Q3 2019 Earnings Call
A few minutes that can be found on fans website.
That's that's actual results could differ materially.
Conciliations for any non-GAAP measures are also posted on <unk> website at Www Dot Yeah. That's you.
Extend by your call will begin shortly.
[noise] <unk> third quarter 2019 financial results conference call.
Cannot act to turn meeting <unk>, Vice President Investor Relations, ladies and gentlemen, Mr. Butcher.
Well. Thank you metric good afternoon, everyone and thank you for joining us for C.N. third quarter 2019 earnings call.
I would like to remind you about the comments already made regarding forward looking statements with me today is g. Internet, our president and Chief Executive Officer, <unk>, Our executive Vice President and Chief Financial Officer.
<unk>, our executive Vice President and Chief operating Officer, Heath, Riordan, or senior Vice President consumer products supply chain and James counts, our senior Vice President rail centric supply chain. Once again I do want to remind you to please limit yourself to one question. So that everyone has the opportunity to participate.
In the Q. and a session.
The I.R. team will be available after the call for any follow up questions. It is now my pleasure to turn the call over to C.N., President and Chief Executive Officer, Mr. G.
Thank you both and the good afternoon, everyone and welcome to our third quarter, earning called.
I'm very proud to C.N. team do delivered very good results with solid cost management in a softer and uncertainty comic environment for the North American real industry.
We produce adjusted <unk>, 11%.
Revenue growth of $140 million, Canadian or 4% growth and operating ratio of 57.9, an improvement on unsexy basis points.
The next few minutes, Rob would cover our operation James and Kate will cover their respective marketplace and just laying will peel off the financial.
C N pricing was above rail inflation, our Carlo growth was flap, which is well above you industry negative average or 4.5% put a quarter and our costs and acid institution K.P.I.R. improving.
Wild and North American ran industry is dealing with slower growth in manufacturing natural resource energy and trade. We stay brief focus on building, our sustainable longterm business, namely.
Increasing our exposure to the consumer economy, and that's a mortal in automotive deploying productivities, enabling technologies, while rail operation, creating new model of rail growth in partnership with others and building advance of human talent as one of our longtime competitive edge.
Since we last spoke.
We reach a purchase agreement for support A.C.S.X. rail property and we are starting with a new joint service that will connect the U.S. East coast sport some of them with the consumer distribution center located in greater Toronto and Gray to Montreal.
We are also initiating wind board supply chain planning with P.S.C. executive.
Leverage to purchase of an ocean terminal in Halifax.
Same whiteboard discussion will also take place with a team of V.P. World, who is acquiring the Vancouver phrases, where we Vulcan container terminal and with A.M.C.I., who is acquiring the Rupert bulk terminal.
C N franchises <unk> has a very high bar you have to entry, namely we are you on the railroad that we used to treat coasts reach 15 container 15 Ocean container terminal.
And 23, and then from an old and growing.
We believe at C.N. that partnering with Celtic World class operators and investors in that respect the feel of expertise is a very small approach to create new model of future around world, especially for the increasing they important demand derive frayed from the consumer economy.
Regarding costs improvement.
P. S.R. is in our D.N.A. and Rob as the number of initiative.
Namely yeah alignment of our mechanical shop with the Dom pyramid volume, the better leveraging or now upgraded locomotive and rail car fleet.
Rob seems also downsizing or a rail car fleet of the less productive and older us up targeting the removal of <unk> of about 5000, Melkar's, which is about 8% or fleet.
In the same vein of costs and Productivities improvement Jesus name will vacated 75000 square feet of lease space in Montreal and make maximum use of our headquarters building and are cheap digital officer is scaling up our robotic process automation to accelerate the visualization of labor intensive repetitive.
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By the end of this year.
We will have 9000 connected workers drain cruise in common with mobile device in their hand.
Michael Foster our Chief then Technology Officer is task to increase it productivities of these newly collected cruise in 2025 populating these device with but activity digital application.
For longterm investors will recognize E.S.G. I spotted investment decision, where I'm very proud to report at C.N. is again, the only railroad to be on the Dow Jones sustainable World Index for the eight years in a row and we also again part of the North American Dow Jones suspended <unk>, so that'd be the index for the element here.
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Also very much worried of mention our carbon emission intensity continue to decline our fuel efficiency improved by 4.1% of water, which means we avoided 50000 metric tons of C. With two emission and say $15 million in costs. We are the most fuel efficient freight railroads.
And all of North America.
But not Rob I will I ascribe to cover the operation Alright. Thank you J.J. first and foremost thinks goes out to the men and women within the C.N. team help deliver this quarter's outstanding results. Some of the operational highlights. This corner include the team handled in all time record G.T.M.'s for third quarter, 1% more than.
The last year's Q3, and 5% higher than 2017 train speed and drew 4% over the same horror last year, <unk> improve 7% and train productivity increases 2% versus the same corner and 2018.
As J.J. mention this quarter's financial results were in large part assisted by our strong cost control efforts in the quarter. We delivered in all time best fuel efficiency performance, improving 4% year over year that means we moved 4% more tonnage the same distance with the same amount of fuel.
C N continues to be the North American class, one railroad leader in fuel efficiency using a little more than eight tenths of a gallon fuel per thousand grows 10 miles.
These results were not an accident, but the result of an intense day to day commitment by the operations team.
Coupling buyer locomotive engineers, and utilizing onboard tools minimizing idling locomotives and a strong execution of the number of locomotives used on trains for T.V. saving.
From a rail car perspective were in the process of returning nearly 3000 rail cars that wrong lease scrapping another 2000 rail cars and parked over 6000 cars to save and car expense.
All of these actions help to write size or flee to the rail volumes were experiencing in decrease our expenditures associated with them.
As a result of these efforts are active online inventory is dropped 6% year over year, leading to a more fluid railroad.
On the locomotive front and we continue to return least locomotives more return the last of these locomotives and Q4 .
As we rid ourselves of further expense related to lease locomotives.
