Q3 2020 Canadian National Railway Co Earnings Call

Over the past several months, we've idled multiple locomotive shops and switching yards that ever remain closed. We completed consolidation of our Canadian dispatch offices from three offices into one location in Edmonton, which allows us to run the network more efficiently during the quarter. We were able to reduce our crew starts by 14% while our volumes dropped 7% off our focus on increasing train length paid off as we increase train length 6% during the quarter allowing us to move more freight with fewer crew starts as volumes returned during the quarter. We've all seen our key metric on car velocity improved since the end of July by 25% as our Network remains very fluid going into the winter months, the team's efforts fuel efficiency continue to pay off as we set new all-time records for fuel efficiency in every month in the third quarter leading to a new best ever quarterly record.

Our efforts so far this year of Saved close to $35 million and fuel expense and avoided over a hundred sixty two thousand tons of CO2 emissions from our fuel efficiency initiatives alone.

We are the North American railroad leader in locomotive fuel efficiency, and we have every intention of maintaining that leadership our efforts underpin our firm belief that real part of the climate solution and recognizes that the best way to reduce our carbon footprint is to continuously improve our fuel efficiency.

As planned we increased our engineering work block production with unit cost for Rail and tie installation declining do to discipline execution of our engineering teams and dispatch centers, This is allowed us to get the work done at lower cost with fewer resources needed most importantly. I'm pleased to report the team's Relentless focus on safety and everything from robotic process automation of everyday tasks to the use of machine learning and artificial intelligence and how we inspect our tracks and cars.

Are autonomous truck inspection program is entering into phase two in the us and our cars are now covering our core routes every week from the Atlantic Ocean to the Pacific Ocean in down to the Gulf of Mexico making our railroads safer unlocking capacity and reducing costs.

The railroad is fluid and prepared for the winter season ahead. And the record grain Harvest is evidenced by the fact that the c n team has now delivered seven consecutive all-time monthly records for the month of Canadian grain, and we're on track to deliver in a straight record month here in October is that turn this over to James? Let me reiterate that we remain Nimble and responsive resources to demand in maintaining the very positive momentum on fuel and labor productivity with that'll turn it over to James. Thank you rob during Q3 we experience with the shape recovery and our ports business Lumber and Automotive what we saw weakness and crude Frac sand and refined petroleum products.

Demand for Canadian green which is not tied to the economy hit record levels and it's Rob said we deliver settings seven consecutive monthly records as we manage through this on uneven recovery. We will drive hard on key markets including Canadian grain Canadian Cole and propane. Let me now discuss it further details some of the topics on the Carlos side of the business name mentioned Canadian grain continues to be a bright spot for CS with our best third quarter volume on record beating the previous best in 2014 by 13% us. Crane grain was also a strong and finished well ahead of last year Canadian Cole was negatively impacted by the temporary closure of CST and Coal Valley mines and the permanent closure of tech Cardinal River mind Forest Products jumped up sharply in Q3 as our customers brought back idle capacity to take advantage of strong construction activity.

Crude and refined petroleum products which are long haul heavy tonnage segments where the week outliers in Q3 contributing to the shift on our overall business office for the quarter the positive momentum. We saw in Q3 will help us finish the year out strong and position as well for 20 21.

We are the dominant player in the Canadian Forest Products market and seeing out weighted benefit as this Market recovers. We have brought back all the lumber cars that were in storage and we recently added five hundred additional lease cars to meet spot demand at auction prices.

Canadian green and US green are expected to be growth drivers in Q4 and twenty Twenty-One the Canadian crop may hit an all-time record and the US crop is expected above-average.

The step function change and grain supply chain capacity has been years in the making and we are investing alongside our customers. We have purchased 2500 new high-capacity grain Hoppers off at our customers have also invested a new private fleet of similar. Hi payload cars by the end of q1 next year. We will have over 4,200 new high-capacity Hopper cars suck on our Network. We also expect to take advantage of the 50% increase in Grain West Coast export capacity all exclusively and physically served by siete allowing us to move more grain faster using fewer resources are three coats Network reach is a long-term structural advantage that cannot be replicated.

And Export volume to Prince Rupert will continue to ramp up and US call Coal volumes will grow in Q4 driven by new Petco volume moving from Chicago to the US Gulf Coast for export International demand for wood pellets as a green few alternative is also strong and we see this Market as a unique opportunity for CN with several new production projects in the work place. We maintain a disciplined approach to pricing and upscaling our portfolio of customers and commodities to ensure the right value Freight is running on our Network.

We are focused on managing Nick's in the face of a recovery that has not been consistent across segments was that I'll turn it over to Keith. Thanks James our engagement with our customer Supply chains enabled to fully participate in the strong recovery of the third quarter, whether International or domestic originated Supply chains or the grocery business office Improvement retailers e-commerce or bricks-and-mortar retail restocking we were there to support all segments of the v-shaped bounce back and those markets as auto manufacturing accelerated. We successfully enabled our customers to meet the pent-up demand in North American Market.

