Q3 2020 Canadian National Railway Co Earnings Call
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C N third quarter 2020, <unk> financial results Conference call, we'll begin moment, Charlie I would like to remind you that today's remarks contain forward looking statements within the meaning of applicable securities laws such.
The statements are based on assumptions that may not materialize.
And are subject to risks described in C. N third quarter 2020 financial results press release and on this presentation documents that can be found on scans a website.
As such actual results could differ materially reconciliations for any non-GAAP measures are also posted on <unk> website at www Dot C.N. Dot C. Please stand by your call will begin shortly.
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Okay. Thank you Patrick good afternoon, everyone and thank you for joining us for CN third quarter Twentytwenty earnings call.
I would like to remind you about the comments already made regarding forward looking statements.
With me today is JJ to it our president and Chief Executive Officer, Jim.
Islam, our executive Vice President and Chief Financial Officer.
Rob Reilly, our executive Vice President and Chief operating Officer.
Keith reared in our senior Vice President consumer products supply chain and James cares, our senior Vice President rail centric supply chain.
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.
IR team will be available after the call for any follow up questions. It is now.
It is now my pleasure to turn the call over to see as President and Chief Executive Officer JJ to it.
Thank you Paul and thank you everyone for joining us this evening.
We hope you are enjoying a safe safe fall and then making sure that all you have your family is thing in good health.
The economy recovery is underway.
Looking back at Q2, the team acted very swiftly thanks to our very engaged and adaptable railroaders.
We are truly some of the essential services hero of just endemic.
Q3 was a quarter of sequential recovery.
The recovery is underway since the month of July.
Operating metrics are improving we brought many of our employee back to active service and we added train start.
And kudos to the entire team for producing an operating ratio of 59.9.
The recovery has a different mix of business some.
Some market recovery fast in V shape, some market have yet to recover all of this involve evolve into a different mix of revenue ton mile as compared to the pre pandemic.
The significant decline in the crude and significant increase in Canadian grain season.
CN rail capacity is precious and the team as always is proactively making decision. So the right value quality freight is on our network in the quarters to come and to ensure that we optimize the return of our investment in the business and our return to shareholders. We.
We consistently target same store price ahead of rail inflation, and we achieved that in the third quarter again.
Our focus remains very much on the long term strategy on the positive secular trend that we intend to right. For example, the growing north American consumer economy to see.
The secular shift to east coast trade the Uni.
The unique cost cost and service mode of the Rupert Gateway.
And all the while being very aware and preparing for the upcoming long term disruptors like driverless truck and the battle for control of the freight sales by competing channel on that note I will pass it on to Rob Rob All right. Thank you JJ and I also want to thank our team of essential Railroaders further.
Efforts not only this past quarter, but since the pandemic started in keeping the critical supply chain open in North America we.
We really have not missed a beat and that is a credit to the men and women of CN is.
As Jerry mentioned, we saw a sequential recovery month over month during the third quarter in a team quickly adapted in Rightsizing resources to the demand along the way.
We've brought back crews locomotives and cars to handle the volumes, but our discipline throughout this pandemic and our structural changes implemented means that we're able to move.
Similar volumes this year versus last year with lower labor costs.
Over the past several months, we vital multiple locomotive shops in switching yards that have remained 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 costs by 14%, while our volumes dropped 7%.
Focus on increasing train length paid off as we increase train lengths, 6% during the quarter, allowing us to move more freight with fewer crew starts as.
As volumes return during the quarter. We've also 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 on 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 say close to $35 million in fuel expense and avoided over 162000 tons of C. O two 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 rail as 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 due to disciplined execution of our engineering teams and dispatch centers. This has 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 through the pandemic has resulted in both our personal injury ratio and train accident ratio, improving by 19 and 22% respectively as.
As running a safe railroad for our employees our customers and the communities. We operate in remains as a core value in everything we do.
Despite the volume fluctuations we have seen we have pushed forward our agenda on the modernization of our railroad operations on everything from robotic process automation of everyday tasks to the use of machine learning and artificial intelligence and how we inspect our traction cars are.
