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Canadian Pacific Railway Limited (NYSE:CP)

Q2 2009 Earnings Call

July 30, 2009 11:00 am ET

Executives

Janet Weiss - AVP of IR

Fred Green - President and CEO

Kathryn McQuade - EVP and CFO

Ray Foot - VP of Sales

Brock Winter - SVP of Operations

Analysts

Randy Cousins - BMO Capital Markets

Edward Wolfe - Wolfe Research

Walter Spracklin - RBC Capital Markets

Tom Wadewitz - JPMorgan

David Newman - National Bank Financial

Jacob Bout - CIBC World Markets

Matt Troy - Citigroup

Cherilyn Radbourne - Scotia Capital

Benoit Poirier - Desjardins Securities

Jason Seidl - Dahlman Rose

Chris Ceraso - Credit Suisse

Bill MacKenzie - TD Newcrest

Seth Lawree - Bank of America/Merrill Lynch

Operator

Welcome to Canadian Pacific Second Quarter 2009 Results Conference Call. (Operator Instructions).

I would now like to turn the conference over to Ms. Janet Weiss, Assistant Vice President, Investor Relations of Canadian Pacific.

Janet Weiss

Good morning and thank you for joining us for our 2009 second 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 Vice President of Sales; and Brock Winter, our Senior VP of Operations. Also joining us on the call today is Brian Grassby, our VP and Controller.

The slides accompanying today's teleconference are available on our website.

Before we get started, let me remind you this presentation contains forward-looking information. Actual results may differ materially. We make reference to assumptions used in our guidance and we provide sensitivities to these assumptions in the appendices, which can be found in the last section of the presentation material. The risks, uncertainties and other factors that could influence actual results are described on slide one in the press release and in the MD&A filed with Canadian and U.S. Securities regulators. Please read carefully as these assumptions could change throughout the year.

All dollars quoted in the presentation are Canadian, unless otherwise stated. This presentation also contains non-GAAP measures. Please read slide two. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions).

Here then is our President and CEO, Mr. Fred Green.

Fred Green

I'd like to start by introducing Ray Foot, our new Group VP, Sales. As most of you know already, Marcella Szel has retired, and I have used the opportunity to establish a pure sales organization. Ray is imminently qualified having led our activities in intermodal, grain, and most recently, merchandise.

Turning to the quarter, today CP reported adjusted Q2 EPS of $0.59, reflecting some very good cost controls. These efforts help counter the continued volume weakness. In an economic environment like this where we are not seeing signs of substantive recovery, we continue to focus our efforts and actively manage what's within our control.

We're doing a lot of things right. Our train productivity strategy is working with train weights up 7% year-over-year and train lengths up 3%. Process enhancements aimed at lowering our structural costs are progressing and 300 supervisory positions have been eliminated limited with 200 gone and 100 given working notice of permanent position reductions. Setting aside the results of the one-off Teck coal outcome, our core pricing success continued.

Ray will take you through our markets and Brock will speak to the strong operational performance trends we're seeing.

I'll now turn it over to Kathryn who will give you a breakdown of our financial performance and highlight that from a cost management perspective we delivered a very strong quarter.

Kathryn McQuade

We experienced another quarter of significant volume reductions with carloads down 24% and RTMs down 26%. Our focus on matching resources to volume and the continued success of our efficiency initiatives produced solid expense savings without sacrificing the consistency and reliability of our service offering.

Let's being on slide six where I will take you through our pro forma income statement. Starting at the top, total revenues were down 21%. Without FX, revenues were down 29%. Lower volumes in every business sector, except grain, coupled with lower coal rates and fuel surcharge revenues drove the decline.

However, an increase in other non-freight revenues did help to offset some of the impact. The increase in non-freight revenues, which is included in the total revenue line on this slide, was driven primarily by land sales. Year-to-date, these revenues are $70 million, putting us well ahead of last year. However, I expect to end 2009 in line with last year's reported amount of $117 million.

Moving to operating expenses, which were down 23%. Without foreign exchange, expenses were down 30%, which more than matches the revenue decline. Lower fuel prices and strong cost control were the primary drivers. Operating income was down 17%, or 23% after removing the FX impact. This is a great result considering the large quarter-over-quarter volume decline.

Below the line, other charges were up significantly due to approximately $17 million in non-recurring charges associated with the tender and debt offering we completed in June. Interest expense was up 18%, primarily due to the unfavorable impact of FX. Finally, income taxes were down 40% due to lower earnings. For the second half of the year, I expect our effective tax rate to be roughly 26%.

Adjusted earnings per share came in at $0.59 or down 39%. This reduction in EPS is greater than the operating income decline due principally to the debt and tender offer this quarter and the dilution of the equity issue in Q1.

Before I take you through each expense item, let me first touch on our GAAP earnings. During the quarter we received regulatory approval for the sale of a portion of our ownership in the Detroit River Tunnel Partnership, which added $69 million after tax to our GAAP and $110 million to our cash position. We also had a gain of $3 million after-tax from the maturity of a portion of our asset-backed commercial paper portfolio, which was redeemed near par and at a higher value than was recorded on the book.

Both of these are included in our GAAP earnings, but have been excluded from the adjusted earnings. A reconciliation is included in the appendix to these slides.

I will now take you through each of our expense line items, starting with comp and benefits on slide seven. As Brock will cover in detail, we continue to drive productivity by adjusting our operations to match volume declines. These efficiency gains reduced comp and benefit expenses by $37 million. For the quarter, we averaged 13,270 expense employee, which is lower than the estimate we provided earlier.

Moving into the third quarter, we should average approximately 13,500 expense employees, as we will call back train crews to cover summer vacations and new hour of service regulations in the US.

Pension expense was lower due to a higher discount rate at the end of 2008, and we reduced a post-employment benefit accrual, which saved $6 million. Wage and benefit inflation and other items added an incremental $7 million, and despite a foreign exchange impact of $14 million, we delivered a $32 million improvement on the comp and benefit line.

Moving now to slide eight and fuel expense, which was down $158 million. Price declines saved us $125 million as our all-in costs fell by 50% to US$1.78 per gallon and a 28% decline in consumption due to lower volumes and an improvement in fuel efficiency saved $90 million.

Our mechanistic hedging program continues to move towards covering 10% of our fuel purchases by 2010. We have provided some more detail in the appendix. On a year-over-year basis, pricing benefits were smaller by $4 million due to lower fuel prices. Foreign exchange and other items partially offset the gains from pricing and volume by $41 million and $12 million respectively.