The increased reliability of her upgraded locomotive fleet has given us the flexibility to make these moves.
S. J J also mention within our mechanical department, we are lining our resources with the increased reliability, Berkeley and the softening traffic volumes. These moves will allow us to more proactively scheduled maintenance at the right locations and continued to improve our fleets availability, while minimizing the amount of inventory.
We carry at outline locations.
Regarding safety, we continue to progress on plan for completion and conversion of all of our mandated positive train control P.T.C. subdivisions as we now have just two remaining subs to convert.
All required territory on the C.N. will be completed by your in which is a full year ahead of the P.G.C. mandate of December 31st 2020.
This will allow us to continue to work with other class one railroads on progressing interoperability between railroads and 2020.
In addition, we now have received or first two autonomous track inspection cars, which are being commission now with another six more to be completed by your in these cars will allow for increased testing in more consistent results that ultimately leads to us to a safer and more reliable railroad.
With winter preparation in high gear. The team is work very hard preparing for this upcoming season.
To that in the team is added 40 more air cars to our fleet, bringing our total to 100 cars.
Ready and prepared for this winter season.
Our capacity additions continue on track and more aid in our resiliency to the impacts of winter as well.
While we don't know the severity of cold weather. The season, we are as well prepared as we have ever been.
To close I'm very proud of the results of this team is delivered as we continue to prepare and adjust where needed working with James and keys teams on the economic scenarios ahead.
With that I'll turn it over to James.
Peggy Rob overall revenue for the quarter was up 4%, Keith and I will walk you through the top line for performance for our respective marketing Q3 had provide some insight on what lies ahead.
North American rail industry is facing a challenging economic environment and as you heard from Rob we're managing across very closely.
Looking and year over year results. It's clear that are unique three post marketing reach had footprint in North America are structural advantages that allow us to diversify or traffic mix at adaptor changing market conditions.
Right example of this structural advantage an action was our performance in North America coal segment in the third quarter.
Cole was a tale of two marketing Q3 strong growth in Canadian exports 80 per cent driven by the wrap up of course versus new mind that opened earlier. This year was partially offset by sluggish U.S. thermal coal exports down 38% as a result of low 80, I too pricey.
Looking forward, we will continue to see a sequential increase or rhodri for Canadian colon Q4, and expect the same for U.S. cool.
Canadian grain crop has been delayed as a result of poor weather conditions, we ended the quarter, 1% below last year.
We expect to recoup those volumes in the spring of 2020.
Again, our market reaches the structural advantage, we run longer trains would direct you had to C.N. service from country elevators to West coast ports.
G. three grain terminal in Vancouver is expected to be in service and the second half of 2020.
Will be the first grain loop track the loop tracks supply chain in Canada, and will facilitate quicker acid turned times I lost the ship more tonnage with fewer cars.
We are creating new capacity and increasing resiliency to respond to hire Canadian crop yields.
The structural change in the B.C. forest products industry was that the root of 11% decline in revenue.
Segment and Q3.
Several B.C. saw males curtail production in response to low pricing and high stoppage fees and 2019.
We have we set our costs to support a new sustainable Ronald Reagan moving forward.
Natural gas liquids revenue was up 32 percentage you three driven mainly by propane and the full ramp up on the altogether export facility in Prince Rupert.
Volume is now running near Phase one capacity at 16, plus cars a day and we expect to see this production level continue going forward.
Prince Rupert as a gift that keeps on giving and Q3, we saw the start off of the Raymark plastic baggie line, which feeds the container export market.
Looking ahead, we see more growth and Carlo translated several commodities at the Port Au Prince Rupert producing container exports that improved steamship line round trip economics.
Refined petroleum products revenue was up 20% on the back of new long haul jet fuel business from Alberta to Ontario, as well as year over year increase and run rate from the northwest refinery in Alberta, which began operation and late 2017.
Our market reach allows us to directly connect Alberta production of refined products with desirable and markets.
San revenue was negatively impacted by slow down and drilling activity in Western Canada, We don't expect to see a recovery until second half of 2020.
Crude revenue was up 34% and a quarter. Despite several of our customer shipping below their take are paid contract level idling capacity in response to production restrictions.
We call that a cue for last year crude differentials were very high and we shipped on average about 230000 barrels per day of crude by rail so the year over year costs and Q4 will be extremely challenging.
Now I would turn it over to key to speak to our consumer products supply chain Q3 results. He.
Thank you James and good after noon, everyone. The consumer markets produce strong results in the third quarter, our ability to adapt to the market realities with strong cost management as well as our ability to provide our customers with solutions have allowed us to outperform our markets revenues were up 13% and R.T.M.'s we're up to.
Percent for the group and the third quarter versus 2018.
In both intermodal an automotive we continued to win with our unique network reach a consistent high levels of customer focus.
The cost effective and efficient gateways with which we serve continue to produce sustainable long-term results.
Starting out with automotive Sans team has worked extremely well together to provide our customers with solutions that generated slightly above 5600, carloads growth, allowing us to outpaced the industry growth rates and setting record monthly volumes.
Our strategy to increase the number of auto port storefronts as well as providing a very solid supply of railcar capacity is winning in the market.
Our new Vancouver Auto Port facility is also now open and producing results.
In intermodal the initiatives, we presented at our Investor Day will continue to provide efficiencies an additional capacity in our inland terminals.
C N has room to grow and we continue to generate new ways to improve our position as a cost leader in this segment.
In the international Intermodal segment trade uncertainties have contributed to lower industry volumes.
We have been able to leverage our network of efficient gateways, our extended reach into the hinterland and our points of product differentiation to outperform the industry. For example, Prince Rupert finished the quarter at run rates of 1.35 million to use which is right at the terminals nameplate capacity expansions.
Coming in 2021, and 2022 did take that capacity to 1.8 million T. use.
C.N.N.R. partner D.P. World have a successful history of innovating ways to increase throughput above the name plate capacity levels.