Our autonomy to track inspection program is entering into phase two in the U.S. and our cars are now covering our core routes every week from the Atlantic Ocean to the Pacific Ocean and down to the Gulf of Mexico, making our railroad safer unlocking capacity and reducing costs.
The railroad is fluid and prepared for the winter season ahead, and the record grain harvest as evidenced by the fact that the CN team has now delivered seven consecutive all time monthly records for the movement of Canadian grain and we're off.
And we're on track to deliver in a straight record month here in October.
As I turn this over to James Let me reiterate that we remain nimble and responsive to aligning resources to demand and maintaining a very positive momentum on fuel and labor productivity with that I will turn it over to James Thank you.
Thank you Rob during Q Q3, we experienced a V shape recovery in our ports business lumber and automotive, while we saw weakness in crude frac sand and refined petroleum products.
Demand for Canadian grain, which is not tied to the economy hit record levels and as Rob said, we delivered setting SEK seven consecutive monthly records as.
As we manage through this on uneven recovery, we will drive hard on key markets, including Canadian grain can.
Canadian coal and propane let me now.
Let me now discuss in further detail some of the topics on the carload side of the business.
As I mentioned Canadian grain continues to be a bright spot for CN with our best third quarter volume on record, beating the previous best in 2014 by 13%.
US grain grain was also very strong and finished well ahead of last year.
Indian coal was negatively impacted by the temporary closure of CST and coal Valley mine and the permanent closure of Tech Cardinal River mine.
Forest products ramped up sharply in Q3 as our customers brought back idle capacity to take advantage of strong construction activity.
Crude frac sand and refined petroleum products, which are long haul heavy tonnage segments, where the weak outliers in Q3 contributing to the shift in our overall business mix for the quarter.
The positive momentum we saw in Q3 will help us finish the year out strong and position us well for 2021.
We are the dominant player in the Canadian forest products market and see an out weighted benefit as this market recovers we have.
We have brought back all the lumber cars that were in storage and we recently added 500 additional lease cars to meet spot demand at auction prices.
Canadian grain and us grain are expected to be growth drivers in Q4, and 2021 that can.
The Canadian crop may hit an all time record and the U.S.
And the U.S. crop is expected to be above average.
The step function change in 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 and our customers have also invested in new private fleet, a similar high payload cars.
By the end of Q1 next year, we will have over 4200, new high capacity Hopper car cycling 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 CN.
Allowing us to move more grain faster using fewer resources.
Our three cost network reach is a long term structural advantage that cannot be replicated.
Propane export volume through Prince Rupert will continue to ramp up and use called coal coal volumes will grow in Q4, driven by new Petcoke volumes moving from Chicago to the U.S. Gulf Coast for export.
International demand for wood pellets as a greenfield alternative is also strong and we see this market as a unique opportunity for CN with several new production projects in the works.
We maintain a disciplined approach to pricing and op scaling our portfolio of customers and commodities to ensure the right value freight is running on our network.
We are focused on managing mix in the face of a recovery that has not been consistent across segments with that I'll turn it over to Keith. Thanks.
Thanks James.
Our engagement with our customers supply chain enabled CN to fully participate in the strong recovery of the third quarter.
Whether international or domestic originated supply chains, where the grocery business the home improvement retailers E commerce or bricks and mortar retail restocking we were there to support all segments of the V shape bounced back in those markets as auto manufacturing accelerated we successfully enabled our CFO.
Customers to meet the pent up demand in North American markets.
In Q3, our overall business mix was impacted by a surge in container imports on both the west coast and the East coast, our year over year volume growth on the West Coast was driven from our Sep from several of our ocean customers as they move business from other gateways and supply chains.
The work stoppage at the Port of Montreal created opportunities for other east coast gateways, leading to strong import volumes in Halifax, and Saint John.
It also benefited our CSX steel wheel interchanges from the ports of New York, New Jersey and Philadelphia.