In Q3, our overall business mix was impacted by a surgeon container Imports on both the west coast and the East Coast are your over your volume growth on the West Coast AM driven from our separate from several of our ocean customers as they moved business from other gateways and Supply chains the work stoppage at the Port of Montreal created opportunities from the East Coast gateways leading to strong import volumes in Halifax and Saint John. It also benefited our CSX steel wheel energy as some manufacturers were shut down with retool for new remodel for new models opening and December are new auto compound in New Richmond.

Wisconsin will serve the Minneapolis Marketplace and based upon strong feedback from our ocean customer base. We will also be providing Intermodal service to that terminal. Well as the North American Consumer Market evolves, we continue to focus our efforts on yield and it's many levers technology advancements that we shared with you at our 2019 investor day are producing ongoing safety security and productivity benefits and Chassis containers and cranes are ongoing efforts to continuously upscale our business and price above real inflation will continue to improve our Intermodal and Automotive business margins as the consumer base wage economy strengthens in North America.

Joint work with our supply chain Partners to invest in the long-term future of our ecosystems continues including with GCT at deltaport and DP world and Prince Rupert to deliver those expansion plans over the next couple of years.

Long-standing successful beneficial cargo owner relationships and service will continue to drive volume through whatever wave that the economy presents us with and twenty Twenty-One. I'm now pass it on to just laughter the financial perspective. Thanks Keith and good evening. Everyone. My comments will start on page ten of the presentation with highlights of our third-quarter performance.

Throughout the quarter as we saw sequential improvements in volumes each month. We remain disciplined and focused on tightly controlling our costs.

We continue to adjust our resources for the recovery in certain markets while being mindful of the mid to long-term opportunities that are in front of us.

Revenues for the quarter were down 11% versus last year at just over three point four billion dollars.

Volumes in terms of our teams were down 7% while Revenue per diem was down 3% impacted by significant changes in business mix.

Operating income was almost one point four billion dollars down 15% versus last year. Our operating ratio was 59.9% up 200 basis-point versus Life. Net Income was $985 Million down 210 million actual results in the quarter.

Turning to page eleven. Let me highlight a few of our key expense categories.

Labor and Fringe benefit expense was 5% lower than last year.

This was mostly driven by 15% lower average headcount in the quarter versus the prior-year partly offset by higher incentive compensation related to. Over. Adjustment to accruals.

Purchase services and material expands was 11% lower than last year. This was mostly the result of lower outsourced Services Lower Trucking and transload expenses and Lower Macungie will cost.

She won't expanse with 33% lower than last year driven by a 26% decrease in price.

9% lower workloads and an all-time record quarterly fuel efficiency

now moving to cash on page twelve free cash flow was close to two point 1 billion dollars through the end of September almost six hundred million dollars higher than the same period last year or resulting in a significant year-over-year Improvement in free cash flow conversion.

Are you today free cash flow performance is very solid and we fully expect to achieve an excess of the 2.5 billion dollars in free cash flow for the year.

At the end of Q3 our leverage in terms of adjusted debt to adjusted ebitda was 2.17 times slightly higher than our two times Target and for financial Prudence company will continue to pause its share repurchases. We will of course reassess on an ongoing basis.

As you will recall we withdrew our full-year guidance on our q1 earnings call given that we now have nine months of actual and that we report weekly volumes. We see little value in reinstating our guidance at this time that being said with the volume.

Covered that we have seen sequentially and the good momentum so far into for we are aiming to provide annual guidance for 20 21 on our upcoming January call. We continue to reward our shareholders with consistent dividend growth.

To conclude as we are experiencing a sequential Improvement in key Market, we continue to tightly control costs as volumes rebound and we are seeing good momentum and operation. We are supporting the volume recovery in certain markets and we remain confident in our ability to develop to deliver value to our long-term shareholders. And on this note back to you JJ wage wage.

He's just laying I'm going to wrap this up quickly so we can go through your question in the second quarter Kudos or a woman and men at CN we demonstrated with our resiliency in the third quarter. We offer our recovery of a different kind of business which impacted our new mix of business and the commercial team is proactively managing for the right book of business to be running on our railroad going forward is valuable again to deliver good long-term value for shareholders. So Patrick We're going to turn back to questions. Thank you, please press star one at this time. You have a question. The first question is from Ken extra from Bank of America, please go ahead.

Hey, good afternoon. Thanks, JJ, you know I guess just want to hit on that last point, you know, I guess just playing you talked about if you're seeing some improving performance, maybe just to step back and think about your wife was on the share repurchases or or what's magical about the two times debt-to-ebitda. I just want to understand the confidence you have in the in the sequential growth you're seeing and and the acceleration we should expect and took two four q and it's the into Twenty-One. Yeah. Thanks again for the question listened. I think we see the recovery loud and clear and certain key markets and I know Keith and Ed and James touched upon it as you know, can we've always use share buyback as a as a very flexible tool to get to a targeted leverage level and you know, are are targeted leverage level always been, you know internally and we've communicated this to the market 1.7 to 1.9 times. So in my remarks I rounded it to 2 and and I think we're comfortable and since we're already dead.

over the two times

We're 2.17 as I alluded at the end of Q3. I think that you know, we we think we're in the right position and and frankly, we like to have a strong balance sheet. We saw that loud in clubs in the second quarter or going through this pandemic. I mean, it created a lot of benefits for us. I mean that as you know, we went out to the market and actually issued a $600 us million off your paper or Bond at 2.5 stay tuned but it's the fact that that we're not reinstating at this point our share buyback is far from being a lack of confidence in Lots looking at the recovery.