Moving to slide nine, purchased services and other was down $26 million. Lower intermodal loads drove reduced intermodal expenses, while aggressively storing locomotive and freight cars meant fewer assets needing repair. These items reduced usage and volume-related purchased services by $10 million. Casualty expenses were down $12 million. We do not use actuarial methods to value our casualty reserves. This reduction is a function of improved safety levels and less costly incidents.

During the quarter, we also had favorable tax adjustments totaling $8 million. Foreign exchange was a headwind of $10 million.

Finally, on slide 10, materials were down $11 million due to the lower freight car and locomotive maintenance I just spoke to and some non-locomotive fuel savings. Depreciation was flat with some small savings from asset retirements being offset by FX. Equipment rents were down $7 million.

With fewer active assets online and fewer leased assets, we saved $20 million. However, these savings were partially offset by a $12 million in car hire receipts from other railways. Absent the foreign exchange headwind of $7 million, our equipment rents would have been down $14 million or 28%, more than matching the volume decrease.

As I did last quarter, let me summarize our cost management success on slide 11. If you remove the impact of inflation, lower fuel prices, FX and the favorable one-time items I spoke to, we reduced expenses by $182 million. When compared to the volume impact on revenue of $310 million, we removed $0.59 of expenses for every dollar of revenue lost.

This was a very good quarter for cost control and I am pleased with the continued focus I am seeing across the organization. Moving into the second half, I expect our run rates will be closer to $0.45 to $0.50 as we start to lap year-over-year management actions.

Now, turning to slide 12 and an update on the balance sheet and our capital plan, we now expect our capital program to be in the range of $800 million to $820 million. This increase is due to the refinancing of certain operating leased assets that will not impact this year's cash flow. As a reminder, during the second quarter, we issued debt of US$350 million and executed a tender offer by buying outstanding debt of US$475 million. These transactions smoothed our maturity profile and reduced both our near-term refinancing needs and our overall indebtedness by $125 million.

Quickly looking now at the DM&E, our transition plans remain ahead of expectations. We successfully integrated our financial systems, and this quarter we introduced our dispatch and crew management systems, which will help to manage the new hour of service regulations. Our plan to complete the integration of all of our IT systems by yearend remains on track. To-date, we are ahead of target on capturing many of the identified synergies on both the operating and revenue side of the business, and we continue to look for opportunities to extend our length of haul.

To summarize, in the face of continued lower volumes, our financial results demonstrate the team's success with strong cost management. We continue to strengthen our balance sheet, focusing on cash and liquidity. We are making the right decisions to navigate the current economic conditions, and while the second half will continue to present some tough challenges, we are focusing on those things we can control, and that's cost management.

With that, I will turn it over to Ray for the marketing review.

Ray Foot

Starting on slide 16, on the quarter we continued to see the effect of the economic downturn and soft commodity markets on volume across most of our sectors. Reported freight revenue was down 24%. Excluding currency impacts, revenues were off 31%. Volume was the big driver with carloads off by 24%.

Revenue ton miles were down a further 2% at 26%, resulting in a negative mixed impact and continuing the first quarter trend. Other factors included 8% lower fuel due to price and a 1% reduction from the Teck coal decision. On price, excluding the Teck impact, same-store price came in at just over 4% in the quarter.

Now, turning to slide 17, let's run through the various segments looking at both the quarter and the balance of the year, starting with grain. Note, in all cases I will speak the currency adjusted revenues. Canadian grain continued to be very strong in quarter two with volumes up 30% year-over-year. US grain was softer as farmers continued to hold product waiting for prices to firm up.

All-in, revenues were up 9%. New crop prospects remain somewhat of a tough call. Recent moisture in Western Canada has mitigated some production concerns. At this point in time, we are modeling based on a normal crop. On the US side, growing conditions have been good, not the record production of last year, but still very strong. While harvest timing and quality remain wildcards, forward volumes will be aided by a large carryover from this year.

Moving on to coal on slide 18, revenues were down over 49% on the quarter. This decline was driven by 37% lower Canadian volume including reducing east-bound long-haul shipments. The export price adjustment on Teck coal retroactive to April 8 reduced revenues by 14 million. Over the past month, export volumes have started to recovery and indications are that spot sales to Asia will support more normal export volumes in the last half of the year. The associated revenue will be dampened by Teck's use of the new shorter haul routings over (inaudible).

Over to slide 19, the sulfur and fertilizer story as in the first quarter is tied directly to extremely weak export potash volumes. Revenues were down 62%. Potash revenue ton miles and carloads continue to run around 80% below last year's levels. There has been some recent settlements announced by Canpotex, but the major breakthrough with China is still outstanding. Until this deal is completed, volumes will remain below 2008. We have the ability to ramp up quickly when demand recovers.

Let's turn to merchandise on slide 20, covering forest products, industrial products and automotive. This sector was down 42% with our most significant volume declines in the mines, minerals and aggregates sector, led by steel and in automotive. Steel-related volumes were down over 60% and auto volumes were off 45%, very much in line with reduced North American light vehicle production.

Our recent carloading trend has started to stabilize in some merchandise sectors. We have also witnessed positive trends in our new business pipeline. On the quarter, we generated some 4,000 new carloads of condensate and ethanol and look to keep growing these markets through the balance of the year. However, at this point in time, I don't see much, if any, improvement in the core merchandise sectors in the second half of the year.

Turning to intermodal revenues on slide 21, we were down approximately 25% on the quarter. Again, very soft consumer demand and weak global markets were the key drivers. Domestic volumes were down about 10%, consistent with the first quarter, but international traffic was again significantly down, reflecting close to a 30% decline in volume. Our primary retailers remain cautious in their outlook for the balance of the year. Some very modest restocking and a slight late summer, early fall demand bump might occur, but it is not likely to be reflective of the sharp peaking of previous back-to-school and fall seasons. Basically, we expect the back half of the year to look very similar to the first half.

On slide 22, in summary, we're sticking to the basics in sales and marketing, keeping close to the customers to ensure we're on top of volume issues and sizing resources and products correctly, targeting and aggressively working the new business pipeline, and pricing in a disciplined manner with an eye on both near and longer term value.

Now, over to Brock.