We did experience a temporary and significant imbalance and traffic in Q3 as the rapid surge in imports was not yet matched with the loaded exports.
We also experienced additional temporary imbalances related to the port of Montreal disruption.
In automotive we were faced with short term headwinds as some manufacturers were shutdown with retool for a new remote for new models. Okay.
Opening in December our 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 service to that terminal as well as.
As the North American consumer market evolve, we continue to focus our efforts on yield and its many levers.
Technology advancements that we shared with you at our 2019 Investor day are producing ongoing safety security and productivity benefits and chassis contain.
Containers and cranes.
Our ongoing efforts to continuously upscale our business and price above rail inflation will continue to improve our intermodal and automotive business margins as the consumer based 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 GTT at Deltaport and DP World at Centurion, Prince Rupert to deliver those expansion plans over the next couple of years.
Longstanding successful beneficial cargo owner relationships and service will continue to drive volumes through whatever wave that the economy presents us with in 2021 I will now pass on to his land for the financial perspective.
Thanks, Keith and good evening everyone.
My comments will start on page 10 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.
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 $3.4 billion.
Volumes in terms of Rtms were down 7%, while revenue for our TM was down 3% impacted by significant changes in business mix.
Operating income was almost $1.4 billion down 15% versus last year.
Our operating ratio was 59.9% up 200 basis point versus last year now.
Net income was $985 million down 210, Mil actual results in the quarter.
Turning to page 11, let me highlight a few of our key expense categories.
Labor and fringe benefit expense was 5% lower than last.
Yes.
This was mostly driven by 15% lower average headcount in the quarter versus the prior year, partly offset by higher incentive compensation related to period over period adjustments to accruals.
Purchased services and material expense was 11% lower than last year.
This was mostly the result of lower outsourced services low.
Lower trucking and Transload expenses and.
And lower material costs.
Fuel expense was 32% lower than last year, driven by a 26% decrease in price.
9% lower workload and an all time record quarterly fuel efficiency.
Now moving to cash on page 12 free.
Free cash flow was close to $2.1 billion through the end of September almost $600 million higher than the same period last year, resulting in a significant year over year improvement in free cash flow conversion.
Our year to date free cash flow performance is very solid and we fully expect to achieve in excess of the $2.5 billion in free cash flow for the year.
At the end of Q3, our leverage in terms of adjusted debt to adjusted EBITDA was two point 17 times slightly higher than our two times target and for.
And for financial Prudence, The company will continue deposit share repurchases.
We will of course, we assessed 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 actuals and.
And that we report weekly volumes, we see limited value in reinstating our guidance at this time.
That being said with the volume.
Buggery that we have seen sequentially and the good momentum so far in Q4, we are aiming to provide annual guidance for 2021 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 markets, we continue to take.
We continue to tightly control cost as volumes rebound.
And we are seeing good momentum in 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 okay. Thanks.
Thank you just lay I'm going to wrap this up quickly. So we can go through your question in the second quarter kudos to our women and men at CN with demonstrated hours resiliency in the third quarter, we experienced a recovery of a different kind of business, which impacted our revenue mix of business and the commercial team is proactively managing for the.
Right book of business to be running on our railroad going forward capacities valuable again to deliver good long term value for our shareholders. So Patrick we're going to turn back to questions.
Thank you. Please press star one at this time you have a question.
Question is from Ken Hoexter from Bank of America. Please go ahead.
Hey, I'm good afternoon, and good afternoon. Thanks JJ.
I guess just wanted to hit on that last point I guess, just plain you talked about if you're seeing some improving performance maybe just to step back and think about your why pause on the share repurchases or what's magical about the two times debt to EBITDA I just want to understand that the confidence you have in the in the sequential growth you're seeing an acceleration we should expect into into Fourq.
You and it's at the end to 21.
The slide that thanks again for the question listen I think we see the recovery loud and clear in certain key markets and I know, Keith and and James touched upon it as you know Ken we've always do share buyback as a as a very flexible tool to get to a targeted leverage level and you know our our targeted leverage.
Level has 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 two.