In Q3, while growth rate that L.A. long beach, Oakland and at the Seaport Alliance, where 3% minus five per cent four per cent and minus 8%, respectively. Our growth in Rupert with about 30% over 2018.
As we position ourselves for the upcoming contracting season of 2020 for our overseas customers. We have concluded agreements with zim.
C.M.H.C.G.M. and Westwood.
Most recently, we have also successfully concluded negotiations and increased our market share with the Ocean network Express for their business at the ports of Vancouver, Prince Rupert and Halifax, as well as Cosco for their Vancouver business, our partnership with mobile grain at the newly opened Regina intermodal.
Terminal is an excellent example of our strategy to continually AD intermodal storefronts, providing our export customers with additional reach opportunities and choice as ship sizes increase creating opportunity to enter new markets from various gateway is critical to continue growth for our customers and our.
Self initial response to this new storefront has been quite favorable and we see a strong pipeline of export volumes as we fully launch and the next couple of weeks.
The new C.S.X.C.N. container train service from the ports of New York, New Jersey, Philadelphia, and Wilmington into the Montreal, and Toronto gateways will compete with over the road trucking for both dry and refrigerated consumer goods.
On the domestic intermodal front weakness in the manufacturing sector led to weaker volumes in the U.S. domestic and trends border segments. In contrast are cargo cool temperature protected services. The Transacts Intermodals service as well as our wholesale partners intermodal volumes are contained are continuing to grow at <unk>.
Than industry levels.
Our full scale partnership and the E.M.P. program has also been a solid plus 15 per cent growth couldn't CRIP contributor this quarter.
So the sum it up we're proud of our results as quarter, which outpaced the industry growth rates, we look forward to working with all of our customers to figure out the ways of the 2900 in 2020 marketplace and providing the service network reach and cost effective gateways that will allow us to win in the marketplace at whatever those challenges.
The waves may bring.
Well now turn it over to his land for the final financial aspects of the quarters yourselves.
Thanks skate starting on page 11 of the presentation I will summarize the key financial highlights of our third quarter performance.
While we have witnessed we could volumes driven by softness in the general economy, we swiftly right size, our resources to changing demand well being conscious of the mid two longtime structural opportunities that are in front of us.
Revenues for the quarter up 4% versus last year at slightly higher than $3.8 billion.
Operating income came in how to billions 613 million up 121 million or 8% versus last year.
<unk> three operating ratio is 57.9% or 160 basis points lower than last year.
No that sands operating ratio always excludes the benefit of any asset sales.
Net income is just shy of $1.2 billion or 60 million higher than last you with reporter diluted earnings per share of $1.66 versus $1.54 in 2018 up 8%.
Excluding the impact of a large SSM in 2018 are adjusted diluted the P.S. was up a solid 11% versus last year.
The impact the foreign currency was favorable by 5 million on net income in the border or one sent to B.B.S.
Turning to expenses on page 12, or operating expenses were up 1% versus last year I just above $2.2 billion.
Expressed on a constant currency bases expenses with laugh versus last year.
At this point I will refer to the variances in constant currency I will cover some of the key highlights.
Laboring fringe benefit expenses were 2% lower than last year.
This was mostly the result of lower incentive compensation by over $40 million, partly offset by higher wages driven by the onboarding of Transacts employee.
Purchased services and material expenses, what 13% higher than last year.
This was mostly the result of higher trucking and Transload expenses due to the inclusion of Transacts and higher repair and maintenance expenses.
Fuel expense was 11% lower than last year, driven by a 12% reduction in fuel prices and the 4% improvement in productivity to produce record fuel efficiency generating over $15 million in savings and supporting our assisted inability agenda.
Finally equipment rents were 11% lower than last year, driven by lower locomotive least expensive $20 million.
No I'm moving to cash on fish 13 free cash flow was almost $1.5 billion through the end of September .
First priority for cash remains reinvestment into business.
Capacity investments are nearing completion, and we have received 135 of the hundred and 40 locomotives on order foot 2019.
We continue to reward or shareholders with consistent dividend grow and we are on track with our current share buyback program of $1.7 billion, having repurchased 9.2 million shares out of costs of roughly $1.1 billion since the end of January .
Finally, let me turn to 2900 financial outlook on page 14.
While volumes in two or three in two or three came in the lower expectations and while economic weakness trade and geopolitical issues are creating headwins.
Unemployment levels are still at record lows and consumer spending so far remains resilient.
Manufacturing has softened significantly.
Therefore, we now expect our full your volumes to be slightly negative on a year over year bases in terms of R.T.M.S compared to what previous volume assumption of mid single digit growth.
As a result, we all revising or 2900 G.P.S. guidance.
We are now targeting to deliver high single digit E.P.S. Grove versus 2018, I, just deluded E.P.S. a $5.50.
On the capital front, we still expect to finish the year approximately $3.9 billion.
As previously discussed we expect the capital envelope for 2020 to normalize to historical levels supporting improved free casual conversion.
In the face of a weaker economy, we will continue to tightly controlled costs. While at the same time remaining focus on the structural opportunities that would provide growth for this franchise for the years to come such as it 30% capacity expansion of Prince Rupert for in a motorbike 2022.
Growth potential related to the purchase of Ridley ball terminal by the private sector.
Creating a prince Rupert of the east at the whole term into modal terminal in Halifax now owned by P.S.C.
In closing remain committed to our agenda of operational and sort of this excellence and we continue to manage the business to deliver sustainable value for today and for the long term on this no back to you J.J.
<unk> and before we open up go in and just like to do some some conclusion comments here. So I was what was mentioned during their calls are consuming calling me in North America, causing you to perform so we have low inflation in low unemployment loud government spending sustain consumer spending.
Business capital investment is weaker manufacturing has slowed down.
<unk> is quite versatile and trade is under <unk> is putting us other much pressure.
This suggests to north American Red industry volume, which was negative by four and a half beside the few tree would costing you two underperform the G.D.P. while at C.N.. We continue to aim for <unk> volume to to outperform hour array of industry in North America, We're focus a longtime sustainable sustainability in every sense of their work.