Brock Winter

Q2 was a strong quarter for operations. We've continued our actions to contain costs by adjusting quickly to changes in volume trends and advancing our efficiency initiatives to create a sustainable lower cost operation. We've had good success and I believe our operation is running in lock step with current volume levels.

Looking more specifically at our results, let's start with safety on slide 24. Our FRA train incident frequent improved by 8% on CP and 65% on the DM&E. For the core CP operation, we continue to be the industry leader in train operation safety with the year-to-date improvement of 22%. I am encouraged to see that our safety approaches are driving benefits and reduced casualty costs. Our FRA personal injury frequency for the DM&E improved by 61%. For the CP operation, we were up by 24%/ So we still have work to do in this area to improve our performance.

Please turn to slide 25. I am pleased with the year-over-year Q2 improvements we posted. At our Investor Day conference we held in late 2008, I laid out our game plan for the key areas we were focused on to drive efficiency. Let me update you on our progress.

First up is our attack on train costs. We've improved train speed year-over-year by 10%, while disciplined execution of our long train strategy helped increase train weights by 7%. With GTMs down by 25%, our focus on productivity enabled us to reduce train and crew starts by 26% and 28% respectively, an excellent result. Moving forward, we are now utilizing our industry leading Train Area Marshaling tool or TRAM, which allows us to safely position locomotives to run even longer trains, reduce starts, extending rail asset life and saving fuel.

Please turn to slide 26 and I'll update you on progress on yard and terminal efficiency. We've improved yard dwell by 6%, a good result despite the actions we have taken to reduce road and local train starts. We also continue to push more volume into our most efficient processing yards, allowing us to close several satellite yard operations in Q2. This is helping us trim our car fleets in line with volume reductions as our active cars online improve by 24%. We've done an excellent job matching car fleet size to the demand and we plan to continue this action.

Please turn to slide 27. Next, our attack on maintenance costs. To-date, we have consolidated the Coquitlam locomotive shop into our facility in Calgary and have revamped our (inaudible) in Southern Ontario, which allowed us to close two facilities. These early actions are exceeding my expectations, and as we complete our final analysis on additional maintenance facility opportunities, I expect even further benefits. This facility consolidation work coupled with improvements in cycle times has helped us to tie up over 400 road and yard locomotives, representing over 25% of our fleet and to store 15,000 railcars or roughly 26% of our fleet.

Another part of our program is to improve reliability and drive even greater efficiency. We continue to apply Lean management techniques to targeted, high-value areas of our operation, from repair activities and shops to customer pipelines. An example of the benefits can be seen in our crew utilization, which has improved by 16%.

Through aggressive management actions, we've reduced overtime costs by over 65% as we introduced better processes and scheduling. These actions have facilitated our ability to reduce crew and maintenance staff by 2,200 employees, which represents about 20% reduction of our unionized work force. Clearly, strong cost management actions are leading to improved efficiency.

In summary, we're sizing ourselves weekly to meet demand and I am satisfied with the results. We are tracking well against our efficiency targets for cost savings, and this has not impacted our ability to deliver a reliable and consistent service to our customers. Service reliability is key to both reducing costs and growing the top-line. We are being methodical in implementing game changing sustainable improvements that will better position us to serve our customers while ensuring lowered variable and structural costs. I look forward to reviewing our performance with you next quarter.

I will now turn you over to Fred for the wrap-up.

Fred Green

In summary, the market remains uncertain. So you can expect that we will continue to be focused on managing the things that are within our control. Operationally, we are executing the plan and adjusting to volume fluctuations, driving very good productivity improvements. In the markets, we're creating value for our clients and pursuing price consistent with the high quality product that we are delivering.

Organizationally, we are implementing process improvements that will deliver a permanent, lower cost operation. Finally, financially, we are taking actions to preserve cash and strengthen our balance sheet to ensure that we retain our strategic flexibility. I believe these actions will ensure that CP is well positioned to deliver value over the longer term.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question today comes from Randy Cousins of BMO Capital Markets.

Randy Cousins - BMO Capital Markets

The first question just on the marketing side of the equation, I wonder if you guys could go into explaining some of the relative differences between sort of what we saw in carloads versus RTMs, and I am thinking of the two product categories; forest products and grain where there seems to be some relative material differences. Is that just simply shipping longer haul of Canadian grain? What's exactly going on those two product categories?

Ray Foot

First, let me touch on the grain side with the high percentage of increase on the Canadian export. That's had an impact on RTMs given the longer haul nature of that business. So, that's really what's happening within the grain.

On the forest products side, particularly on lumber with the closure of the various mills that are out there, they are having to ship basically longer distances to the markets that they are servicing. That's the impact that you are seeing on the forest products side.

Randy Cousins - BMO Capital Markets

One other question just in terms of the marketing side. Could you talk a little bit about your trans-border business in intermodal as opposed to the Canadian business? You talked about the domestic and the international, international obviously being down a lot more, how is your Canadian business doing versus the stuff that you got going across the border?

Ray Foot

You have to look at it by segment. Relatively on the cross-border basis, we're pretty much flat. On the food business, that's holding pretty well relative to last year as well just given the basics of that business. Retail, as I mentioned, is down and we're not seeing any significant signs of life there. So, if you look at the food and cross-border business that's what's allowing us to only be at the 10% number on domestics.

Randy Cousins - BMO Capital Markets

Obviously, the Teck decision went against you. One of the issues I guess you guys have had in the past is simply fuel recovery. I wonder if you could comment, with the decision did you get 100% fuel recovery on that contract with reference to diesel? Could you update us on what status is in terms of your fuel recovery programs? I guess to some extent, for Kathryn, was there a fuel hedge gain or loss in terms of the surcharge lag benefit in the second quarter?

Fred Green

We'll probably end up going through all three of us. I'll start off. As with every other contract that we have signed this year, we have 100% appropriate and current fuel recovery, including that in the Teck agreement. So, on that issue, we are in very good shape and pleased with the success of the commercial team's ability to deliver that.

Ray, maybe you could address the recovery, and then Kathryn will pick up on the lag issue.

Ray Foot

As we've said in the past, our policy, first of all, all the programs that we have out there have margin recovery in them. Secondly, every contract that we renew, we make sure that the policy is held fast, as Fred stated. Going forward when we look at coverage, we talked about the fact that that will improve to the 70% to 75% range by the end of the year on a margin basis.

So, just one other comment. I think in 2008, we saw that $17 million lag in Q2 2008, we talked about the fact that moving to the bimonthly program on January 1 would basically eliminate that going forward. So, we did not see the impact that we had in Q2 of 2008.

