume declined 14% on an RTM basis and 22% on a car load basis which obviously had a significant impact on our results. But lower fuel surcharge revenues due to the lower fuel prices in the quarter had an almost equal negative impact.

If you strip out the impacts from fuel and the lower other revenues which were down 24% primarily due to lower business volumes in the non-rail transportation activity, especially the dock and vessel business tied to iron ore, you get to an apples to apples freight revenue decline of about 10%.

Price increases in the quarter were again in the 4% to 5% range, consistent with our strategy of having a long term view of reasonable, sustainable pricing that is tied to the value of the service we provide our customers. As I said in the past, we do not view transportation as a commodity, but as a service and are not discounting our prices to attract business.

The merchandise business saw further declines this quarter as many producers continue to adjust operation rates to reflect reduced demand. Chemicals continued to be weak; however, petroleum products benefited from spot opportunities in the petroleum segment which helped offset lower volumes in plastics and sulfur.

Metals and minerals business segment experienced a worse performance in the quarter as iron ore shipments dipped to record low levels during the weeks 18 to 23 period. Forest products was also down again this quarter, but seems to have stabilized as volumes have been steady on a weekly basis since the beginning of March. Automotive also remained very weak.

The bulk franchise had a blend of both strength and weakness. Grain benefited from a large Canadian canola crop and a strong export wheat program. However, this was offset by slow U.S. corn and soy bean shipments.

Fertilizers continues to be impacted by the farmers' decision to delay applications. The coal side, U.S. thermal coal continues to benefit from strong production from online mines and increased related to the acquisition of EJ&E, while our Canadian net coal has been impacted by reduced export demand.

Reduced consumer demand continues to impact the imports for overseas intermodal. Improving volumes over the Port of Prince Rupert are being offset by ongoing significant year over year declines to both the ports of Vancouver and Halifax. On the domestic side, that business remains relatively stable.

A little bit about the next slide about going forward. I'm optimistic that volumes should be better in the second half than they were in the first half. The question is just how much better. The merchandise business segment appears to have bottomed. Steel production capacity is coming back on line as is auto production.

New business is being brought on in the petroleum area and as I said earlier, we believe that the forestry industry has stabilized. On the bulk side of the business, reasonable crop production combined with a strong carry in will provide us with above average grain stocks to move out of our draw territory in both our Canada and the U.S.

Canadian metallurgical coal volumes are showing strength, especially with the strong export moves to China and will be augmented by volumes from a new source. International intermodal volumes over Prince Rupert are doing very well and will continue to improve sequentially for the rest of the year. Domestic intermodal should remain near flat with last year.

Those factors combined give me a more optimistic view of the second half of the year, and with that, I'd like to turn it over to Hunter.

Hunter Harrison

Thanks for those presentations. Well, let me wrap this up by making a few comments here. We obviously are going to continue to drive productivity and efficiency but first point, we're not going to do that and let our service and safety falter. I can tell you that.

Right now, our service levels in spite of dealing with these downturns are better than they've ever been and I'm tapping on wood at the same time. We've year over year performance in the area of increase and casualty has done much better, and I think you can learn from Jim's comments that we're going to sustain our pricing disciplines that we have been able to achieve for some number of years now.

We're going to clearly focus on some additional structural growth opportunities and I think we are well positioned as the economy improves. Jim's point has just brought it on just how much it's going to improve.

From my personal standpoint, I think we've seen the bottom. I think we've seen for the first time starting in May sequential run rates, not year over year but month over month picking up modestly. I think that will continue into the second half and I'm talking more in the context of CN's business, not the overall economy in Canada or the U.S., but the business that affects us.

So I am pretty optimistic that the second half will be a better performance given the revenues that we've experiences the first half and I'm excited to be able to see some of these volume increases and have a further impact of the productivity metric improvements.

So with that, we would be happy to entertain questions from the audience.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from William Greene – Morgan Stanley.

William Greene – Morgan Stanley

Hunter, I just wanted to follow up on your comments here about we've seen perhaps the bottom in your business. How does a rebound look in your numbers? What are the first categories where you see the benefit and what moves first and then how does that follow through the rest of the business?

Hunter Harrison

I'm looking at it from a more 40,000 foot level of overall RTM's. Our RTM's have improved, June over May, July over June. It appears that that trend will continue. Jim's comments about the metals and minerals, I guess we could say it could get worse. It was down as low as 40% plus. To bounce back would be down 30%, not all bad.

We've seen some positive signs in chemical. I think the bulk, we're going to be fine with the grain, coal opportunity, and these are modest gains, but gains. Jim's right, there's not been as much positive sign on the lumber side, but a little bounce back there, some issues positive there. I think the most positive sign to me has been the last six or seven weeks intermodal has been pretty strong, particularly on the west coast.

We've made some operating changes there and I think that gives some indication of support for the improvement in Asia and China with those business levels which will only help us. So that's a little commentary on what I see.

William Greene – Morgan Stanley

Given that we may be near a bottom and the cash flows that Claude outlined here were actually quite strong, shouldn't we think about having a buy back, a more regular one in place given where the stock is?

Claude Mongeau

I think we have to wait to see what this economy does to confirm itself and that at the end of the first quarter; we have gone a little bit over where we want to be in terms of our balance sheet strength. So we've been replenishing our cash balance in anticipation of our debt maturity coming up here and our short term focus in on keeping a strong balance.