We have an exceptional balance sheet when bad investment grade credit rating <unk> of less than two we have a track record for increasing dividends for 23 years in a row and one of a dividend yield that currently have sent out about 1.9%. We're passionate about building a innovating you supply chain for for the future available.
We even mention a couple of those on the call and we managed costs vary from these ring a slowdown in cycle.
Quite so Patrick I'd like to turn it over to it a few any session.
Thank you. Please <unk> at this time you kind of question.
Well, they're responsible the package that's hard to several questions. Thank you for intentions.
The first question is from Brandon Glinski from Barclays things go ahead.
Hey, I could afternoon, or one and thanks for taking my question. So I guess, you know just plain or or J.J. You guys. Definitely mentioned, you know an incremental slow down and manufacturing in the industrial side of the house, but retail we may need okay.
I guess in that context, and you know some of the contracts that sounds like Keith was talking about that incrementally come onto the business next year. I mean is this where we should expect Saint <unk> industry from a volume perspective.
So if C.J. think rather than a question you know there's two things that we're trying to do which we try to as an industry as a north American industry, we'd like to outperform the G.D.P., obviously not possible short term and S.T.N., we would like to outperform a on industry and that is our goal. So.
We did that into a third quarter, we have volume flat and industrialized minus 4.5%.
Either call load staff, so far quarter today, the college stuff for the industry actually they are more challenging the there were no third quarter for all of the railroad and it sends objective whatever this fourth quarter and next year is too odd perform the industry, but a while the economy is difficult for my dispatching energy trade and natural resource.
<unk> may not be able to perform the economy.
I don't put it up help.
Yep. Thank you.
<unk>, thank you rather than.
Thank you. The next question from Cherilyn long from T.D. Securities.
Thanks, very much and get afternoon.
You know so currently we've had a slowdown in the economy eat but it does seem to me that some of the volume growth that you're anticipating and 2019 has simply been deferred and there I'm thinking about crewed by rail the cost per mine and Canadian grain. So I appreciate that it's too early to talk about 2020, yet but.
Maybe you could just give us the more color in those areas.
So I think James you know that's you know some markets space, maybe you can provide color and needs to be segment.
Yeah. So we were disappointed to see the late you know the late harvest for the Canadian grain crops. You know, we're still confident that you know moving forward, we're going to have pretty pretty good granier. This year. All indications are that it couldn't be one of the largest crops in the in Canadian history. So we're we're eager to start moving that and we have the resources to do so.
On the crude side of things.
A little more difficult there was some governing government intervention that you know took place in in that market segment, and we built out capacity to move about 300000 barrels a day of crude.
In September we moved about 180000 barrels you still have that lead capacity available to move that crew. If in fact it does become available you know indications are pretty clear that we will see the Alberta government crude contracts go into private hands here in in short order, possibly by the end of the line.
We're very excited to start moving that that could volume when it does talking about the calls for our mind it had some challenges.
Of wrapping up right now, they're kind of where we expect and to me at an annualized rate at about 3 million times a year.
Open moving forward the that rate is going to continue to accelerate we see good to see sequential improvements.
Get to that 5 million you know time per year round your base.
Thank you for the question Charlotte.
Thank you that's my one.
Thank you.
<unk>.
Thank you to any questions from Chris whether me from city. Please go ahead.
Okay. Thanks, good afternoon.
Enough to know what's it all at the touch on on.
The topic, a a volume and I get sort of the the outlook getting all software as me move forward here you started the year expect thing I think hiking will be but our camp horseback did but <unk> progressively it'd be years gone on if we see each of the weakness linger through the first 2020, I'd think about sort of resources aren't you well position you paint.
Batching bashing resources relative to get potentially softer volumes, particularly around had gap.
Yeah, I think because I think I was taught and then the rub can add to that but definitely the overall strategy is quite simple we need to adjust abuse also demands when demand goes up we need to size up resource when demand comes down we need to to go to size of the reserves to to the to the new volume. So we talked about locomotive rolling stock people. So if you want.
To add some color Rob yeah, absolutely and thanks for the question, Chris. So you know I talked about some of that and my <unk>. Some of the things we're doing certainly in locomotives I talked about turning back the lease locomotives, we're doing that adjusting to it. We've got 150 locomotives laid up right now and will continue to adjust as we go on from.
Rolling stock standpoint, J.J.J. talked about it. We've got 5000 cars were were reading ourselves up another 6000 laid up that are off car hire relief will continue to be aggressive than that that area from a people standpoint, we continue to adjust our hiring model year over year. So.
Done that as the years gone year has gone on will continue going into next year and then finally I talked about the mechanical footprint that were.
We're looking at from an alignment standpoint, as we see the volumes dropping you know it is about getting or locomotives to the right shop, reducing inventory, increasing the reliability and ultimately that would lead less people to do that so I will continue to be aggressive in this area and and continue down that path.
That's right and more effort on fuel efficiency.
And even an I.T., where where where we're in the process I haven't and of course now for a few weeks and we're going to do that between on your event to convert what we call to paycheck of consultant with one paycheck of or permanent a employee. So you you you will see some money moving from.
Purchased services into added wet headcount, but then f. of that is almost of the ratio of 1.9 enough of that is a dollar savings because.
The employee F.C.N.R. you know the way we're habits sorted out are no. Good the costs is less than the purchased services of a consultant.
I don't know if that helps you or something.
The very helpful. Thank you very much appreciate it.
Chris.
Thank you.
The next question, it's been on applying from Dejarnett capital markets. Please go ahead [noise].
Yes. Thank you very much. So my question is more on there.
On the terminal side, the Prince Rupert. This currently running at men played there's also additional business with costs go in Vancouver, but I was just wondering whether the the slow down and volume is kind of slowing down the <expletive> expansion and any thoughts about the a blank.
Sailing winter, it's more specific to a particular geographic region. Thanks.
I think came to this or that in in your question. This sort of the the short term, which is the peaks isn't an m. legs sailing into long term, which is those x. pension, which will take place. He yes on the long term those those expansions will go on there's there's there's no no discussion about stopping that and.