Kathryn McQuade

Ray just answered the question. We had no lag or lift this quarter end. When you compare it to last year's 17 million negative, it does look favorable quarter-over-quarter.

Randy Cousins - BMO Capital Markets

What's the coverage ratio right now? If fuel prices start to back up, are we going to get little margin compression?

Fred Green

If you look at the margin coverage right now, we're in the 60% range moving to the 70% to 75% by the yearend. I think that if you look at the fourth quarter, there's definitely a downturn. In terms of lag and lift, that will basically be removed.

Operator

Your next question comes from Edward Wolfe of Wolfe Research.

Edward Wolfe - Wolfe Research

I think I heard you mention, maybe it was Kathryn who mentioned that there was a $14 million reduction in revenue in the quarter related to the Teck. Did I hear that right and was that just on the pricing side, or how do we think about that going forward with also some volume that will be lost to CN?

Fred Green

The statement was made and is correct that if one takes the retroactivity of the FOA loss on price alone in the quarter it was a $14 million negative hit. So your statement is correct. We'll have to leave it to others to judge the impact of that on a go-forward basis because, obviously, the volumes were fairly low in the second quarter. So it will obviously be a number bigger than that as the volumes recover.

With regard to the interchange at Kamloops that is something that I believe another party has spoken to their expectations with regard to what they might get. I think Teck has publicly stated that there's a cap or a limitation on that of 3.5 million tons. So if it happens, it happens.

Edward Wolfe - Wolfe Research

Was any of that movement in the quarter or is that a next quarter and forward event?

Fred Green

It would all be Q3 and beyond. There's no volumes that move that way in Q2.

Edward Wolfe - Wolfe Research

Fred, just based on your comments, I guess the assumption is there's no volume targets within the new Teck contract that would alter the pricing. You are just saying that assuming the world gets a little bit better there's more volume because there's a lower revenue per ton that the total revenue number goes down. Am I thinking about that right?

Fred Green

I think you've interpreted it correctly. We can't predict what will happen on volume. Clearly, Teck has been quite robust in their expectations in the last couple of weeks. You'll have to net out what could happen with the other guy. Our volumes will be what they will be, and then, obviously, they will move at rates similar to the numbers you can derive based on the second quarter.

Edward Wolfe - Wolfe Research

In terms of seasonality, I know you are not looking to give guidance, but when you think of third quarter over second quarter, historically it's a seasonally stronger quarter. Is there a sense that assuming potash doesn't change right now that seasonality is out the window, or should we think about the ongoing numbers that you drove and the productivity is kind of ongoing and there's a little bit of seasonality improvement in third quarter as we model for things?

Fred Green

I think the way I look at it, Ed, is that from an operational perspective Brock and his team are in rhythm and they will continue obviously to pursue continued opportunity for productivity improvement, but sustaining those levels would be a good accomplishment and anything more than that would be gravy. I'm certainly seeking from Brock and his team continued improvement.

With regard to volumes, I think it's unrealistic based on the evidence that we are seeing and feeling so far in July. You follow the carloadings, RTMs are kind of in the same zone, we're down about 18% or 20% on RTMs month-to-date. The big differential I would say between the first half and the second half of the year is that we are seeing intermodal as similar to Q2, which is weaker than it was at the beginning of the year. Ray gave you the numbers. That pattern continues in Q3.

The merchandise side continues to be very soft. Autos are down; I don't know what it is these days, 35% to 40%. Steel is down 40% to 45%. Forest products business continues to be brutal. So, the merchandise sector continues to be very weak. The difference is that we are starting to situationally see some of our bulk commodities that were so difficult for us, particularly in Q2, make some level of rebound. We just don't want to get ahead of our customers.

If Teck feels that they are going to have a good strong year, you can do the math on that. If Canpotex or the underlying companies make statements about their belief on settling China and getting the volumes back up, you should obviously anticipate that we will move 100% of that Canpotex volumes.

We're ready to go. We are seeing some spot levels better than the second quarter, but not substantially better in the fertilizer side at this time, we're probably down about 65% Q3-over-Q3 in the July numbers so far. So, we're still waiting to see that one kick back up.

Edward Wolfe - Wolfe Research

Can you talk a little bit about the thought process in moving the CapEx back on balance sheet versus leasing, how you are looking at the asset change?

Kathryn McQuade

We're really looking at it opportunistically as we work with each one of the leasing company, depending on what kind of deal that they are bringing forward to us. In terms of the operating leases, these were assets that we needed longer term. So we got favorable capital leasing opportunities there.

Operator

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

Walter Spracklin - RBC Capital Markets

Going back to the coal decision, Fred, when you are looking at what happened, and we're looking at it now just less than a year you're going to be going into a new coal year, negotiations conceivably starting up again soon, how are you going to change your tactic now going into negotiations with Teck over the next couple of months? Are you going to try to get that 3.5 million tons back? Are you looking at a different way of linking the coal prices to your freight rate? Can you give us a little sense of how you are reframing your negotiations you are going into the next couple of months?

Fred Green

It's a little premature and probably can't offer up negotiating strategy in a public forum. I think what our team has to do is stand back and ask ourselves the outcome. For a perspective, as brutal as the FOA outcome was, it was still substantially better than the last commercial offer that we had from Teck. So, in a weird way, it's actually far better than we would have had on a commercial term.

With that as a basis, we'll have to evaluate what it is that the client would like to do going forward, the value they place on our service and we will have to calibrate our ability to meet their needs. We don't know the answer to that. It's premature to judge where the outcome will be. Nobody likes to fight with their biggest customer. We seem to have a pattern of that over the last five or eight years.

If there is a way to bring that to a result that's good for both parties, that's great. Needless to say, we need to protect our shareholders interests. These are very long-term assets, and when you have a crack in the ground, you need to earn a return that is satisfactory to our shareholders.

I think we're going to have to recalibrate, work together, do our best to try and find a solution good for both sets of shareholders. Clearly, it's premature for us to determine what it is that will be of interest to the client.

Walter Spracklin - RBC Capital Markets

Moving on to the grain side, there's a few moving parts. You don't agree to getting some good market share gains against your competitor there. There is the longer haul mix effect that's impacting going forward, there is the rate cap adjustment kicks in through a quarter and you are modeling for a normal crop yield. There's a lot of moving parts therein.