When the economy is clearly on the recovery path and our cash will improve, that's when we will be in a position to reassess where we are in terms of use of cash.

William Greene – Morgan Stanley

Any unfinished business here before you leave at your end?

Hunter Harrison

I'm trying to stay current on all my files and now I think we're positioned for a smooth transition and I don't think there's any trash I'm leaving behind.

Claude Mongeau

I can tell you from my side we haven't witnessed any less. We still get those phone calls and they're pretty intense.

William Greene – Morgan Stanley

So I guess there's no one big merger you wanted to do right before you leave?

Hunter Harrison

Just times got me filled.

Operator

Your next question comes from Edward Wolfe – Wolfe Research.

Edward Wolfe – Wolfe Research

Can you talk a little bit about the recent announcement with the Tech [Temenco] contract and maybe what the pricing is like relative to your other business and what you think the opportunity is here longer term.

James Foote

This is kind a topic that got a little bit of play, be glad to talk about it. First of all, we're very happy to be moving the coal for Tech and we hope that we do a very good job for them. I think what people need to understand, is that if a customer or potential customer comes to us and asks for a rate to move their product, we are obligated to quote a rate to them, and we did that with Tech at a rate that was very consistent with the other rates that we have in place to move coal and apparently Tech liked our service which is a direct move into the terminal on the west coast, and the price and chose us to move some incremental or tonnage for them from Kamloops to the terminal.

So we're very pleased that they chose us.

Edward Wolfe – Wolfe Research

So when we start to see that reported, will we see a major change in the reported yields? Is there a mix change or price change or something for coal or will it be seamless to the way we see it? We won't notice it.

Hunter Harrison

The only thing that you will see is in our consolidated coal revenues would more likely than not, and I haven't run this out pro forma, but I'm attempting to answer your question, our yield should increase. The western Canadian metallurgical coal moves on a per car or a cents per RTM basis, move at a higher rate clearly than some of the short haul interline moves that we have in the U.S. of PRV coal as an example.

Edward Wolfe – Wolfe Research

Is that starting to move already? When is this ramped up?

Hunter Harrison

I believe that coal started to move, and correct me if I'm wrong, July 10, within days after the announcement and it's about a train a day, and yes, it's moving.

Edward Wolfe – Wolfe Research

And the first question I asked also, what's the opportunity longer term? The way the announcement was released, it said this is through the end of the coal year this year. Is there the opportunity to go beyond that?

James Foote

The terms of the agreement that we have with Tech are confidential, but I think as with any business, we will try to do the best job we can of providing a good service to Tech and it's really up to the customer. It's not up to us.

Edward Wolfe – Wolfe Research

Claude, and you talk about, if I just look at compensation per employee, it looks like it's up 11%. I know there was something in the comp a year ago, but even sequentially, it's down quite a bit. What's going on with the average comp per employee?

Claude Mongeau

I think for the most part, other than the normal wage inflation, we have reduced our work force in line with what I said, and we are reducing our overtime expenses quite significantly, almost 60% on a year over year basis. But what is driving the comp per employee up a bit is the stock based compensation. That is the movement of the stock rates from beginning the quarter in both years and there's been a big swing on a year over year basis. That explains roughly 5% increase in labor and fringe expenses.

We've also reduced our overall capital expenditure and that reduces our capital credit, so that tends to impact a little bit the reported labor against the number of employees because some of them are working out there and we're not getting the capital credit that we did last year.

Other than that, we're focused on every aspect. We're asking our employees to take additional vacations which is reducing our vacation accrual. We're reducing overtime and adjusting our workforce the way you would expect in a well run railroad.

Operator

Your next question comes from Walter Spraklin – RBC Capital Markets.

Walter Spraklin – RBC Capital Markets

Coming back to the coal agreement, obviously this was an enactment of one of the regulatory changes that allowed you to do, or allows the customer to do a change. Taken away that one, if you were to look back at some of your other customers or lines, have you seen either coming to you more requests for quotes on interchange, LLC quotes, or would it have been consistent recently with what it's been in the past?

James Foote

There's no change in the regulations here that allowed this customer to decide to have an interchange rate at Kamloops. That ability has been there forever as far as I know. So no change in the regulations there.

I have not seen any increase in any kind of activity from customers that are trying to any kind of rate shopping. We're very eager today to do anywhere Rule 11 rates which would be gateway rates and have always been open in that manner. Haven't seen any kind of increase, haven't had an FOA around here for a couple of years, and I personally handle all the FOA's and win them all, so maybe that's why we don't get them.

Walter Spraklin – RBC Capital Markets

I'm hearing more and more push back from customers, not about the freight rate or the base rate of 4% and 5%, but rather the significant increase they're seeing in ancillary charges. How much of your 4% to 5% is built in in sort of ancillary charges at the price number?

Hunter Harrison

That 4% to 5% that we talk about is a base rate increase on a same store sales basis. Our policy as it relates to ancillary charges is that we have fair, consistent rates in place that are consistent with the industry practice. The only thing we do is if we charge somebody for one of these services, we expect to collect on it. So we're aggressive in terms of collection.

Because we are aggressive in our collection, and don't take these things as some bargaining ploy to trade back and forth with our customers, our asset utilization, our turn times, the dwell times with our cars sitting is improved, and therefore that impacts on our service.