It's just because again, we're we're we're we are a little higher and and stay tuned for what we're going to do for 20 21.

Thank you, Ken. Thanks Thanksgiving.

Thank you. The next question is from cherilyn. Radbourne from TD Securities, please go ahead thanks very much and good afternoon in terms of like the shape volume recovery, which is the note has been most pronounced in Intermodal Forest Products and Automotive. Just curious if you have a sense for how much of that might be inventory restart universes consumers pivoting. They're spending to Goods over services and to the extent that it's restocking how much of a backlog is there still left moved?

So you want to address that?

Thanks Carolyn for for the question. It's a little of both as we talk to our customers most specifically our overseas customers. They're still seeing an opportunity for restocking some say of into the first quarter the there's that much of a replenishment that's required. But I also do think that that trade for wage, you know buying sprees versus going on vacations is happening. I'm sure it's happening and everybody's household on the call. So we see a little of both there's the thank you for your question. Yeah, and at the Port right now, the business is still very high. Right? So the fall Peak actually is lasting and they will be a very stronger fall pick this year. Thank thank you.

Thank you. The next question is from ravishankar from Morgan Stanley, please go ahead tell me when I get the logic of not introducing for your guys only have one quarter to go. But can you give us any color or going to how we think of you from here in terms of other incremental margins or or have given a series of the volume recovery, you expect kind of a really strong fourth-quarter or going to how do we frame that this point? You know, not even a quarter left to go if it's just lame. Yeah. I mean we we try to get away from the quarterly guidance, but I'll tell you and and as I said in my remarks, we do provide our volumes both on Carlos and on our t m on a weekly basis and this if you look and I think our Carlo's now month today in October, I think they're up to six or seven per-cent. So, I mean, I think we're we're doing quite well James mention wage.

Fact that that the grain has been a star commodity grain grain works. I mean whether they're spent demek or not people need to we good news is on the on the significant Investments That Sienna's making on the grain Hopper cars. We will advance some of those cars that were slated to to come in q1 actually in January. We're going to advance about eight years of those cars and Q4 and I think that will will help get us to started well in on grain in in in front of the winter. And so this Thursday, I think check our volumes every every week and what I think right now we're we're we're quite positive and quite favorable and what's happening, you know, just laying loves grain and just a reminder. I think this quarter talking about makes the kpi for volume to look to track would be more the RPM. Yeah.

Thank you. Great.

Thank you. The next question is from

One doesn't wipe. All I need is your name Capital, please? Go ahead. Good afternoon. Everyone. Could you talk a little bit about the fact that you've been short on resources in Q3, maybe quantify the impact on you are and maybe also about the available resources employees that can be bring back online with the number of cars and locomotives. Thank you. Yeah, that'd be a good question for Robbie manage things quite tightly in the third quarter. You want to talk about the resource program? Yeah, absolutely. And thanks for the question Benoit. So as you said sequential volume increases month-over-month over month in the third quarter actually entered the quarter on a depressed number. We were down 70% for the month of July that improved to nine percent in in August, and it was actually flat in September and we're up 6 to 7% is just on just spoke to in in October.

Actually Managed IT quite well, you know as stated it was a V shape recovery. We had over seven hundred locomotives out of service nearly four thousand people furloughed in thousands of cars and we mobilized that quite quickly and and really have the railroad running very very fluid throughout that they'll we're able to stretch ourselves and you know, as we said bring back resources 1 to 1 and we found coming out of this v-shaped recovery. We can actually do more with less and we've had permanent cost take out in terms of switching yards and local shops shut down. We can we finish the consolidation of our dispatch centers this time last year. We had three of those in Canada now we have one so we've actually done a really nice job velocity train velocity car velocity and well or actually back up there to where they were at last last year at this time. So really a heck of a job with a significant number

Downturn in the second quarter only despite back here in the third quarter really proud of the team brings up the return of a lot of employee back to work, which I think is a good thing for a lot of time out. Their capacity is a little tighter than it was and the marketing team is asked to actively manage yield. So it is one of our team beyond the courts to come. Thank you, buddy. Thank you.

Thank you. The next question is from Chris weather be from City, please go ahead.

Hey, thanks. Good afternoon, guys, good afternoon, maybe touching a little bit on yields or cents per diem and maybe kind of getting into the mix break down and maybe pricing tool. Can you sort of disaggregate a little bit of the cents per RTM for it seems like mixed with a little bit of a bigger headwind for you. I just want to make sure I understand sort of where the main drivers there. And in the media how you see that going forward. I know it's difficult to predict but maybe sort of thoughts around 4th quarter.