Short term with regard to blank ceilings, we are seeing blank sailings and let's all remember what a blank sailing is it's where the the the operator. The vessel is a is looking to consolidate volumes and and maybe stop calling on a particular port.
Maybe skip a port and a lot of that has to do with capacity management and we are seeing those and they're mostly on the west coast. We are not seeing as many on on the east coast as of yet.
Thank you very much worse.
I may have been Wesley if you go in our.
<unk> for the there's a quarter you go and pays 21, and you will see the expansion that I'd been worked on on I.D.P. World and there's $200 million of $4 million of jointly funds track in a different infrastructure outside the terminal itself, which can be built for the next 24 months by C.N. the federal government an apart.
<unk>, so they're investing and we're investing and those that infrastructure I going ahead.
Okay. Thank you very much <unk>.
<unk>.
Thank you to next questions from mechanics or from a bank of America things go ahead.
Hi, Good afternoon, maybe just a little clarity on that outlook, just playing or are you just to understand you now targeting negative earnings and the fourth quarter, given that the pertains or mid teens kind of growth in the first couple of quarters and and I guess just trying to understand it just beyond economic is it [noise] forest products secular shift or or delayed coal grain.
[noise] Ah crude that could ramp up as we move forward just want to try to understand how you roll into the fourth quarter and then into early 2020. Thanks anytime.
<unk> yeah. Thanks to account for the for the question I can take the first part and then maybe I'll turn it over to you James for for the the commodity outlook out you know obviously I mean can you can you can do the math, but but we went from a low double digit D.P.S. growth and now we're high single digit.
<unk>. So obviously, we we've we've two four will be a challenging quarter and if you look just on the volume standpoint, you know month today, I mean or volumes and and we do report are volumes. Both in terms of color with an R.T.M.'s are volumes are down 10%.
So obviously that impacts E.P.S. and and I'll, let you do the math, but but obviously that the volume you know deterioration or challenge is is the story, maybe maybe James you want to touch of course early on some of the commodities Yeah I'll take I'll talk about a couple of market you mention forest products. The forest products that is a structure.
Change the basic forest products industry that business is not coming back, but you can expect to see the same rate in or similar run ready for that we saw on Q3 on the crude side of the business. That's a little different if you look at the costs from last year queue for compared to four of this year, we had an all time.
<unk> 232000 barrels a day that it came for as we're getting to wrap up take on as additional capacity and the government contracts that were coming into their that didn't happen and this year, we're not going to see that level of I ship and you know we don't expect to see the same level ship. It that we saw neck last year. So it's going.
To be very difficult a comparison year over year basis coal is going to continue to be a very very favorable year over year costs of Canada coal in the U.S. as much as we are seeing a improve runrate from June two two and did you three and expect to see that continue any queue for we're not going to hit the record call volumes of U.S.U.S. export.
Are we sign that 2018 I.
I hope it gets to the root of your question Oh actually I appreciate it. Thanks.
<unk>.
Thank you. The next question, it's from Ravi Shankar from Morgan Stanley . Please go ahead.
Hi, good afternoon, you've got sort of <unk>.
Maybe just bring it back to crew by rail here I guess you know the question is how quickly could get teams in place to be able to move higher volumes and he invented the Alberta government does transfer their program to private <unk> and then maybe just any way to frame. How you guys could see volumes ramp into 2020 in that case.
So maybe I can certainly the resource so we have the locomotive the people in the track capacity to wrap it up now up to the 200000 vowel that we talked about earlier in term of what's me up and they get a marketplace to live James talk about what what's what's the color there yeah I I don't get it's unclear to watch what might happen in in 2020.
As far as what crude is going to look like it's really going to be dependent on it.
The government is successful and placing the contracts in private hands and if they lifted curtailment on production, there's about 200000 barrels a day of crude that it not moving that's in the ground that wants to move if the production elements are left.
That does happen, we're ready willing and able to to move that volume you know Rob asked me all the time I said why does it could come and went as a group them and I'm, saying.
Lied, you're ready to go Rob and as soon as I know I'll make sure then you know.
Great appreciate color.
<unk>.
Thank you. The next question is from some laundry from quite <unk> go ahead.
Thanks, I'm, good at golf and and I, just want a task a little bit about the the queue for guidance and specifically the L.R. seems like the the implied operating ratios maybe a bit worse sequentially. Then then we've seen historically sounds wonder if he could talk about the factors that that might be driving not if it's next door then if there's any seasonality.
The with Transacts that that we need to think about any color would be helpful. Thank you.
As you know Allison with all due got things by quarter, but let's see if.
I can help you have if with yeah. There's always on it when you looked at D.O.R. Alison on on a quarterback quarter bases. There's always some seasonality I mean remember we we are the rebel that the north so obviously.
The winter hits us earlier than than others.
So that there's some seasonality there I mean, we just had a quite a a dump of snow in western Canada about a week or two ago. So there is some seasonality there and and as I said some of it is some of it is volume and and and some of it remember is you know we are reducing or right.
Sizing or resources, but as I've mentioned, a few times there is always alive. When you do that where you know by the time that we identify cars are locomotive still be return sometimes that benefit is it comes a couple of months. After because you know you need to inspect you need to know where you're going to return those assets to the less source and so.
One so there is alive so.
I as a as you mentioned you know we don't guide on a quarterly bases on a war, but there is seasonality a winter comes every year and then there is alive when we reduce costs.
Hopefully that great. Thank you all around US and then thanks you for the question. Thank you.
Thank you. The next question time, Jason title from Colon. Please go ahead.
Thank you operate or in the afternoon and every one you guys hobbies. You mentioned you are right sizing up throughout the quarter and and fully understand a lag effects of that but it's hard to write size <unk> because a lot of the programs have already been started.
Start thinking about 2020 <unk> as it relates to the levels of 2000 in 19.