So because those dwell times improved, the actual cost to the customers goes down. So our charges that the customers are talking about are going down. The revenue stream that we're collecting from that is going down and that is exactly the behavior we're trying to foster in the marketplace, is to get the cars loaded and unloaded and moving on the railroad, which provides a better quality service.

Walter Spraklin – RBC Capital Markets

Claude, one of your competitors last week announced a casualty reserve adjustment or benefit there. They had their review in the second quarter. Are you having reviews upcoming either on casualty reserves or any other what we could call lumpy that might have an impact other than the tax lift you're getting on that lower corporate tax rate.

Claude Mongeau

We look at our cash reserve on an actuarial basis every year, at least once a year. As you know, over the last couple of years, we had improvement in this area. We had significant reduction in our legal claims for operational disease. For instance, asbestos claims. We will have another review in the second half of the year and hopefully we continue to have improvements, but nothing different than what we've had in the past few years.

Operator

Your next question comes from Christopher Ceraso – Credit Suisse.

Christopher Ceraso – Credit Suisse

On the decline in the yard crew starts, 32%, that sounds like a dramatic change. Can we just talk a little bit about how you do that? How is it down so much more in volume and do you feel like maybe you run the risk of being too tight when volumes start to get better?

Hunter Harrison

This is the result of some efforts that have taken place over the last three or four years that we have talked about ongoing. This is part of the smart yard project. It's part of the justification for the investment in the Memphis yard where we put in a mini hub. We have closed the hub at Flatrock some time back.

We've effectively closed Battlecreek terminal. We have closed Fulcon terminal. We have closed the hub at Edmonton, and the list goes on an on. So this has been planned for some time. It just so happens that from this standpoint, it happened to work when we needed it the most.

Are we positioned to handle business as the economy improves? Just try us. Yes. These metrics will not suffer as a result. If you peel these back, what you'll find is remarkable, basic raw productivity gains, I like to call it.

If you go to our largest yard, effectively the only two remaining in Canada, Winnipeg and Mack Yard, Mack Yard productivity over the last five years is up like 75%. Their crew starts and all those things that have added changes.

So this is the coming together of the strategies and plans that have been in the works for some period of time, and I would expect going forward, as volumes come back, the figures improve from a productivity standpoint on a per basis.

Christopher Ceraso – Credit Suisse

What was the change in yard crew headcount and how many of those people are just furloughed versus how many have been let go?

Claude Mongeau

Most of them, the ones that are recently hired will get laid off, but we have been making a concerted effort to actually use the employees that are being released from transportation and encouraged them to take on work in the engineering forces to help us address attrition. So I think as we speak, we have roughly 180 employees for instance which are transportation employees, working on engineer gangs and we have a few that are laid off waiting to return to work when the business comes back up, but we are managing this with a very close eye trying to keep employees gainfully employed at the same time as we are effecting the productivity change.

Christopher Ceraso – Credit Suisse

Your headcount wasn't down 32%, right, just the crew starts? What was the headcount decline?

Claude Mongeau

Our transportation employees are down about 1,000 on a year over year basis, so on the base of roughly, 5,000 or just under 5,000 employees. That gives you an order of magnitude. Some of them are being used to fill in work on engineering side as I discussed, and others are being laid or sit on fertile boards.

Hunter Harrison

Depending on whether you're talking Canada or the U.S., as Claude mentioned to you earlier, some of this productivity is the result of drastic reductions in overtime for example. Some have gone to these other crafts as Claude had mentioned, and some of this is simply a case that a crew person that was making $120,000 last year might be making $55,000 this year because of less work and less overtime, but not directly related 32% to the headcount.

Claude Mongeau

Our overall overtime is down 48% so that just gives you an order of magnitude of the embedded productivity.

Christopher Ceraso – Credit Suisse

Do you think there's any risk of any kind of retaliation on the behalf of other railroads that might have lost some business to you?

Hunter Harrison

I hope not. Look, this is a competitive world. It's our responsibility to be out there and be competitive as it's others' responsibility. I would imagine, I don't know that they're giving us any freebies. If they can come and get some of our business, and do a good job for the customer and compete, I would imagine they're going to do that as we will do.

That's what the free world is about, is competition. It's what makes the world go round. So I'm not worried about retaliation. That's just part of the game we're in. We play it better than anybody.

Operator

Your next question comes from Jacob Bout – CIBC World Markets.

Jacob Bout – CIBC World Markets

Can you give us your thoughts on the Rockefeller Rail bill? How much input have you had? How do you think it's going to impact CN and the industry going forward?

Hunter Harrison

From CN's perspective, and let me qualify that. First of all, we've had our opportunity to have input with the personnel we have in DC. I have not personally seen the final product. I don't think the final product is out. I have some ideas of some of the potential issues in the legislation and I guess I would give you this comment.

None of it I'm losing sleep over. I think its things that are very manageable on our part. I hope it doesn't create a lot of bureaucracy and inability to do business effectively, but I don't think we have trouble with some of the anti-trust issues.

We just want to be treated like everybody else and the only thing down line, and I don't think this is contemplated whatsoever in the Rockefeller bill, if we ever get into rate regulation, that's a different animal. But I think the Rockefeller bill, I think there's some compromises being discussed. I think there's some fine tuning, and I think it's something that we're comfortable with.

Jacob Bout – CIBC World Markets

So at this point it doesn't feel like regulation to you?

Hunter Harrison

No, not at all.