Yep. So we've given a lot of thought to that to James you want to give the the broader picture from the broader portfolio seen? Yeah, so big picture if you think about it, you know, the the Mix Change we had in Q3 was wage significantly by the decline in in energy carloads P&C crude a PNC Carlos crude jet fuel and like as you would expect we reallocated that capacity to move a record amount of grain volume. So we traded off some long-haul 2500 miles accrued business for 1,200 1,500 Mi Granja. Also moving forward with you know, we think we're going to see a rebalancing some of that crude business coming back certainly not to that 2019 level but we're going to see a little bit of a rebalancing of mix keep you on track a little bit of both pork sure, you know, we we we love our overseas Intermodal business in the fact that we have very balanced approach. However in the third quarter with the with the

large influx of

Of imports that happened very very quickly. The boxes were not able to go through the supply chain and get the exports to go back out to match up a one-for-one or you know on a on a equal basis as we normally have so that that was another thing that hurt us that that may have showed up in your your rtms as well.

So as soon as I be of import and quite a bit of a lag on export, so if you train moving with empty platform, that's that's affecting that was affecting the mix the summer. Okay, that's helpful. Thank you. Thank you, Chris.

Thank you. The next question is from Felicia Moon from BMO, please go ahead.

Hello. Thank you. Hi guys. Thank you for taking the question. So.

I'm trying to square a little bit difference is like if I look at your quarter-over-quarter like three versus Q2 Revenue increase and operating income increase. It seems like incremental under 50% like high 40% at the same time. It looks your operating metrics kind of performed really well in a quarter like Rob went through August data on train lines and wait and all this kind of stuff like what what what explains kind of the muted lovers that we saw here in the third quarter and how should we think about this is going into Q4?

Just saying you want to talk about that.

Yeah, I think I think when you look at it fatty there's there was some labor expense that that came in that are not necessarily related to head count off. When you look at it. There was when we talked about the labor of variance there was about a thirty million dollar of of two things number one a reversal of a gruel a bonus accrual of last year of about a third of that and then two-thirds of it was a true up into our incentive compensation related to related to some performance performance package share unit. So so that is that is a cost that that came in that's a variance that came in on a quarter-to-quarter basis that that is not necessarily related to to head count against and depreciation continues to be a headwind. We've said that, you know, we said it was a hundred thirty million headwind the beginning of the year. So that issue every quarter about evenly dead.

And then the pension is a headwind as well. And we've said that pension was about fifty million. I I'll tell you it's still about fifty million. So those are some of the things that that you may not see when you look at the metrics that are in our cost.

Maybe one last thing side. We reopen our training center in Winnipeg and Chicago meaning that we will have unproductive labor here because we are training people to offer me the expected volume group of twenty Twenty-One, which is something that they were closed like a quarter and only reopen Midsummer. Thank you for your question. Thanks ID. Thanks.

Thank you. The next question is from Scott group from Wolf research, please go ahead.

Hey, thanks afternoon guys, so I just want to go back to that. I just want to go back to that last question because I think he was asking about sequential incremental margins where depreciation down and pension probably wouldn't be a sequential headwind. So ultimately though. Should we be thinking about give or take 50% incrementals or Better or Worse going forward and then just to specific modeling questions other Revenue was down 25% year-over-year down sequentially any thoughts there and then compare employee was up 12% year-over-year. Any thoughts are just a couple of big uh saying you want to expand on the earlier question. Yeah. I think I think as I said the the the off the bonus and the the accrual that I've just talked about in labor explains part of it for sure and I think that's that's what it is.

And then it says other parts on other revenue and the questions and other revenue and Conference. Will you going forward?

Change when I talk about other Revenue. Yeah, I think our vessel Revenue was slightly down on a sequential basis, you know as would be expected and we came in to covet I'm talking on the Range here on the Iron Range here, you know, we took a lot of activity on the Iron Range very good results, but we were drawing down the inventory and a very very fast paced with our with our vessel Fleet. So we had slight decrease on Monday.

On the vessel side of the revenue the other Revenue decrease. I'm not I'm not seeing that. So yeah, so we move less I know by vessel. Yeah the third quarter then we did the day before. Yeah.

Okay. Thank you.

Thank you. The next question is from Walter spracklin from RBC Capital markets, please go ahead. Thank you very much. Good afternoon everyone. So I'd like to turn to page of facts and and certainly with the strike at the Port of Montreal you had the opportunity to see how Halifax would react to to some of the volume that was diverted there. Now, obviously that came they were you know, you know that was unexpected, you know preparation obviously had to come in fairly quickly, but when you look at and and assess how Halifax did and how it stepped up with regards to when when the port of Montreal went down how would you characterize it and what what was learned from that that can be improved as as hopefully volume to expand into the East what capacity pinch points might you be able to address in the future?