And I think we're comfortable and since were already over the two times were at two point 17 as I alluded at the end of the Q3 I think that you know we we think we're in the right position and frankly, we like to have a strong balance sheet, we saw that loud and clear in the second quarter going through this pandemic I mean, it created a lot of.
Benefits for Us I mean, that's as you know we were.
We went out to the market and actually issued a 600 US a million dollar 30 year paper or bond at two point, 45%, which was the lowest the second lowest coupon of any corporate in the U.S. So so we see value in having a strong balance sheet.
Right. The the targeted the the 2.2 0.25 is the limit that we have that supports our credit rating.
So you know targeting around too is good and we feel good about that so stay tuned but the fact that that were not reinstating at this point or share buyback is far from being a lack of confidence in us looking at the recovery. It's just because again, we're where we are a little higher and and stay tuned for what we're going to.
Due for 2021.
Thank you Ken Thanks, Thanks, David.
Thank you. The next question is from shown in Red blood from TD Securities. Please go ahead.
Lets her lingering.
Thanks, very much and good afternoon.
In terms of a decent volume recovery, which as you know I have no plans.
No premium intermodal fourth products and automotive just curious if you have that very how much of that might be inventory restocking versus consumers pivoting their spending could could deliver services and.
Thats good its restocking how much of a backlog is still left.
So Keith you want to address that.
Thanks, Sheryl and for Us for the question.
It's a little of both as we.
As we talk to our customers most specifically our overseas customers. They are still seeing an opportunity for restocking some say into the first quarter.
Did that there's that much of a replenishment that's required but I also do think that that trade for.
No buying sprees versus going on vacations is happening I'm sure. It's happening in everybody's a household in on the call. So we see a little of both there so thanks.
So thank you for your question yet another pork right now the business is still very high right. So the fall peak us really is lasting and there will be a very stronger fall peak. This year. Thank you Sheryl.
Thank you.
Thank you. The next question is from Ravi Shanker from Morgan Stanley. Please go ahead.
Thanks, everyone.
Then I get the logic of not introducing full year guidance I knew only have one quarter to go by.
But can you give us any color on kind of how we think of for Q from here in terms of other incremental margin there or have given the pace of the volume recovery you expect.
Okay.
Really strong fourth quarter are going how do we frame.
Screen that Mike.
Yeah, not even a quarter left to go obviously slave yeah, I mean revenue. The we we try to get away from that quarterly guidance, but I'll tell you and I as I said in my remarks, we do provide our volumes both on carloads and on our TM on a weekly basis, and if you look and I think our carloads now month to date.
In October I think they are up six or 7%. So I mean, I think we're we're doing quite well James mentioned, the fact that that the grain has been.
That the grain has been a a stark commodity grain grain works I mean, whether theres pandemic or not people need to be good news is on the on the significant investments that CN is making on the grain Hopper cars, we will advance some of those cars that were slated to <unk> to come in the Q1 actually in January we're going to.
Advance about the 800 of those cars in Q4, and I think that will that will help get us started well.
In on grain the in in the in front of the winter and so listen I think check our volumes every every week and.
I think right now, we're quite positive and quite favorable and whats happening yeah.
Just laying loves grain and.
Just as a reminder, I think this quarter talking about mix the KPN for volume for look to track would be more the RCM.
Yes.
Thank you great. Thanks revenue Exelis Donna thanks revenue.
Thank you. The next question is from one than what Bonnie Chardan capital. Please go ahead.
Relevant here.
Good afternoon, everyone could you talk a little bit about the fact that you've been short on the 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.
As far as we manage things quite tightly in the third quarter, you want to talk for the resource growth absolutely and thanks for the question Ben Law.
So as you said, we saw us sequential volume increases month over month over month in the third quarter actually entered the quarter on a on a depressed.
Number we were down 17% for the month of July that improved to 9% in.
In August and it was actually flat in September and we're up six to seven percentages on just spoke to in October actually managed to quite well.