Is there anything you can help us with in terms of framing our forecast for the second half, maybe if you look at it compared to the second half of last year given those moving parts.

Ray Foot

If we looked at it, it's tough to add to the comments we've already made to you. If you take them in part, our service to the ports has been excellent. Our turn times have been very good, much better than we've seen in the past. Our customers like that and we think we've benefited from it. We think that's going to continue going forward.

On the crop side, tough to call. You've heard from Viterra and others they are modeling average crops. So, that's what we're looking at. There is a strong carryover in both Canada and the US that will help. In terms of trying to put a number on it and dependent upon quality what will get shipped in the third quarter or the fourth quarter, difficult to come down on any specifics.

Walter Spracklin - RBC Capital Markets

I don't know if you covered this off, just a last question here, sort of technical question, your other line time had a pretty big growth or other revenue line item. What's in that? Is that a new DM&E stuff in there, but it went from 27 to almost 50.

Kathryn McQuade

I assume you are talking about the other non-freight revenue line.

Walter Spracklin - RBC Capital Markets

That's correct.

Kathryn McQuade

I did mention that in my comments. That was land sales.

Walter Spracklin - RBC Capital Markets

The land sales are in there.

Kathryn McQuade

As you know, land sales can be chunky and we do expect to end up comparables to where we were last year. So, right now, we are ahead of where we were for the six months last year, but we expect the year to end up close to the same.

Operator

Your next question comes from Tom Wadewitz of JPMorgan.

Tom Wadewitz - JPMorgan

Wanted to see the weekly coal volumes for you have started to pick up quite a bit. Like you said, Teck's outlooks improved a bit. Do you have any broad sense of where your coal volumes in second half might look like year-over-year?

Fred Green

I don't think there's any way for us to predict that. Unfortunately, it's really, as we've learned over the last six months, in the hands of the shipper and what it is that they expect to accomplish in their markets. The indications that we get, obviously, from the pretty strong statements coming out of Teck these days about their production intent is that it should be a pretty robust second half, and then, of course, you'd have to discount off that anything that could end up moving on a different routing.

Tom Wadewitz - JPMorgan

The different routing is not going to reduce volume, it would just reduce revenue per car.

Fred Green

The short-haul, that's correct. It will short-haul less a little bit.

Tom Wadewitz - JPMorgan

In terms of the cost that you have with the Teck business, it's a unit train business; it's presumably highly efficient already. Given that they are taking 15% price away from you, is there a way that you take some cost out of the system and you say, "Well, we won't hold as many crews waiting for the business or, well, somehow lower the service and take out some cost in response to getting paid a lot less for doing the business?"

Fred Green

Little bit of a delicate question, Tom. A fair one, but delicate. I think our basic approach has to be that as an organization, we have an obligation to fulfill the commitments of the arbitration finding. We will live up to everything that we are obliged to do. The bigger issue for us is preparing ourselves for the future. We clearly cannot sit with an abundance of resources just in case somebody wants to ship with us. So we will have to recalibrate the amount of resources that we have available, and hopefully, we'll end up with the commercial terms that are satisfactory to justify those.

If we can't end up with commercial terms to satisfy that, then obviously we'll have to keep trimming resources to match that. There's no reason at this point. It's still premature for us to determine exactly where that discussion will end up. You can be assured that to the extent that we can fulfill all of our commitments, we will, and to the extent that we can find ways and means to remove resources that don't impede our ability to do that, we will also do that.

Tom Wadewitz - JPMorgan

One more question on the resources side of things. In terms of comp and benefits in second quarter, you did a nice job getting more aggressive with headcount reduction, so that cost side came in pretty well. When you look at third quarter and fourth quarter, do you think you can keep those levels for comp and benefits similar, or with the pickup in coal volumes, does that naturally have to come up a bit?

Fred Green

Just for calibration, I think it's important to understand that in Q1 we started off actually quite aggressive on removing the resources, but we misread the market based on the demand for clients. We had about a week of demand and we called a lot of people back. So, our Q1 results reflect the fact that although we started a pretty aggressive layoff program, we ended up calling back nearly 600 or 800 people in January. Of course, when they come back they stay on for four weeks or five weeks.

So, as a consequence, the team was trying to be nimble and trying to responsive to the market. We got burned in Q1. The run rates that you saw by the end of the Q1 in March, and certainly what Brock and his team have down in April and beyond, are much more calibrated. We've actually migrated away from a forward-looking expectation to calibrating our resources based really on the last four weeks demand. That is just a function of the fact that nobody, including our clients, have a clue what's going to happen.

As a consequence, we just can't be speculating and having resources on stand-by. Yet, we've delivered a great product and we haven't missed a beat. I think that model will continue until we see some stability.

Kathryn McQuade

We do think it will probably be about 13,500, and again, Brock is trying to balance AV and the hours of service in the US as well. There are couple of other things in the comp line I think you need to take into consideration also. Of course, our unions got increases this year. So we are fighting some inflation in terms of salary increases for our union forces, as well as we did have the one-time in the comp benefit line from our post-employment benefits adjustments.

The other thing that we will be a little different from where we've been in the past in terms of our TRS, as you recall, we have attempted in the first quarter and towards the end of last year to make it more effective, but we did choose to not take out return swaps on any new PSU issue. So, we will have, depending on what stock price does, that could have an impact, slight impact as well.

So there's a lot of moving pieces in comp and benefit when you're looking at the overall cost. I think in terms of our ability to variabalize the headcount, Brock and the team have done a very good job. That will pretty much be a function of what level of business we have.

Operator

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

David Newman - National Bank Financial

Just on the theme that seems to be playing on the pricing overall, obviously all the rails have reported and are still reporting fairly consistent pricing across the board. Net-net, how do we think about this mean?

First of all, did you manage to continue to secure pricing at the same level into Q2 for 2009 and '10? How much of your book has been priced for 2010? Overall, as you are looking at it from a customer perspective, obviously, fuel surcharges come off fairly significantly here. How do they look at it year-over-year and are they actually getting a bit of a break in terms of what they are actually paying for rail services?

Ray Foot

Let me come at the three components. First, as I said, in the second quarter we were just above 4%. That's not different in any material way from the first quarter. So we continue to sell the value of the product in the marketplace and get good prices as a result of it.

To your second question as it relates to 2010 book, we're about 50% in that respect at this point in time looking forward to 2010.

David Newman - National Bank Financial

That's also at 4% as well?