Yeah, so maybe I'll take that one. So the

We never serve the city of Montreal. I've substituted the greater Montreal. There's always served our key with vessel coming in right into the city. So we're usually not set up to serve the city hundred percent by rail from May 4th and would only a 72-hour notice strike notice. Obviously what the end up happening is that's one reason why our mix in the third quarter was worsened because we have to send back between to Halifax to pick up the import We have basically sort of a one-way Freight the export we're already in gated at the port and couldn't couldn't get out of the port because of the strike zone and then we were bringing plates and Montreal and I was one where faith and not a whole lot of going back. So for me from a Frogadier point of view of the strike was not the best from from a point of view. The other thing is when you should send me to our notice and you have all these tsunami Afraid coming out you on a short notice to what terminal and Astro we had to open temporarily terminal in Valleyfield. We also have two open temperature.

A ramp in and just close to the office here because of the kind of a one-time effect. If you were to perform a PSA and see any point of view obviously wage a little more notice than 72 hours we can we can move a lot more faith from the maritime and we could also move it very violence, you know with with web typically will be coming out of Montreal song. I'm not sure that this whole exercise was the the conclusion of anything because in in strike time, when you we only get very short notice, I mean, it's no customer ready to get the kind of service they would like to get when this will have a position or and train our position and terminal are not prepared for the labor required to respond overnight to at something of that but we did the best we could to help the city of months ago. Yeah Walter. I'd like to add a little piece of that and as we're not we're not a one-trick pony here. Yep.

Wasn't just that we had vessels diverted to Halifax. We had vessels diverted to st. John which we handled very well. We also had vessels diverted to New York, New Jersey and Philadelphia that we hugged very well, so we have multiple outlets for our customers at each one of our gateways where we can handle the freight. So, you know that you have to take all of them volume together and look at it versus just one place, and I appreciate the color River. Thank you. Thank you.

Thank you. The next question is from Brian Wilson back from JP Morgan, please go ahead. Hey, good afternoon. One more question on Thursday and operational side. Can you quantify just how much impact that had in the system with the next shift and some of the dislocations you saw during the quarter imagine that be more one-time in nature compared to the Top Line impact and then when you look at the service metrics for Intermodal and in bulk both those we're trending down your year in in the quarter. Was that something that was impacted because of the mix shift or wage laws that and now to start the fourth quarter, so maybe I can start to get it posted onto to James but the think about the Striking for Montreal that's obviously just a one-time write-off. They're back in operation. And actually one of the shipping line is added one call and Halifax as a result of the what the, you know their dissatisfaction with the fact that was a labor disruption dead.

On the west coast there was a tsunami Afraid coming in at and it took a little while for the export to resume our train balance going to get a little better here at time. Meaning that support from North America back to Asia was eventually get back to her level.

The Tuesday conducive to the amount of import, but the real thing that is sort of circular that we have to work on is there's not as much crude. There's not as much Diesel and jet fuel. There's not as much back then that's a fact you will take a while before the energy Market recovered and we're going to be moving more domestic and tomorrow phrase more overseas phrase more grain. And and therefore as I said earlier, when we allocate slot on on on the network, we want to be mindful of which train gets the green light and that each train that gets a green light is a train that's worth it to be on on the network because we've invested Capital money to create that that capacity. So I think you know, I think anything else we want to add Kate regarding when will Xbox got to be more balanced with import. They already are they are yeah, we we have we have a lot of you know boxes that are heading to the Prairies to pick up exports. Yep.

All of our other trans loads across our Network, I would also say that as as James said records again for grain movement in the second quarter. We talked about record green movements in containers. We didn't get close. We didn't get as close to the record levels of containers with grain in them, but it was very very close up of significantly over last year. So I think we're there with the balance in Brian as far as how the railroads running. We're very fluid and in really good shape going into the winter. We're actually had more volume than we did this time last year and really good shape. So we've worked through it. Thanks, Brian. Yeah, very solid ghost on my right now in the network. Thank you for adding that robbed. Thank you, Brian.

Thank you. The next question is from from Scotia Capital, please go ahead.

Good afternoon, and thanks for taking my question. So just my one would be how do you think about margin Improvement in to 20 21 next year volumes recovering here obviously get into the year-end and heading into the next year and you are on board a new contract. So obviously we heard a lot about the opportunities you have that you have kind of sealed. I called Intermodal grain Automotive all those things but how should we think about margin Improvement coming from those contracts and organic recovery things?

So now you want to talk about this without getting into guidance. Yeah, I think listen I think as as twenty Twenty-One comes and if you look at you know, if she has came out this week, actually that you know people believe that next year either GDP or industrial production will be up for 5% versus twenty twenties. So obviously, you know, I'm not only us as a railroad but Economist are seeing a recovery coming next year and as we do recover and and Rob talked about this, we're we're not adding people one for one month and we have done some permanent some permanent changes during the pandemic. Therefore, you can expect our margins to continue to improve and and as we continue to deploy your tech knowledge remember that we have, you know, very exciting technological projects that that are and will create value then you can expect that with all of this and then are focused on wage.

Management you can expect at all.

This will will help us continue to improve margins on a going forward basis and we're quite we're quite optimistic about this rob. You want to give you some color on on cost for for Prestige speaking for next year? We have we have really good momentum as I talked about, you know, we figured out ways to do it more efficiently through this pandemic and we we expect that to stick. So we're seeing here as we go into Q4 and and certainly as we go into next year.