Yeah I go ahead, I can save that one Jason like we said and and and at C.N.. We do what we say we're going to do so again.
We've said that we would have to use of elevated Catholics 90, 18 and 19. This money we will need because this is on our core route going from essentially Western Canada, Edmonton Winnipeg, and then to Chicago. So we believe that we will grow this railroad in the middle long term.
Push from it you just hope Keith talk about Rupert being to get on keeps on giving so we will need that we will need that capacity and that that will be good for us. We've caught up now so now we need to keep up with our partners and D.P. world and their expansion, but we will go back to historical levels. So again next year.
And we said that the people that next year, we would go back to historical levels and you've been following us for for years, you know what that means and a and frankly as we finalize our our business blind with our board. This fall we will provide more visibility on on on the absolute number in January as we've typically do.
But rest assured that cap X. will go back to historical levels and 2020.
Yeah that was my <unk>.
Thank you very much.
Thank you to next questions from Walter Spracklin from our B.C. capital markets. Please go ahead go thanks very much a good afternoon everyone.
So I'd like to start a on on pricing and and perhaps I don't know if keep you want to chime in on on the intermodal side because I note Junior you mentioned you were pricing above inflation and you're not providing specific but.
Is it fair to say that pricing is being <unk> is less robust than it was previously and and is that due to excess capacity or truck capacity is it do to access or or more intense real on real competition in any color you can give in terms of not necessarily the absolute value pricing, but perhaps.
Directional changing pricing and where it's been earlier this year.
Thank you all term maybe also other than the kids will come in we are definitely definitely pricing above rail inflation and as you know really inflation right. Now is is not that high so the gap between what we get on price and the rental inflation something that we feel good about kids you ought to talk about some of your segment sure.
Walter you talk about competition, we we compete against you know all the class one railways, we compete against the truck, but I also compete internally against James for money for capital. So if I bring a project where I want to grow the business to as his land J.J. and I don't meet the hurtle rates than I don't get the money. So.
We have a very disciplined approach inside that if we need things in a we have to have a good track record and we have to.
Have gain confidence from J.J. and she is land that we are doing the right things from a pricing standpoint so.
So thank you for your call Okay. Thank you.
Thank you.
Thank you. The next question from the scene and Hansen from Raymond James. Please go ahead.
Oh, Yeah. Good afternoon, guys. Just a quick for me on Forest, If I may James I think you mentioned earlier in the call that forestry is down to or stable run rate now are you getting good indications from the P.C. customer the mellor that is that the predominance of the capacity her comments or shut down heard the far and should we <unk>.
<unk> are we at risk of another step down one number log Beck burn through discriminate colored you might have that.
I think longerterm answer to look out past 2020, 2021, you're going to see you know additional take down at capacity just because of the you know the allowable caught Ah right now the indications we're getting into stable pricing indications are that we've kind of reached a new stable level that we've seen through three that we expect to continue on movie.
Forward and that's what we are Resourcing again.
And if I, if I'm glad to see if I may have through the screws the defined vetoes actually moving in the province of opera and there's a number of producer that tell us that did they think the province with up to do it B.C. has done which is to control the prime be it'll do we'll have to open up the for us to the higher rate of a of or cut so.
So.
We even though this.
Space of coding of the of the Pine [laughter] is done at some point, we may see some of the in Alberta in that area. That's a favorable it's just.
Yes.
I understood.
Thank you.
Thank you and the next question is from seven o'clock from don't you Bank things go ahead.
Hey, Thanks, [laughter] I, just want to get back to cap X. for a second and so can you guys probably better understand why the intensity of investments wouldn't come down next year Sorta I guess below your typical historical range given your envelope. This year is on change at 3.9 billion and you know our T.M.'s have been you're our came assumptions up.
I'm down from a pie single digits to now down slightly every year. So could you just gives a sense of why that you wouldn't see savings roll over into next year based on your capital and vote for this year, Yeah, maybe I can start the density of the Catholics will go down next year, and we've been very clear of others point out or quite a number of months.
And what will be the final Catholics program, we're gonna they say decide that in January the board meeting.
Because we would like to see whether for quarter will do in term of total volume. There is are obviously a direct relationship between how is the business doing almost got picks we need to to lay out and I think right now being an apology, calling me that's moving fairly fast.
We would like to have the benefit of knowing where the fourth quarter will do and some of railroad some volume for all the railroad before we find out of topics for the Catholics intensity is going to come down including M.C.
Anything else I guess, well, maybe maybe I just want it I just want to so the tell you as well that again, our our use of cash strategy has not changed for the last 15 years. It's always the British was up gosh is is towards the business.
And and we have a very focus on a return on investment capital as you know and we've publicly said that we are targeting 15% to 17% of the next two to three years. So we have a very disciplined approach, but if we have projects at C.M. that can generate a return.
In that range, we'd rather do that then do share buyback hot and because that creates real shareholder value. So to J.J.'s point, I think our capital intensity or capital envelope will be we write size and re sized because now we're out of that catch up cap X. now we need to keep up Catholics.
But again you know we managed as business for the mid to long term, we understand that quarters are important but some of these investments were making a will actually feed this network for many years and remember a D.P. world is investing hundreds of millions of dollars in in a increasing its footprint than.
<unk>, we need to keep up to make sure that with our partner, we make that gateway competitive and continue to big market share from a a really long beach.
Thanks for your question seldom.
Thank you [laughter]. The next question is from it's her arm from Bernstein. Please go ahead.
[noise] Hey, good afternoon, guys. So I think the yesterday you get hit outlined you know $1.3 million to $2.4 million of incremental polls revenue opportunity in 2020 to 2022.
It feels like we're going a little bit in the opposite direction is there anything outside of the structural shift you've seen in the forest product market, perhaps that that that has changed in terms of what that incremental upside opportunity could be or should or should we just think be thinking that this is pushed out a year or two as we get through this off passing the economy.
I think if I may start so definitely if all railroad manufacturing sector.
Actually probably possessing negative girl to a spots of Grove.