Ray Foot

I'm not going to talk about where the pricing might be in 2010. We've achieved 4% year-to-date. I'm talking about the fact that when you look at 2010, about 50% of our business is locked in.

David Newman - National Bank Financial

Okay. At positive pricing though year-over-year?

Ray Foot

At positive pricing. On the third piece, in every negotiation we're looking at all the factors in terms of how price is moving around and the relative competitive position in the marketplace and the customers are doing the same thing.

David Newman - National Bank Financial

How much did the fuel surcharge impact the top-line in Q2? I'm trying to do the waterfall or attribution analysis. We have mostly elements, I think mix and fuel surcharge, maybe Kathryn, any thoughts there?

Ray Foot

In terms of the total impact, we said 8%.

David Newman - National Bank Financial

Okay. On fuel?

Ray Foot

Yes.

David Newman - National Bank Financial

Mix was how much?

Ray Foot

Mix was 2%.

David Newman - National Bank Financial

Mix was 2%. In terms of the taxes, Kathryn, did you say there was an $8 million positive benefit? I assume that's the provinces that have an impact on that?

Kathryn McQuade

No. It was a capital tax adjustment in this quarter. The province would have been under the income tax and the income tax rate, and there was only the first quarter income tax.

David Newman - National Bank Financial

You've assumed 26% for the year.

Kathryn McQuade

For the second half of the year, I'll say you can model 26% and what that combines with what you have for the first six months. So, I'm just saying we expect the second half of the second six months to be at about 26%.

David Newman - National Bank Financial

So, if Ontario does adjust their income tax rates, should that take that down once again?

Kathryn McQuade

Yes, it would.

Operator

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

Jacob Bout - CIBC World Markets

If we can talk a little bit about how you are handling the decline in intermodal volumes in Vancouver, both from a pricing perspective, but also any thought about switching from rail to truck similar to what your competitor has done in Vancouver as well?

Brock Winter

Let me start with the operational side. No, at this point, we obviously looked at that and it didn't make any economic sense for us. So, no, we intend to continue to serve the port by rail. Again, we are obviously taking action in our train designs. In fact, last week we piloted our first 10,000 foot train off the Port of Vancouver and our equipment yard heading east.

Again, we have lots of capacity on the existing train starts to and from the Port of Vancouver and we are able to handle the volumes that were projected for the balance of the year with that train model.

Ray Foot

There's no truck competitive situation on the international business coming out of the Port of Vancouver.

Jacob Bout - CIBC World Markets

Turning to just more of a macro for CP as a whole, maybe you can talk a little bit about the targets for your operating metrics from a dollar perspective, and then maybe do you have targets as far as fluidity metrics and headcount as well.

Fred Green

When you don't give guidance it's pretty hard to start to back into all those things. I can assure you that Brock and his team have some very clear expectations of improvement over the past, and I think the evidence in Q2 is that they are stepping up big time to realize those.

The difficulty that we and probably everybody else has is that you don't know what you don't know in times like this. The volumes have been so volatile. Just look at April and May where you dropped literally 32%, 33%. That kind of volatility requires almost instantaneous reconfiguration, redesign. For that reason, I don't think it's realistic for me to turn to Brock and say, "Look, I haven't got a clue what's going to happen on the demand side, but you have to do this." What we have said is that productivity needs to more than offset wherever it is at all possible, and obviously, Brock and his team have delivered that, and that we will continue to pursue even more.

The variable cost side of things, we are having great success on all the operating data that's available. We won't repeat it but it's a great new story from Brock's life. What I'm more interested in over the longer term is the structural cost reduction. It is my belief that we can go back to the comments that we made last fall at the November Investor Day. We said we'd start first focus on variable costs, and as we saw the traction delivering on that, and we estimated that to be $85 million to $100 million over one to two years, every reason to believe we will deliver to those expectations.

What I introduced at that time was that we would then turn our attention to the fixed costs or the structural costs, and I can assure you that there's an enormous amount of effort and energy going into that. What we said at the time is we didn't know the quantum of that, but that I hoped and believed that it could be at least as large as the savings attributable to the variable cost side. A little premature to declare yet, we won't go there, but I can assure you the amount of energy in the company is now probably proportionately much greater on looking at the structural fixed costs because we are in rhythm on the variable cost side.

Jacob Bout - CIBC World Markets

My last question then, we've heard from a number of your competitors, but on the volume side, it's starting to feel like a bottom. What are your thoughts there?

Fred Green

I don't know that I can draw that conclusion. When you look at the underlying business, it's just so uncertain and so flat in both the merchandising, intermodal side, we haven't seen the end of layoffs, we know we're going to see some spot inventory fills in various commodities and they may be blips more than the beginning of a sustained recovery. So, I'm probably on the more conservative side of anything I've heard from anybody so far.

I'd like to believe it. We've got the upside, of course, against some very brutal down volumes in second quarter on the bulk commodities. That is an upside for us. You're starting to see some of that materialize. In the general merchandising retail side, we're still bumping along. Don't have a clue to be honest with you. Certainly we're not seeing any evidence from customers that they are seeing sustained recovery. So, probably pretty conservative.

Ray Foot

There has been some stability certainly when you look at those volumes over the last 8 to 10 weeks. In my discussions with the customers, they've got no signs of strength going forward or any signs of upticks in terms of the merchandise and intermodal world. So, they are just not able to tell us that they see a recovery.

Fred Green

My summary for all of this is that the guidance I'm providing inside the company is we're about 85% focused on cost management, driving down long-term structural costs, and obviously, we've got a sales and marketing organization that's seeking every opportunity. Ray gave you some examples on the (inaudible) and other products, the ethanol.

We need to stay focused on establishing ourselves and being opportunistic, but calibration is very much focused on a sustained long-term recovery. As a consequence, we are heavily weighted to the expense management side over the foreseeable future, while trying to be opportunistic on the revenue side.

Operator

Your next question comes from Matt Troy of Citigroup.

Matt Troy - Citigroup

I wanted to ask about the land sale and other revenues. Could you quantify that? I'm just trying to level as that expectation is going forward. If I normalize your other revenue for what you did last year, I come out with that land sale contributing about 200 basis points of margin improvement without which deal I would have actually slipped a bit. Is that the right way to think about it or are there moving parts and pieces that I am missing in that?

Kathryn McQuade

No, the land sale was up about 20 million.