Thank you. And do you have any permanent cost out initiatives that are pending right now as they will take place next year?

I I I didn't hear hear all that. I'm sorry. So you have some permanent cost out initiatives that you have taken right this year. Are there any cost initiatives that are running into next year?

Yeah, absolutely as we go into the plan for next year. We'll we'll double down on what we did this year and and have some new initiatives as we go into twenty Twenty-One to take a more cost and we'll have the full you to effect of what we've done this year. Next year will have to fold your effect of those Steakhouse. So so I think we're quite optimistic about about our plan going forward, Thank you so much for the question. Thank you. Thank you. Thank you. The next question is from John from evercore is I please go ahead. Thank you. Noon everyone. You touched on this a little bit so far Keith, but the Intermodal volumes have been incredibly strong both on an absolute and a relative basis. How much of that is Rupert in Vancouver taking share from some of the congestion related issues and in Long Beach and and given the fluidity of your network that you've spoken about. What's your confidence and being able to maintain that market share when the imbalance across the entire North Americans dead?

and somewhat normalizes

Yeah, thanks Jonathan. You know, we we pride ourselves on creating these these opportunities for Supply chains to be you know, servicing customers and Midwest and Canada for long periods of time. If you look at whether it's a shift of business away from the south west coast or if it's a a change from one carrier to another carrier. I think that they all know that the Rupert and the Vancouver gateway to the US Midwest on CNN is something that works and it works. Well, I know that I've read a lot of articles that are out there talking about how much good shift over the next five to ten years, you know, we're doing all we can to make sure that these Supply chains are resilient. We provide the match back for our ocean customers that allows them to have a profitable.

Economic round trip experience and you know, we we are providing ourselves on putting the capacity in line with what our partners are doing as they increase their capacity so that we're working in lock-step so that we don't have the pinch points that cause those problems where people have to move away from a supply chain that we created wage. That's good. I mean between two Brad Rupert is running at capacity right now, right 1.35 million is this fall so it's not about taking more phrase It's about selling the phrase.

Thank you, JJ.

Thank you.

Thank you. The next question is from David Jordan from Bernstein, please go ahead.

Hey, good evening. Thanks for the time. I wanted to ask you keep it maybe JJ if you look across the ethernet ports in the network, you're going to be effectively for a double incapacity on the basis. I'm just wondering how long do you think it will take to grow into that passage for the courts? And do you anticipate any need to kind of spending on the line of road to connect all that traffic that is off today relatively low density wants

I think quite yeah. Yeah. Yeah, it was a little muffled. It was harder to hear you. But we yeah, that's okay as as our partners increase their capacities and as we work with them from a marketing standpoint to increase the business that it's going through there are Eastern network is underutilized you've heard numerous times before it was built for the industrial. We're a lot of manufacturing was was up and running that is not up and running now and and the some of that railroad is the best we have. I mean, it's, you know, double triple tracked in certain places and we can handle the volumes and that's why we're pushing so hard with our Partnerships in the East to to sell the additional capacity out. And and I think we Will Smith

The Halifax to Halifax to Chicago Midwest Corridor is going to be one that two or three or four years from now. You're going to see it. You're going to see it. Probably at least doubled from what it is today. As JJ said we have customers that want to bring vessels there today and we're continuing our marketing efforts with with PSA 2 a.m. To fill that I think you also have some developments in the Mobile, Alabama. Yeah, I guess are are are good partner has announced a a vet school that normally first call of Houston is now the first call in Mobile and that's a direct. That's a direct service from Busan Korea. So we hope to see the the automotive traffic on that. They would go up into the Midwest and we also hope to see some other opportunities for exports going going that way as wage.

So we're we're glad to see that. Our partner mask has has put that first call First Port of Call in. Thank you. Coast Network. Thank you, David.

Thank you. The next question is from Jason said oh from Cohen, please go ahead. Thank you operator. Good evening, guys. You talked a little bit about some of the long-term threats and you mentioned all autonomous trucks. I was actually happy that you brought that up. I I'd love to hear your thoughts on how yourself and the rest of the rail industry can can work to combat that as it doesn't really show up in the marketplace. Yeah. So thank you for that question. I think a number of us here. You know, when we look long-term. We we know we're convinced at some point the competition from the from the from the road. It will get more intense. Therefore. We need to work on our cars. We need to go to eventually also work on how many how many people we have on the cab to be operate but driving his truck. There's a lot of Capital Money start-up money going into driving District. It's something that we would like to study from the inside of the tent more to come on that and then it's it's your question.

Send of when is it going to happen? How did we get prepared for it? How do we leverage or benefits? And how do we understand it?

That rather than being a victim of driving this truck that we are a one of the potential users of what that might do mainly for integral Network. So all I'm saying here is what I'm getting off of what we have in mind. We recognize that is real and we don't we don't want to be caught up on The Blind Side, so it will recognize it and be we're getting prepared for it. So, but if you look at life in us no snow no ice nice big Highway long-haul. Yep will happen at some point in the next five years or depending on your crystal ball. Thank you for bringing that up. It's actually an important Point. Thank you for the time. Thank you.