Jacob Bout – CIBC World Markets

Turning to pricing, just walk us through your contracts that have been re-priced for 2010 and what the pricing has been on those contracts.

James Foote

We have somewhere between 50% to 55% of the business for 2010 currently re-priced in the range that we've been talking about, 4% to 5%.

Jacob Bout – CIBC World Markets

And how did that change from last quarter?

Hunter Harrison

We have contracts that are, the average length of our contracts is slightly less than two years and we've got significantly more tariffs than we used to have so the duration of our agreements is shorter in length. So as we move forward through the year, I think at the end of the quarter last time, I think we said around 25%.

It's just going to progress. It's pretty smooth. There's no one big quarter where we have some large pricing activity.

Jacob Bout – CIBC World Markets

Turning to intermodal, we saw freight revenue per RTM down about 13%. Just comment a little bit about what's happening there, the competition from the truckers, just what's happening there on the intermodal side.

Hunter Harrison

First thing you've got to do is you've got to get as I try to do as I discuss these items, you've got to get the noise associated with exchange and the fuel surcharge out of the numbers in order to do any kind of a freight on an RTM basis or whatever that is.

So if you strip out exchange and you strip out the $200 million or so lesser revenues from fuel surcharge, our sense per RTM was actually up total 3% with all of the business units being positive. And you're right, the only one that was down was intermodal being down only 4%.

And the reason for that is, it's a mix issue. The volume growth that we're seeing is coming through Prince Rupert and as I said before, as we price these services out of Prince Rupert, we've always said it was a premium service at a premium price relative to the other terminals. But the length of haul on that traffic is longer.

So it has a lower cents per revenue per ton mile because even though slightly premium priced, it's not totally commensurate with the length of haul which is born out by, short answer is if you don't believe me, the average revenue per load in intermodal is up 4%.

So it truly is a mix question there. But everything else is positive.

Jacob Bout – CIBC World Markets

And maybe comment on the competition of truckers in Vancouver.

Hunter Harrison

There is no really truck competition for the international import. Nobody's going to truck that business from the west coast to Chicago, Memphis, Toronto or Chicago, so that's rail. The domestic intermodal, and a lot of people are talking about the fact that the truckers clearly have not maintained their pricing discipline like the rails have, but we are not chasing freight out there with price as I said earlier.

Truck rates are traditionally higher than rail rates. Customers at this point in time want to find a low cost alternative which is rail, and so we're growing share industry wide in the domestic intermodal business, and we're not different.

Operator

Your next question comes from Thomas Wadewitz – J.P. Morgan.

Thomas Wadewitz – J.P. Morgan

I wanted to see if you could give some parameters for third quarter year over year volumes. You did provide some comments about why you think volumes may get a bit better in third versus second, but if you're down 22% year over year in second quarter, do you think third is down 15% or down 10%? Any kind of broad parameters you can give to help us with your thoughts on the third quarter volumes.

Hunter Harrison

I think what we've said is about all we can say at this point in time is that we expect that the volumes in the second half will be better than they were in the first half and as I said, the question is how much.

There are certainly signs out there of why we've come to that conclusion, but don't feel comfortable giving any more information than that.

Thomas Wadewitz – J.P. Morgan

Your typical seasonal pattern, volumes would be quite a bit better in second half than first half, so it's possible that your year over year doesn't improve? Is that a fair way to look at it?

Hunter Harrison

I think, my comments earlier, if we're looking at June over May and July over June, and you take the seasonal factor out of there, we are right now seeing sequential increases as modest as they may be.

To take the whole second half and try to predict what those numbers are going to exactly be and compare them year over year in this kind of environment, is kind of like a stab in the dark and I just don't think it would be helpful.

We've said this all along. As the smoke clears, we'll share with you what we see and what we think we can do out there, and if you get some information, share it with us.

Thomas Wadewitz – J.P. Morgan

A question on the pricing side; it seems that your 4% to 5% that you're able to achieve on pricing is pretty immune to what the volume growth has been or the volume decline has been and I'm wondering when you see strong volumes eventually do you think that that pricing that you're able to achieve ramps us or instead of 4% to 5% you see 5% to 6% or even beyond that, or is it the type of thing that you're just pretty much insulated to volumes but the pricing is not going to be that sensitive to a cyclical recovery in terms of getting stronger.

Hunter Harrison

I will try to take the criticism that I took two or three years ago when everybody told me that 4% to 5% should be 6% to 8% then and I think we're trying to have long term, sustainable pricing and it benefits you in times like this if you're reasonable, and maybe you leave a little bit on the table in the peak years, but that's the strategy that we're employing and that's what I think we'll do.

Thomas Wadewitz – J.P. Morgan

The improvement, I think you said in train length was 3% higher in this environment, so that's highly impressive. We'd expect train length to be down when volumes are down so much. But then volumes come back, is there still room for further improvement in train length so you could see some operating leverage to volumes coming back, or is that tough to do given how well you sustained train length in this downturn?

Hunter Harrison

There could be some modest improvements there and it's all lane sensitive and where are we. We have gone in certain lanes where we have maybe two markets within 150 miles of each other and we've got one train serving both markets two trains.

So as things come back, there will clearly be a period of time when we will have to add train starts and the train start we add won't be back up to productivity levels that we achieved now, but we'll quickly achieve that and then take another step up.

The biggest issue there, that maybe some of you are not aware of is, we're running more DT trains now than we've ever run before, and we're still in the leaning curve. We're running trains very cautiously, but much, much bigger than I thought we could achieve successfully and that will continue. And that gives you a lot of leverage on the freight side.