Matt Troy - Citigroup

There would be no incremental costs or margin hit from that if your revenue is falling over your cost?

Kathryn McQuade

That's correct.

Matt Troy - Citigroup

Second question would be then, on the pension expense side, I think you reported $2 million or $3 million this quarter versus about $20 million in last year's quarter. If you could just give us an update on pension, what your funding requirements and expectation might be through the balance of the year and where you are on the funded or unfunded basis, that would be helpful.

Kathryn McQuade

I do refer you to our MD&A. We have extensive disclosure surround our pension in that. As you know, it's very fluid out there in terms of funding requirements. There's temporary regulations, there's potential permanent regulations coming out before the end of the year. Therefore, we've only given a range of what our possible pension contributions could be for the year and that's $100 million to $150 million. We will wait and see as the regulatory environment solidifies a little bit for us.

In terms of our deficit that as of the end of last year, I believe it was close to $1 billion. Just to be honest, we've seen improvement this year through the six months and where we are to-date of course by interest rate changes and asset equity improvements. Again, funding is based on a point in time and that's an end of the year.

So we'll take a lot of factors in consultation and decide what we will do in terms of following evaluation or not. So, I refer you back to the MD&A and there's no difference in what we have projected in the past, which is the $100 million to 150 million for our pension contributions this year.

Operator

Your next question comes from Cherilyn Radbourne of Scotia Capital.

Cherilyn Radbourne - Scotia Capital

Most of the questions have been asked, so I'll just ask a couple. You did indicate in your commentary that you had exceeded the expectations that you set out last quarter in terms of your ability to control headcount. I just wondered if you could give us a sense as to where you found additional efficiencies on headcounts in Q2.

Brock Winter

Couple of things. Firstly, we are very nimble in changing our train designs, so we are able to actually reduce our train starts further or greater than our actual volume reductions. The other big contributor of this is on the running trade side where we were more efficient than we had planned in terms of our crew utilization. That was a large contributor.

The second one, as we took more locomotives out and we applied some Lean principles in terms of our locomotive repair, we are able to cut our labor ratio to locomotive further than we had planned. So, those are the two big areas where we are able to exceed on the unionized expense side on the running trade side and some of our mechanical forces we're able to go a little deeper than we had planned.

Cherilyn Radbourne - Scotia Capital

Last question for me, could we just have a bit of color on how the DM&E performed in the quarter and how their volume declines would have compared to your own?

Kathryn McQuade

We are not going to really continue to report on DM&E separately in anyway. Suffice it to say, as Ray mentioned, we've seen an uptick in ethanol volumes. We are beginning to see some strength in the US grain. Generally, they've experienced reductions just as everyone in the rail industry has in this recessionary time. Overall, we are still very pleased with the book of business and we are beginning to see some strengths coming back in some of their key areas, which is ethanol and grain.

Operator

Your next question comes from Benoit Poirier of Desjardins Securities.

Benoit Poirier - Desjardins Securities

My first question is more on the free cash flow standpoint. If you look at the quarter, you generate almost $4 million of free cash flow. I'm just wondering what should be your expectation going forward? I understand that the Detroit River Tunnel Partnership brought some positive free cash flow this quarter, but is there any other properties for sale going forward?

Kathryn McQuade

We have not given guidance on our free cash flow. You are correct on the Detroit River Tunnel. It was a great monetization in this quarter. We have indicated earlier that we will have another major land sale this year that should complete in the third quarter and that's our Windsor Station.

Benoit Poirier - Desjardins Securities

Could you please give us more color about the progress for the new intermodal complex that listed, just wondering where you are and is it still moving forward at the same rate?

Fred Green

The progress is being made through all of the appropriate regulatory and permitting steps. Obviously, with the economy having gone soft, the volumes having dropped off, we will pace the construction or the decision for construction to reflect the demand or the capacity situation that exists. Clearly, in today's economy, we don't have to proceed with that. It may be in our interest to proceed with that in the immediate term.

The more likely scenario is that we'll defer that out a little bit, but not very far based on demands rebounding over time. So, we're just going to keep our powder dry and wait and see how the economy goes, continue to preserve and protect the ability to respond when the market is right. But we won't make any decisions until we see the sustained demand recover.

Benoit Poirier - Desjardins Securities

What was the return on capital employed this quarter?

Kathryn McQuade

I don't know that we have that.

Brock Winter

I'll probably have to take that offline. It's a pretty easy calculation. It's done with our fingertips.

Operator

Your next question comes from Jason Seidl of Dahlman Rose.

Jason Seidl - Dahlman Rose

Could you remind us of the pending wage increase, what percentage is that?

Kathryn McQuade

3% this year.

Jason Seidl - Dahlman Rose

It's 3%?

Kathryn McQuade

Yes.

Jason Seidl - Dahlman Rose

When that kick in?

Kathryn McQuade

It's kicked in January 1.

Jason Seidl - Dahlman Rose

January 1. So there's not one in the back half of the year.

Kathryn McQuade

No.

Operator

Your next question comes from Chris Ceraso of Credit Suisse.

Chris Ceraso - Credit Suisse

When I look at the fuel expense, its looks like relative to the other railroads; you didn't perform as well in Q1. So, in other words, fuel expense was down about 30% year-to-year whereas the other Class 1 have fuel down 50%. Here in Q2, your fuel expense declined by about the same amount as the other guys. What explains that sequential improvement? Was there something unfavorable in terms of hedging in Q1 or that helped Q2, or is this the winter fuel effect that hurt you in Q1 and then it goes away in Q2?

Kathryn McQuade

The winter fuel did have an impact in the first quarter, and I think we spoke to that, as well as I think in winter months, we didn't have the productivity and efficiency lift that we had in the second quarter as well. So, those were two items that hit us. It also depends on where we are doing most of our buying, if we're buying more in Western Canada versus other locations like Chicago as well. So it can have to do with the mix of where we're doing our purchasing as well and there's different times of the year that you do buy from different locations.

Just to remind, it's also significantly impacted by the higher taxes in Canada versus the tax in the US on a cent per gallon basis. So a lot of factors that can move that where we stand in relationship to the other guys.

Brock Winter

I'll just talk about our consumption that we achieved in Q2, which was more in line with my expectations. A couple of things contributed to that. Again, we saw the benefits of our top-of-rail lubrication program. We've implemented pretty 300 sites between Calgary and Vancouver that is mostly kicked in now. We've got a few more sites to put in and that is producing the results that we expect in terms of consumption.