The algorithm energies space <unk>, there's also going to be possessing short term.
Negative girls are supposed to parts of grow to the point made earlier by James There is crude production available in Alberta, what it's been curtail. So we we obviously we can't move it in the case or <unk>.
The the fact that the price of lumber is down in the price of the costs of some pages up and the fact that for us to this and have as many dying trees and it had is a combination of secular shift and also just cyclicals cyclicals about the price of the stumpage fee and the selling price of lumber so.
You know the story about U.S. Cole and you know U.S.U.S. coal company, we're producing tremble coal are increasingly having a tough child, making any money and obviously that has an impact on on one's volume is available for the railroad and the case of seeing that we're talking the the export markets, where I'd take the usually is more about the broad.
<unk> environment than our customers not being able to perform enough space there spaces on the pressure. So all of them are either producing less or they have had to take some you know <unk> production. So we we can only we're not losing market share.
We're serving on manufacturing natural resource.
Energy and trade is not as big as it was and I think that's true for all of you know with American Railroad when you see volume down, but no North American Railroad, it's way beyond just that pisses on schedule railroading impact.
A big part of that is no. What's the man is available for us in some of the overall economic environment.
[laughter] so the the the project right <unk> still going to be there you just can have some offsets the walk through is that the right way to to to interpret that are there.
Okay. The deep your well expansion in <unk> going ahead, and C.I., who bought the the the the the the coal and the ball terminal that's going ahead, and there's a expansion coming up a a two of the container terminal in Vancouver, We're still very much focus on the Rupert of these.
No we have a number of initiative on the card outside the biggest one is screwed by rail we could actually execute as soon as either.
The production compelling I'll list or when the province of Alberta transfer these commercial contracts into the handle private shippers.
Just as a for example.
Alright, Thanks, a lot from the time I guess.
Thank you.
Thank you to next question assignment charting a jerk from Goldman Sachs. Please go ahead.
Yeah I afternoon, just a question a follow up on intermodal yeah. The yields the revenue per R.T.M., we're up 11% revenue per Carlo it up 12% so.
Curious if you could sort of frame that is that mixes it price and how do we think about it looking ahead because it is a big number thanks.
Teeth, you want to do that sure. Thanks, you are the.
The revenue uptick they're included Transacts okay.
So when you look at that.
It's about 100.
100 million or so.
Okay, great. Thanks that was my question.
Thanks.
<unk>.
Thank you. The next question is from Brian or some back from J.P. Morgan things go ahead.
Hey afternoon, Thanks to take on the question just one that will come back to 'cause by real one more time in that sounds like you're you're keeping amount of resources ready in terms of capacity and on that level. So.
It's coming at a cost to C.N.. So I wanted to see if you're able to get any liquidated damages as an offset and then if you have any specific comments on the volume number embedded in the update guidance that would also yeah.
Yeah, So a a big <unk>, let's maybe just talked so we do have locomotive I was all mentioned a number of them a park.
Then I'm in jail Park rub. It wasn't 150 and then we are refer to returning the last of the least locomotive.
Into People's side, we do have they're qualified cruise and either they're on furlough, they're taking vacation.
And you know, it's it's party across partly party across we can avoid parts of your crossword to carry.
And when it comes to the the pick we'll pay system, maybe you want to add color James Yeah. When we got back into the crewed by rail space. We are very clear to have these new contracts you know based on a.
Labeling amendments. So you know we always want to move move the rail cars and you always want to move the crude but if we don't.
Either take her big contracts.
That's right. So the the it was done from the beginning of the capacity was was going to be made available, which obviously we have it just mentioned that we have the capacity we could do up to 200000 barrels a day, we could do that in October November December if need be but you know there for us to create the capacity there was an agreement in his contract.
For us to be protected with some minimum amount of cash just to have the capacity available even if you don't move the crude.
So that the answer your question.
The the fourth quarter expectation similar to freak him with all these issues you want to give some call on the fourth quarter crewed by rail volume of James Yeah, I would say.
You know, we're looking at that again looking at different difficult comps, but if you look at you know three going into queue for we were flat you three from Q. do we're going to be slightly down I think it grew by rail volume going to three and four unless something changes you know at the end of the day of the customers phone us up that have these a ticket pay contracts to say I'm ready to move.
Let's go we're going to be ready to move the differences are quite there yet we're looking at differential somewhere in the range of you know 14.
$15 per barrel should be a strong pricing single moving forward to get back in the game, but again I think the government curtailment and the kind of Kaplan name out of crew produce puts an artificial a cap on the differential.
Customers look very very hard about getting back into the crewed by rail space without some notion of longevity, yeah. So a quote fourth quarter of last here on average we move drawn in 32000 barrel per day and the peak month was a month December where we moved 250000 barrels a day, we actually provide you with those tests on page 19 or up and.
So it gives you the reference point of what is our compatible for crewed by rail.
Got it. Thank you very much thank you.
Thank you. The next question is from Scott Group from Wolf, We search you go ahead.
Hey, Thanks afternoon guys.
So.
So our T.M.'s are gonna be down a little bit this year in earnings going to be up high single digits. If we think if we assume Archie ends you're going to be you know down a little bit again next year, maybe down in the first tap up in the second half, but we'll call it down a little bit do you think it's harder or easier to do hi single digit earnings growth next year or just.
Anything you want to see be thinking about comps wise easier tougher to do hi single next year round to what you're doing this year.
Hmm, it's the Crystal ball for next he is not clear yet so.
I think that.
We wouldn't know a little more by the purse, having a second half because it's closer to us so the person might be more challenging the second half on the overall big business <unk> economy, but how how we how we might as all these things with costs and all to.
Giving guidance to give a 2020, but maybe we can give some in but I think one of the heads as a first that might be more challenging at a second.
Maybe maybe I want to maybe I can give it a little bit of color to your point J.J. On this one you you will have to stay too and we will provide visibility in the end of January as we typically do and and frankly as as J.J.'s mentioning the first half like again in Canada being the Redwood at the North a window comes every year. So that's.