Operator

Your next question comes from Jason Seidl – Dahlman Rose.

Jason Seidl – Dahlman Rose

Could you give us an update on your mid America corridor initiative you announced in February. Where are you at with that and what do you see heading into 2010 with the hopeful uptick in volumes.

Hunter Harrison

There was an agreement there to provide capacity to the Norfolk Southern over our premier routes through the Midwest. The concept is still very, very solid, but the volumes have been slow to materialize because just about the time we announced it, both of us got whacked with the economy.

We're still very optimistic about it. We are in some pretty intense discussions currently about finding new business opportunities. As an example, maybe some grain. Again, the whole deal is matching our origins with the NS destinations and matching up some of our grain origins with their destinations. Maybe some ethanol traffic, we're still looking, and optimistic about some coal business over that route and I believe that we will be starting to see some real volumes moving on that route by the end of the year.

Jason Seidl – Dahlman Rose

If we look at Prince Rupert, can you give us an update on any discussions to add another ship and other than the economy, are there any impediments there? And also, can you talk a little bit about some of the export developments out of Prince Rupert as well?

Hunter Harrison

I wish I could tell you there's another boat going in there, but people would think I'm smoking something. Things are pretty bad on the Trans Pacific right now and despite all that, our business there with Costco and our alliance partners has been growing very, very well and the reason for that is our service offering there is just superior to anything else that's available out there, especially down into Chicago/Memphis which is our largest destination for that terminal right now.

So nothing is going to change about the fact that the port of Prince Rupert is the closest and best service route into the Midwest and I would expect that when the volumes come back from a chance in the economic environment, and more imports into North America, that our volumes there would take off, and have no reason to believe that we wouldn't be able to get back talking about the date when we'll have sold out. But I think that's a little premature for me to do that right now.

On the export side, as the vessel configurations have changed, in the first quarter I think our ratio of exports container volume to imports was around 35% of them were loaded, and that number is up significantly from where it was in the first quarter.

Jason Seidl – Dahlman Rose

What specific commodity is up?

Hunter Harrison

On the export side we move a lot of different products. We move scrap paper. We move just about everything and we're hustling like dogs to find business to get it out of there; pulp, logs, to Asia. So it's not a matter of us finding the opportunity. It's find capacity on a vessel going back to be able to move that, and as they have changed their ports of call, and the strings of service that they provide when coming into Prince Rupert, it has freed up more capacity on the vessel to Trans Pacific westbound for us and we've been able to fill it up.

Operator

Your next question comes from Bill MacKenzie – TD Newcrest.

Bill MacKenzie – TD Newcrest

Going back to developments with respect to coal in western Canada, some of the concerns I've heard from investors with respect to the FOA decision that came for your competitor out there, there's some concerns that that could result in increased FOA's across Canada in general and I'm just curious to see what your response to that, what the counter-argument to whether that might happen or not.

Hunter Harrison

It's not for me to get involved in the workings of the relationship between the [inaudible]. I'm really not going to comment on that other than I think it was well publicized that dispute about those rights were out there for a long, long time and I don't have any information about what it was other than they disagreed upon what they should pay. And as I said earlier, I don't expect this to spill over in any way shape or form. The FOA process has been there for a long period of time.

There's nothing unusual about any kind of change or circumstance that would lead me to believe that I should see any kind of increase in FOA's. I have not seen any increase in FOA's and I don't expect to see any increase in FOA's.

Bill MacKenzie – TD Newcrest

In terms of the other revenue you talked about that was driving that business down in the quarter, just curious for the outlook on that part of the business. Do you feel that we're at the bottom for those types of non rail services or will that lag the freight volumes coming back up?

Hunter Harrison

That should increase. Just as we talked about the significant decline in our iron ore volumes associated with the shut down of steel production, as steel producing facilities come back on line, the demand for iron ore has come back on line and our car loadings of iron ore moving up, those car loads of iron ore move over our docks and onto our Great Lakes vessels and then onto destination.

And where we account for the revenues on our docks and our Great Lakes vessels is in this other revenue line, so as ore came down, other revenue came down. As the ore comes back, other revenue will come back and I would expect to see that in the third quarter.

Operator

Your next question comes from Matthew Troy – Citigroup.

Matthew Troy – Citigroup

I was wondering if you could talk about the peak shipping season. I was wondering if you could just refresh memory. We should be at the point where shippers are already making requests or they will shortly. Are you hearing, I know there's conceptual hope for a pick up, but are you hearing tactically, directly from customers that they're trying to arrange capacity for the peak shipping season? What are your expectations for that and how should we expect that to ramp in the coming weeks and months?

James Foote

We are certainly not expecting what anyone would consider a peak in shipping and anybody that wants to buy capacity on an east bound steamship right now to move product from Asia into the U.S. can do it at a cost of about 25% of what it used to be so the capacity is available out there, and what we're looking at as I said, is some kind of a sequential, gradual increase in our volumes somewhat in international intermodal, somewhat seasonally adjusted for the traditional Christmas season.

But we are not anticipating any kind of a traditional Christmas shopping season, so our expectations are tempered.

Matthew Troy – Citigroup

What about on the automotive side. It's obviously coming off a very depressed level. You've have some plant shutdowns. You've had obviously the financial morass in the U.S. Expectations are that production levels could accelerate or pick up into the back half of the year on volume levels which were down 40%, 50%, 60%.