As you might have seen, we have also decided to move forward on applying 200 fuel optimizers on our most recently purchased locomotives and we're excited about what benefits that might bring. It's like a cruise control, if you will. Our preliminary testing is suggesting that on a go-forward basis we could see benefit there. So I'm pleased with what we are able to achieve in the quarter and too early to declare a victory in terms of fuel consumption rates, but I think you can expect to see it move along in line with Q2.

Chris Ceraso - Credit Suisse

One other question with regard to the business that you lost or the change in the contract with Teck. Do you think that this signals an increase in competition between railroads? I think, Fred, once you told me that one of the keys in your view has helped pricing in the past few years is that the railroads stopped fighting with each other. Do you think that's at risk and should we be worried about price stability going forward?

Fred Green

I think the commentary from the past was more along the lines of selling your strengths instead of selling your weaknesses. So I think over the last 5 or 10 years, as everybody realized the return on capital employed, people have sold their service levels, their relationships, the equipment supply, the nature of their equipment, et cetera, and not reverted solely to price competition. Price competition is part of it. It's a competitive world.

So, I have no reason to believe that we need to be worried about the future. We'll continue to be competitive. We have an incredibly robust franchise and product offering. I'm pretty sure we can be competitive in any environment. So, I'm not terribly concerned. I am disappointed with the sequence of events, the arbitration of finding, but I am pretty sure we'll be able to figure out how to be competitive going forward.

Operator

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

Bill MacKenzie - TD Newcrest

I just wanted to go back to the discussion on variable versus fixed cost reductions. It sounds like the vast majority of the efficiency savings that we're seeing right now is more on the variable side. I was just wondering if you could give us a little commentary on timing, when will we see those fixed costs reductions kicking in. Is that possibly a second half event? Have we started to see that or is there much of that in Q2 or just more of a longer term process to get realized?

Fred Green

There's no black and white line in time. I would suggest if you put in context the structural costs, they can often involve other parties. So, for instance, if we want to do something working with our mechanical sites, we will need to consider the alternatives. We'll need to perhaps put capital in place. We'll need to perhaps have labor dialogue with the parties affected. If we do that we have to have advance notice that can vary I think 90 to 120 days.

So, there is clearly a time lag between the evaluation and discovery of things. I guess, the way you probably want to look at it is that the approach. We'll use some of Brock's efforts on Lean that these are continuous improvement opportunities. It's not like you're going to flip the page, in the next page you are going to see a dramatic drop in expenses. What we are going to do is complete our evaluation on these many, many initiatives we have underway. We will make decisions and they will have a lead time to them with regard to the capital or the labor issues and you will see them phase in over time.

So, I would like to think we'll start to see some modest impact in the second half of the year, but I'm not counting too much on that. I think they are going to be a '10, '11, '12 story.

Kathryn McQuade

I guess I'm kind of a dog of the bone on this. There are very few costs that are totally variable and very few costs that are totally fixed and there is a lot of intermingling of costs. If you go to what Brock talked about, a lot of the work that we've doing in the shop area and everything are realizing benefits today. As we sit down and look, the working notices that Fred was talking about in terms of some of our salaried employees that are taking salary, we are seeing benefits of those today. There are lot of interdependencies, and so it's very hard to be purely volume variable and to look at things in this pure way that a lot of people like to do.

In my view, we have started to see a lot of the cost beginning to sustain itself in the structural area. We say volume usage and everything in the slides, but there's a lot of things behind those initiatives that are creating the reductions through each one of the line items. I caution people back to what Fred said that it's everything variable and now we're going to turn our attention to structural. This is really about an evolution of changing our total cost structure and a continuous improvement through Lean management and through centralization of processes, et cetera that will be an evolution over a longer term period.

Bill MacKenzie - TD Newcrest

On the coal side, Teck had about 1.5 million tons, I believe, of carryover tonnage in Q2. I'm just wondering in terms of your newest contract that you had with them, does that impact you at all? Is there any benefit in Q2 from sort of carryover tonnages from previous coal? Was your old agreement with them separate not tied into carryover tonnages?

Fred Green

No. The rates that we collect apply in the period in which we move the coal, as simple as that.

Bill MacKenzie - TD Newcrest

You've given some pretty helpful disclosure and the expectations there, you said $360 million of revenue in the upcoming year. You disclosed that it is $560 type million customer in 2008. I'm just wondering if you can give one last kind of important piece of disclosure to that, how much of that reduction is fuel related?

Fred Green

I don't know if we can do that. I just don't know if we can do the math.

Kathryn McQuade

Let us take it offline.

Fred Green

We can explore offline if there is something there, Bill, but we don't have it at our fingertips.

Operator

Your next question comes from [Seth Lawree] of Merrill Lynch.

Seth Lawree - Bank of America/Merrill Lynch

I think most of my questions have been asked, but if I could just get some clarification on the fuel expense line. Looking at your year-over-year decline in gallons used at about 24% that was a little bit more than carloads and RTMs. I realize there are efficiency gains in there, but would you expect that spread to stay constant going forward, or were you referring to earlier that absolute gallons used were going to stay near of what's the second quarter run rate?

Brock Winter

I guess it's a combination of volume and the consumption rate. As I said, I would expect our consumption rate certainly in Q3 to reflect what we achieved in Q2.

Fred Green

I would caution anybody to use absolute numbers. The volume is so unpredictable and so variable that I would just encourage you to go back and look at run rates, as Brock said, on productivity. He is pretty comfortable that he has got in rhythm and that the Q3 consumption rates, unless there's a dramatic change in mix, ought to be in the range of what you saw.

Seth Lawree - Bank of America/Merrill Lynch

Just quickly on depreciation side, I guess you sold some assets. Looking forward, can that move around a bit or should it stay fairly constant in that 135 range looking forward?

Kathryn McQuade

That's one area I'm really challenging the team on to look to see if there's further retirements that we can do. Right now, I'd say the run rate is about what it is for the rest of the year. If we are able to figure out some more assets to retire between now and the end of the year, that could be a help. That's something that we're going to aggressively pursue, but I have no numbers to offer up at this time.

Operator

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

Fred Green

Thank you everybody. Appreciate the time together and we look forward to seeing you or talking to you in the various conferences and at the third quarter.

Operator

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

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Source: Canadian Pacific Railway Limited Q2 2009 Earnings Call Transcript
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