We never know how that's going to that's going to impact us not we've done we've done a few quite a bit of investment to help us through the winter like for example, we have 40 more air cars or Rob that we will be able to use. So now we'll have 100 air cars and this typically allow us in when it's very cold to have <unk> to be able to have longer term.
Lines, then if we wouldn't have them. So there's things that we did the end that we're doing that will help to one and but in terms of costs stakeout than in volumes us God on this one I mean, where as you know the that the environment is changing quickly and I would tell you to stay doing on that one and would provide more visibility and.
January as we typically do for for the entire 2020, yeah. It's cause you could go back to some of the commitment at the beginning by Rob about Rolling stock locomotive.
The shops, where we do maintenance work you know the overall until these all areas right now that we're looking up and actually executing a feels or.
Okay. Thank you guys.
Huh.
Thank you to next question, it's from on our group tough from Scotiabank. Please go ahead.
Okay. Thanks celebrated and a good afternoon when everyone. Just a question on pricing what kind of discussion. So if any are you having video customers are shipped blind partners regarding the impact of I'm only 2020.
Keith.
Yes, Konark add things pretty question, we do have those discussions with our line liner customers. We know that they are in a their discussions with with the beneficial cargo owners. We've seen some of those dates that those search.
Charges will go into play we've seen some of them get pushed out from maybe some of them wanting to start in October we've seen someone posted December maybe some in November but that is something they're going to have to do to recoup their their higher costs.
We also see some of the B.C.E.O.'s with their own surcharge, they're going back to the the lines with so it is a very dynamic situation and one that we're keeping apprised of but it really should not impact us at this point in time.
Thank you.
Thank you too.
Thank you.
The next question is from someone who it's from U.B.S.P.'s go ahead.
That's an old.
Yeah. Good afternoon, thanks for that a chance for question want it to see if you could offer some thoughts sequentially on headcount and Rob if you could kind of ballpark some of the commentary on mechanical a resource reductions are you.
Are you talking about 50 people a couple of hundred people just you know what's the magnitude of potential reduction in resource in that bucket and you know how quickly you can respond I'd headcount fourth quarter.
<unk>.
You want to have some color as <unk>, well, maybe maybe high level and then I'll, let rob jump in but if you look at our head count on a sequential bases between two two and three we're basically flat.
If you look at if you look at head count on a you over your basis <unk>. We have a few three if you you've got to take into consideration Transacts here. If you do take into consideration transacts than actually are headcount is down about 1%.
And so and then I'm I'm going to reinforce J. Tracepoint and then turn it over to when you look at headcount you've got to be careful because we're focused on cost and head count is part of the story, but it's not the entire story in the example that J.J. talked about a little bit is.
Is is a night tea in our technology Department, where actually headcount there may be a little higher but we're getting rid of a lot of high paid consultants.
And therefore, the net basis, it's it's a net net when for US. So that's what would focus at C.N., we use the the the the nomenclature up being focused on paychecks and paychecks includes consultants. So Rob I'll, let you cover the mechanical peace right in in the only other thing I'd add to that design is that from.
T and he standpoint, you know productivities actually up two per cent. Your your from an employee per G.T.M.. So we're actually seeing improvement that in that he's you're you're on a mechanical peace. We're in a process rolling it out right now it's one that's gonna last through the end of the quarter and into a first quarter of next year, obviously there's.
A lot of communication to go with that really don't have a number to give you in terms of that we will have fewer heads in the mechanical department as we react to the volumes that we're seeing right now and it isn't just about fewer heads, it's really about aligning or resources inner mechanical department that will allow us to have better productivity really skin.
<unk> or maintenance on her locomotives better and increase Grady reliability overall.
Thanks for the question.
Okay. Thank you.
Q.
Thank you. My next question is from just 10 long from seasons. Please go ahead.
Thanks, Good afternoon, and maybe just start by building on that last question and we think about com per employee based on some of the things that you just described.
We expect downward pressure in com prime points as we get into next year and then also wanted to ask about the impact from transaction <unk> I believe it the Investor day, you talked about it being around 100 bases point had when so curious that that still what you're saying play out today. Thank you.
Just slow.
Well the Transacts Trans I. says you know, we did say that things you to that it had about 100 basis point I would say that it's it's still the same but translates as part of the family. So part time is X. is is is part of the family Keith is working very hard with myself and others.
To get a very successful integration offends X. I think we're well on our way we're very pleased with the acquisition and the integration is going is going quite well in terms of your question related to employee productivity.
I think you <unk> I wouldn't assume a more pressure on employee productivity absolutely not I think that as we continue to advance as we continue to deploy technology actually.
You know it'll it'll make us more efficient and frankly, as we deploy R.P.A. and as we deploy some of the some of the and held devices [noise] that you have in the in the deck a at the end here that actually you know employee productivity will be better under you ever you basis, I don't know, whether Rob more Jews or you want out anything.
Rob.
No I I agree with everything you said is technology continues to roll out not just next year, but in into the year. After will continue to see the benefits the only and efficiency, but also and safety as well.
And then in regards to finally, your conquer employee I wouldn't I wouldn't go in that level of detail I think at the end of the day. We're all I mean, if you look at either Transacts employees or employees were all part of the family and.
And I wouldn't I wouldn't go into detail at this point Justin.
Okay fair enough I appreciate the <unk>.
Thank you Justin Thank you.
Thank you Discontinues today's question answer session I would have to turn happening back working whatever they.
Thank you up everything your past week and thank you for all of you to join Us Tonight.
And I'd like to stage occasion to take a very special to check for myself to all of the C.N. employee.
Dealing with every challenge as they come to us, but the first and foremost would safe in mind and everybody of seeing how they can do attitude. So I appreciate very much. The first of all this U.M.T. will makes possible do sell a D.P.S. and operating ratio that we'd be producing into third quarter. So thank you for joining us take your Patrick This is the end of today's call.
Thank you.
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Okay opinion, that's because at that.
Let me.
Okay, and our consumer spending.