Automotive traffic I think is about 4% of your traffic base, but can you just frame what other percentage of your business be it plastics or metals might relate to auto, and how those might improve or how you're positioning for what could be a sequential recovery in automotive. Are you hearing it from customers and how do you plan for it?

James Foote

Obviously as Chrysler and General Motors start back up their plants which were idle during their financial and legal proceedings, we'll start to see some volumes. Chrysler is not a customer of our, but General Motors clearly is.

We have tried to in the past quantify how much aluminum, chemicals, etc. import container traffic etc., is tied to that. It's been difficult for us to do, but clearly as I said earlier, as auto production now comes back online, we are seeing iron ore traffic begin to move as the steel manufacturers begin to ramp up and start to get some sheet steel and some core products available. Aluminum has been relatively strong.

Obviously we expect finished vehicle shipments as I said earlier, to be stronger than they were in the second half of the year than they were in the first and the products associated with auto manufacturing should also be up.

Matthew Troy – Citigroup

In terms of capital budget, can you give us an update if it hasn't changed or if it has changed for full year 2009 and what kind of hurdles or metrics are you looking for before you can potentially adjust upward capital expenditures in 2010, 2011? What are the hurdles you've got to clear?

Claude Mongeau

Our hurdles never change. We want to make sure we create value and we actually have projects that provide a return well above our cost of capital. In terms of sizing the envelope, at the moment we have not been increasing. We've done the reverse over the last couple of quarters, making sure we are targeting our CapEx while we continue to invest.

But we are targeting it on productivity, safety and service, things that are short term benefits and we've deferred a few growth related type investments because business demand is not there. Overall, for the year, our CapEx envelope should be in or around $1.5 billion, maybe a little bit less than that as we previously indicated.

Operator

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

David Newman – National Bank Financial

I was just noticing on the re-pricing you did about 4% to 5% in Q1 and about 4% to 5% in Q2. Have you seen any sequential softening at all in the re-pricing or has it been fairly consistent?

Hunter Harrison

Very consistent.

David Newman – National Bank Financial

On the purchase services and casualty in other, is there a run rate that we should anticipate for Q3 and Q4? Is this kind of the level we should expect?

Claude Mongeau

Again, short of exchange playing havoc with the numbers, our focus on containing expenses and reducing our reliance on outsourced services continues unabated, so you should expect that we will continue to make progress in this regard.

Exchange obviously is the only thing that has an impact on a quarter to quarter basis as you translate our U.S. dollar denominated expenses into Canadian dollars.

David Newman – National Bank Financial

On headcount, it looks like you've got about 700 on furlough last quarter and that would imply that you have just slightly less, about 900 on natural attrition. Are those numbers around what we're at?

Claude Mongeau

Our year over year head count on an average basis is down 1,100, and I've indicated that we took on roughly 600 employees as a result of our acquisition so year over year, our headcount is down 1,700 or thereabouts, and you should expect that we will continue to make efforts to keep our headcount in line with our business levels. We will be at some point lapping those acquisitions in the coming quarters.

David Newman – National Bank Financial

You have another 1,000 I believe, another 2,000 for the year in natural attrition so maybe another 1,000 to go in the back half. I assume that you've still the hiring freeze in place?

Claude Mongeau

We have a targeted approach to our hiring and we are hiring only where we need to and even those employees that we have that are surplus at the moment, we are trying to re-direct to handle the work that we have.

So we're trying to be smart about it. I'll give you an example. We've been trying to increase our IT work force here at the headquarters. For a number of years we were only able to recruit consultants to do work in the most technology platform. Now, with today's downturn, all of a sudden we are able to hire them on an ongoing basis as a permanent employee. We're doing just that.

Similarly, to the extent that we've been outsourcing some of the work that we do for our basic capital envelope, today, we're not doing any of that. So we have more of our employees doing the work. That shows up in reduced outsourced services for purchase services and material, but it's employs our workforce and increases our labor expense versus what it would otherwise have been in the past.

That is just smart business to try to contain our expenses and work with our work force in a smart manner in tough times.

David Newman – National Bank Financial

I think a couple of years ago, when volumes were surging, I believe at the time Hunter you mentioned there was about 20% to 25% extra capacity at the time. You've done a few acquisitions in the interim. Obviously EJ&E will really help out. What do you think your capability or your capacity is at right now and how will you scale that back up if volumes do return? It looks to me like you're running around 60% of normal capacity or so.

Hunter Harrison

Are you speaking of physical plant capacity?

David Newman – National Bank Financial

Yes. How much can you scale it up, and obviously with EJ&E will help operationally in terms of freeing up more capacity. What do you think you can handle?

Hunter Harrison

We can obviously handle and go back to 2006 kind of levels which I hope we see before I leave. We're not. But capacity is not an issue. And, what I would point out, we could pick up 30% capacity tomorrow and it would be a non event.

To go further, we can add capacity incrementally as we need it. If we need to add a patrol out here between, we don't have a lot of double track railroads, virtually none. So if we need to add capacity between Winnipeg and Edmonton, we can do it pretty cheaply. In fact, we have a lot of 6,000 foot [inaudible] that are kind antiquated, not used very much because of train size. We can use that material if we need to to put it together.

So capacity is something that we can deal with. Claude, my colleague here is not going to have to worry about for some time.