Thank you. The next question is from Addison laundry from Credit Suisse, please go ahead.

Good afternoon. Thanks. So you're a competitor talked this morning about potentially be able to achieve a big cities are in 2021. And I know that the is not the end-all-be-all but I was hoping you could speak to how you're thinking about what the right balance is between the the oh our growth and our life is longer term.

Yeah, maybe I can definitely we're going to the balancing of the two, right so balancing EPS growth a balancing free cash flow growth or shall return and balancing. And what does what does the or come in to be able to do that? And when we look at 2021 you also have to run this little bit about crude contract and all of these things are trying these companies contract, but I think it's about balance. What do you think just named? Yeah, I think I think Alison I mean and we've said this many times. We're not to JJ's point. It's about balance. We're not an armored with video are we want to preserve our foundation and we've implemented PSR fifteen years ago, and we'd rather be a twenty five billion dollar a 59 or than be a fifteen billion dollar at at fifty six. I mean just do the math. So I think that really as as we move forward and as we you know focus on yield and a phone number,

You know get more and more benefits from our technology deployment. I think that you can expect the DOR to improve and and I would say, you know stay tuned. I think that I think that our our game plan that works extremely well, I mean and and that's what I would say, I would say that you know, we don't we don't have a specific Target on the war for twenty twenty one. That's not the way we think it's the end we have opportunity and we are are are focused on executing on these opportunities and dor will be the result of execution and these opportunities but we definitely have a vision of growth. We definitely have a vision of a profitable growth. So when you talk about profitable growth, this is where you want to make good use of your capacity. You don't give it out to Riverhead smart use of it. You want a price it popularly but the same time you want to be able to grow when the business is available. That's something that provides a decent return on investment and you know the Dead

Oh that we're looking for so well wiring itself. I think in fact in our compensation system and we don't have a war as one of the bonus factors so that in itself, I think.

Tells you you know, how we balance things out. Thank you for the question Allison. Thank you.

Thank you. The next question is from Tom wadewitz from UBS, please go ahead. Hello, Tom.

Yeah, good afternoon. So I just wanted to see if you could offer some thoughts on what the potential growth might be for an RT in perspective in 20 21, if we life, you know prior periods where you came off some weakness. So if you look at like 2010, I think you had twelve percent RTM growth approach and 11 in 2017. So is that reasonable? Do you think the look at twenty Twenty-One and say maybe you can be kind of similar ballpark to that or are there reasons why you'd be you know, kind of more muted than a you know, ten percentage type of money when you look to twenty Twenty-One. Well, we are as I said earlier you the following would we reopen or training center in Chicago in Winnipeg? So they give you a sense that may be we want to be sure that we replaced, you know, the normal attrition and be that we have we are creating capacity train struck capacity to handle more value. We also talked about the

The mix of business post Corvette which is pre-coated because of the impact of covet on the energy sector. So we're working on that mix aspect same store prices always above rail inflation off and then you know, there's a lot of things tend to be unknown that Keynesian election maybe condition election. How will this phase of second wave that seem to maybe you will last all winter how will of shape out but we would like to see definitely to twenty Twenty-One to be a little closer or better than 2019. That would be that would be that would be one of our aspiration here for the sake of our employee and for the economy, but we're preparing for growth definitely and and the time will tell what kind of economy is available to us. But whatever happened we want to at least right and not perform the economy. So we always said it's kind of GDP plus so we we want to be able to move the economy wage.

Like the more which has always been our Target, but it's in good time of that time try to outperform the economy, you know all boat rides economy. And we rise a little faster than the average will give you more of the first the next quarter next quarter call when we have guidance for 20 21, then we will most likely what I've gotten is at that time.

Okay, but it sounds like you think looking back at 2019 and maybe doing better than that as a a reasonable framework.

It would be nice. Well, we'll we'll wait to see a little more like what the crystal ball is from all the economist as we get late in the year and prepare a guidance for the third week of January. Thank you. Tom. Great. Thank you.

Thank you. The next question is from Selden Clark from Deutsche Bank, please go ahead.

Good evening. Thanks for the question just came back to some of the earlier, and operating leverage As you move through 20 28, you just normalize for the incentive comp accrual and trying, you know, think about the Cadence of assets deployment relative to the recovery and volumes wage should underlying operating leverage then improve from 3 to 2:40 relative to what you you saw from two to three Q.

Yeah, like we tried to get away from providing quarterly guidance Seldon. So I think I think frankly, you know, we Rob's team did a tremendous job of that very quickly to the heart of the pandemic in the second quarter. I think the team did an outstanding job now supporting the recovery and the recovery came quite fast and it came and took some key markets versus others that created this mix issue that that we've talked about and I think that you know, again we were being very careful on the assets. We're bringing back on the railroad. We're being very careful and the people were bringing back on the railroad not on a one-on-one and and then that's that's what I can offer as as a bit of color and you've obviously were using the current situation to improve on efficiency and improve on productivity and and I would say that that's what I can offer. I think that job

I think that we're quite pleased with this quarter. We're very pleased with the squatter and and delivering a a Noir that starts with a V. And and I think that as I said our volumes are up on a year-round basis and in October by six or seven percent and and I think that there's two more months to go and the team is energized and we've got some good we've got better visibility in front of us that we did in the past and but there's still some uncertainty. I mean, I know here in Montreal were living a second wave of depend emack so we have to see and and be cautiously optimistic about what's happening. But at this time so far. We're quite pleased with the volumes coming at us in October.