David Newman – National Bank Financial

A couple of years ago, one of your initiatives was to look to the train speed. It's obviously improved dramatically. Where do you think you can take that and what sort of CapEx would be required?

Hunter Harrison

What we have gained so far this year, year over year we're up about 4 mph over last year. Basically it's been achieved just through execution. The horsepower per training ton is not increased. We have not basically increased any infrastructure. And right now, there are not plans to do this.

We're not going to hurry up and wait. We don't need to do that. And, it is, and I say this strictly from a labor standpoint, it is much more important in the U.S. than it is in Canada, from a labor cost standpoint, because I'm paying by the hour in the U.S. and I'm paying by the mile in Canada.

And if somebody gets there in four hours instead of six hours, then the cost is no different for me. So we can add capacity or speed pretty quickly if there is a need there and if there is a market there for it.

Operator

Your next question comes from Cherilyn Radbourne – Scotia Capital.

Cherilyn Radbourne – Scotia Capital

I wonder if you could comment to the extent that you can the way that the auto bankruptcies are shaking out in terms of assembly plant closures, parts plant closures. Can you speak a little bit about how you think your franchises have faired in that process and also the auto port franchise?

Hunter Harrison

I'll mention Michigan and Jim can talk a little bit about Canada. I think effectively with Ford in Flatrock, we're not going to adversely impacted from that standpoint. We are going to be impacted by Pontiac closing, but the Pontiac closing, that production will all move to Lansing which will then actually be more efficient for us, so we'll have Lansing and Flint more up to capacity.

We'll not have Pontiac. Pontiac will effectively close. So from a Michigan standpoint, we're in pretty good shape and Jim is more up to speed on the Canadian standpoint than I am.

James Foote

From a net net standpoint it has had minimal impact on us and we expect that to be the case going forward for the reasons Hunter has just described. We've been lucky enough to have the facilities that we serve be retained and be viewed as critical assets to the manufacturers.

From an auto port standpoint, which is the internal operation for handling the finished vehicles, that business has been growing and will continue to grow and it's not only handling, doing those activities on our railroad but beginning to take those activities offline to other locations for the manufacturers.

Cherilyn Radbourne – Scotia Capital

With respect to the EJ&E, at the time you bought that franchise, you talked about the potential to use the yards that came with that acquisition to reconfigure your U.S. yard network, and I just wondered if you could speak about whether you've initiated that process, whether you've started to use Kirk yard?

James Foote

At the moment, with the business down, especially in the steel sector which is the predominant customer base that we have on the J proper, we are not in need of ramping up Kirk yard at the current moment, but we are making plans to phase in as we build the connections which will take place over the next two to three years.

As we build the connections allowing us to move our trains, then we will have to make sure that Kirk yard is ready to handle the business that we will move there.

Hunter Harrison

We have effectively close the hump at Kirk yard also because of the cost of operation and some issues with the collective bargaining agreement. Claude's point is very well taken. What this effectively does, it gives us time to plan to see exactly what we want to do at Kirk yard, how large a complex do we need to put there, what improvements we need to make, which will then free up the assets at Markham, and Joliette, much for customer development, business opportunities that Jim can put together, and particularly be involved from other facilities in Chicago.

Operator

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

Randy Cousins – BMO Capital Markets

If we take a look at the costs and when you're volumes are collapsing, it's kind of tough to get the costs out at the same rate that the volumes are coming down, so assuming we've got stabilization in volumes and some recovery, and if we look at the second quarter numbers in terms of costs and took out the fuel, is there another $50 million to $25 million of costs that come out given that you've got these initiatives but you've been chasing declining volumes. How should we think about the second half from a cost perspective?

Hunter Harrison

I don't think it will, I wish it was, I don't think there will be enough impact in the second quarter pick up that we could see numbers like that. I do think that once again, when the economy really improves, when we can see the smoke has cleared and things are picking back up, then I think that's when you can hone in on some really pretty outstanding if we can maintain these metrics, and I'm sure this group can.

Randy Cousins – BMO Capital Markets

So the short version is that basically you've been matching the cost cutting as the volumes come off and there is no kind of lag phenomenon for CN.

Hunter Harrison

I think we've been ahead of the curve. We anticipated this. We got out ahead of the curve. We've continually challenged ourselves. We changed the operation significantly. We've done some things that we didn't think we could do, and I think when you look at RGM's down 14% and you see some of these metrics that are improving 25% to 30%, we're well ahead of the cost curve.

Randy Cousins – BMO Capital Markets

Second question has to do with that derailment in the Chicago area. It got a lot of press. Has there been a reserve put in place in Q2 or did it get more press than it justified in terms of cost impact. And secondarily, do you see any fall out in terms of the oversight in terms of the reference to the EJ&E coming out that derailment because I know it wasn't on the EJ&E track, but it's within spitting distance at some level.

Hunter Harrison

I don't think that there is any fall out. We are continuing to make improvement. If you look at our safety statistics, our FRA number of accidents is down significantly and it has been a very unfortunate derailment, but we're doing everything to prevent them on a go forward basis and it's too early to make any assessment as to the cause of the derailment and any responsibility that CN would have.

Randy Cousins – BMO Capital Markets

What about costs? Have you already reserved for it, or is it going to come at some point later in the year?

Hunter Harrison

We reserved for the cost that we incurred due to the derailment and we're very early in the process of assessing responsibility, so that's where we stand at the moment.