Yeah, leave no doubt, but right now the railroad is busy. I mean the different terror is busy and you know, if we're given the opportunity, you know, our track record to grow Revenue. I mean, we have waged a track record the last decade and we work on our o r like everybody else going to be the leading pack, and we we do same-store price above and placement. So if we get get get a little luck or a little environment on the economy side, I think we should have a decent year of decent year in 2021.

Thank you, Seldon.

Appreciate it, Thanks.

Thank you. The next question is from Jordan from Goldman Sachs, please go ahead. Yeah. Hi. Just coming back to a question that I think it come up earlier. Not sure if it was directly above it on the cost per employee and perhaps head can as we think forward from here. I assume a fair bit of that normalizes with some of these headwinds moving out of the way, but if you can any color on that would be great. Thanks.

So maybe maybe arrive you could just talk about you know that we were untrained right now and some of the positive impact on the train land train weights and on the regular operation, maybe dark liquid. Yeah, absolutely. So, I mean I said in my comments what we saw with train length and how we're able to move more freight with fewer crew starts. Our crew starts were down 14% while volume was down 7 a.m. We continued with that focus into the fourth quarter. We're actually moving more afraid with about 2,500 less employees in in operations year-over-year our labor productivity for this Thursday order was actually up 17% year-over-year or so some really good momentum going into the fourth quarter. We're going to continue to look for every every opportunity to make it more efficient, but in the railroads off quite well, we're in good shape you're going in is evidenced by 7 straight record months of grain movement and we'll be talking here in about 10 days 10 11 days about an a straight. So

Very good. Thank you Jordan.

We take the time for one more.

Certainly. The next question is from Justin long from Stevens, please go ahead. Hello Justin in the prepared remarks near the beginning of Life call. You talked about pulling forward some of the modernization of the network. I was wondering if that's something that's changed the way we should be thinking about the framework for Kap as a percent of Revenue as we look ahead to next year and Beyond and then also on the topic of capex as volumes have returned. Have you reconsidered the page or a locomotive modernizations?

Rob, you want to talk about Rolling Stock and Technology? Yeah, absolutely. I think you'll you'll see us continue to invest in technology alleges on answer the page that backs but the capex piece of it. We haven't finalized that for next year anyway, but you'll you'll continue to see us invest in technology. We feel like we're leader there in a couple of different things. You know, let's take take a few moments to talk about some of the things we're doing out there. As I said are autonomous track inspection cars are now in phase two that allows us to have a safer of railroad. Those are in trained in regular Revenue Service. And now in phase two we're actually able to remove regulated inspections as well on our autonomous inspection portals. We have 41 algorithms now, we'll have $55 by the end of the year. We have seven of those portals will have a hundred by this time next year why that's important is that those algorithms will be dead.

that's really the

How are you is is the ownership of the algorithms anybody can put a portal in there but to use the machine learning and artificial intelligence to teach it to find a defect on the the hundreds of different types of cars with the different components on each car. That is the value and that's what we're seeing out there today. We're actually finding defects on a daily basis and we're actually finding some significant defects that if left unchecked could lead to something much more impactful. So we'll continue to to invest we've bought a new Chief Information Technology officer here on board who is all in in terms of advancing us to the next level in terms of operations technology package and maybe maybe on capex Justin. I think that again as I mentioned we will provide more more color on 20 21 in on the January birth.

Call but I can tell you that you know, we're quite quite comfortable and if you look at historically we've typically our Capital envelope was typically around 20% of Revenue. We had two years of elevated cat facts a little bit of catch-up in eighteen and nineteen and twenty five percent. I think that we did we did cut up. I think that now we're staying ahead of the game and I think that that's you know, I mean we're we're comfortable in that ballpark and but again will provide more color in January so stay tuned on that one or thank you. Thank you just laying off and thank you all for your question. Maybe have time to close it up here. Just want to be sure that everybody you know is is we we make or commitment a very clear that we're we are pricing above inflation. We we invited them commercial team is managing the yield and Rob's team. Is there really driving productivity which generate steady and solid solid cash flow with the industry leader. Has it come to my home.

You know making the industry modern where we did industry leader on the SG not just on fuel, but on the energy as well, and we have good momentum right now on volume entering the fourth quarter and Thursday looks good for the remaining of the year, and we're we're positive contract is a positive about 20 21 in what twenty Twenty-One might offer to us. So focus on long-term Sienna's about the long-term not seeing is about sustainable profitable growth and all that. Good night to all of you. This is the end of the call and see you back in January. Thank you. Thank you Patrick Walsh welcome. The conference has no ended please disconnect your lines at this time and thank you for your participation.