Randy Cousins – BMO Capital Markets

On the grain side, because the grain numbers looked pretty impressive. I'm looking at a 5% increase in yield, a 12% increase in average revenues per car load. RTM's just down 6% and car loads down 12%. Is that just canola or is there something else going on here to translate into why you're doing so well in terms of the grain business? And could you comment on the impact of the CTA in terms of setting the grain rate for this crop year is going to have on Q3 revenues or unit pricing in the grain category?

Hunter Harrison

I think the answer to your first question is right. There's nothing unusual, nothing significant that has changed in order to drive yield or pricing other than mostly canola and the strength of the export moves.

In terms of the number, I don't recollect what the statutory number is at this point in time.

Randy Cousins – BMO Capital Markets

I think it's a reduction is it not?

Hunter Harrison

It was a reduction. That will fold into, largely as a result of lower fuel costs and that will folk into our results starting August 1.

Randy Cousins – BMO Capital Markets

I know the wheat board was kind of cautious on their outlook and I think Viterra has come out and given some indications. They seem to be much more bullish. How are you feeling about the state of the crop within your attachment area, because I guess the issue is, it's been very cool and the crop has not developed as nicely as everybody would have liked.

James Foote

The crop, there is some issue about the crop because of the coolness, because of the dryness. Now there is some rain. Will that be enough? It's the kind of dance we go through at the end of every crop year. I think it's safe to say that most people have a consensus that it will be down from last year, but more of kind of in line with the five year average, five to ten year average.

So that's what we've always used going into a period, is an average crop. We never try to pick in advance what the crop is going to be. And that's what we have planned for and that looks about like what it will be and we'll just have to wait and see.

Randy Cousins – BMO Capital Markets

So from a volume perspective, in terms of your thinking for Q4, do you sense flat volumes in the grain category, down or up?

James Foote

As I said earlier, the big wildcard here is the fact that there is this large carry forward for the prior years' crop so we will have a lot of grain available for us to move. The question is, if the world economic conditions change to the extent that a lot of people start to buy Canadian grain at the levels they have historically bought them, we will probably move grain kind of at the historical level.

We saw that getting close to that earlier prior to the slowdown as they focus on the harvest, and we're hoping that those levels return later in the year.

Hunter Harrison

Let me clarify one thing here, I want to be sure. The derailment, we have not, the NCSB in working with closely to investigate this derailment and we have to be very cautious coming up with a cause because all indications were that this was not a normal type derailment. We had had tremendous rainfall and flooding and all indications were nothing to do with the infrastructure or the equipment, it's beyond that.

So I don't want this is not a case of the people of the EJ&E should get alarmed about some deficiency in our system. This was we think, at least we think, weather related.

Operator

Your next question comes from Ken Hoexter – Bank of America.

Ken Hoexter – Bank of America

Jim, the metals yields was up. Is that solely because of the addition of EJ&E or is that because of the volumes being down so much?

James Foote

It relates to the change in the iron ore move which is a very high volume short distance move.

Ken Hoexter – Bank of America

So it's a length based on the volumes changing.

James Foote

Correct.

Ken Hoexter – Bank of America

On the EJ&E, you talked a little bit before, are we starting to see some of the benefits come in from that on the cost side or is that going to take awhile until you completely get that network operational.

Hunter Harrison

Let me answer two ways. As far as the EJ&E operation, we have stripped a lot of cost out. We'd never get it all, but we are far ahead of the curve of what we thought we could do with EJ&E costs. Number two, the benefit that we see going down the road with our investment in the infrastructure, is more of a timing issue as we get those projects and connections completed so we have not seen only just a faint drop of the benefits there from the acquisition.

Ken Hoexter – Bank of America

As we start to hear more and more about the Create investments that could potentially be made with the next bill, with the next surface transportation bill, what are your thoughts on that? Does that then remove some of the benefits you could get from the EJ&E or are you still encouraged that if that goes through, there are even more operational benefits you could derive from that.

Hunter Harrison

We have been in support of Create. We're still in support of Create. There's no projects that are going to have an impact on us that says we wouldn't have done this project if we would have know what Create was going to do, and I'll believe it when I see it. I've been hearing about this since I think '97 or '98 so more power to Create.

There's a lot of things in the Create project that's not directly rail related, so I hope it happens. Anything that relieves congestion in Chicago will help all railroads in my view.

Ken Hoexter – Bank of America

What's in the recapitalization of foreign investment number?

Claude Mongeau

The couple of pennies that we gained from the capitalization of a foreign investment so we're crystallizing this investment in Canadian income tax benefits.

Ken Hoexter – Bank of America

What was the investment that you got the gain from?

Claude Mongeau

This is one of our foreign investments out of Europe.

Ken Hoexter – Bank of America

Did you go over what the FX impact was on yields?

James Foote

Yes, I did at the very beginning, strip out fuel charge and FX.

Ken Hoexter – Bank of America

Okay, strip out fuel charge and the rest is FX.

James Foote

Our volumes are down 14%. Our pricing is up 4% and the difference is the fuel which is about equal to that 10%.

Operator

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

Hunter Harrison

Thanks. I'm sorry we overran a little bit today and we'll try to be a little more timely next time, but I appreciate everybody joining us and I look forward to the next earnings release which will be my last one.

Thank you.

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Source: Canadian National Railway Company Q2 2009 Earnings Call Transcript
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