You know as as stated it was a V shape recovery, we had over 700 locomotives out of service nearly 4000 people furloughed in thousands of cars and we mobilize that quite quickly.
And and really have the railroad running very very fluid throughout that though we're able to stretch ourselves and as we said we didn't bring back resources one to one and we found coming out of this V shaped recovery, we can actually do more with less and we've had permanent cost takeout.
In terms of switching yards and locomotive shops shutdown. We can we finished 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 the velocity train velocity car velocity and dwell are 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 downturn in the second quarter only despite back here in the third quarter really proud of the team.
Try the wording of the return of a lot of employee back to work, which I think is a good thing for a lot of families out there.
Past is little tighter than it was and the marketing team is asked to actively manage yield. So it is one of our team to you in the quarters to come.
Good runway thanks.
Thank you.
Thank you. The next question is from Chris Wetherbee from Citi. Please go ahead.
Hey, Thanks, good afternoon guys.
Good afternoon.
You know, maybe touching a little bit on yields our cents per RPM, and maybe kind of getting into the mix breakdown and maybe price in fuel can you sort of disaggregate a little bit of a cents per our TM force. It seems like mix was 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 then maybe how you see that going forward I know, it's difficult to predict but maybe.
Sort of thoughts around fourth quarter.
Yes, so we have given a lot of pass through that so James maybe you ought to give the broader picture from the broader portfolio cm. Yeah. So big picture. If you think about it you know that the mix change we had in Q3 was driven significantly by the declining in energy carloads PNC crude PNC Carlos crude jet fuel and the like as you would expect.
We reallocated that capacity to move a record amount of grain volumes. So we traded off some long haul 2500 mile.
Crude business for 1200 1500 mile grain haul so moving.
Moving forward.
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 our mix keeping on talk a little bit of both portside sure. You know, we we love our overseas intermodal business in the fact that we have a very balanced approach Uh huh.
However, in the third quarter with the with the large influx of.
Of the imports that happen 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 one for one or you know on an on as much to equal basis. As we normally have so that that was another thing that hurt us.
May have showed up in your your Rtms as well.
So a tsunami of EMCOR and quite a bit of a lag.
Quite a bit of a lag on export so a few train moving with empty platform. That's that's affecting the over the affecting the mix of the summer.
Okay. That's helpful. Thank you. Thank you Chris.
Thank you. The next question is from adding salmon from BMO. Please go ahead.
Hello, Thank you all.
Hi, guys. Thank you for taking the question so.
I'm trying to square little bit differences like if I look at your quarter over quarter.
I'm like Q3 versus Q2.
Revenue increase in operating income increased seemed like incremental under 50 persons like high 40%.
At the same time, it looks you're operating metrics kinda performed really well in the quarter like Rob when you all this data.
On a train lengths in weight and all this kind of stuff like what would what explains kind of the muted love news that we saw here in the <unk>.
Third quarter wondering how should we think about this 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 came in that they are not necessarily related to head count I mean, when you look at it there was when we talked about the labor variance there was about a $30 million of of two things number one.
A reversal of an accrual for bonus accrual of last year of about a third of that and then two thirds of that was a true up into our incentive compensation related to relate it to some nonperforming performance share units. So so that is that is a cost that came in and thats a variance that came in.
On a quarter to quarter basis that that does not necessarily related to head count again depreciation continues to be a headwind. We've said that we said it was $130 million headwind at the beginning of the year. So that hits you every quarter.
About evenly and then the pension is a headwind as well and we've said that pension was about 50 million I I'll tell you, it's still about 50 million.
So those are some of the things that the that you may not see a way.
When you look at the metrics that are in our cost.
Maybe one last thing for D., we reopened our training center in Winnipeg, and Chicago, meaning that we will have unproductive labor here because we are training people to me.
Meet the expected volume growth of 2021, which is something they were close second quarter and only reopened mid summer.
Thank you for your question Thanks, Eddie.
Thanks.
Thank you. The next question is from Scott Group from Wolfe Research. Please go ahead.
Hey, Thanks afternoon, guys. So I just wanted 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 were depreciation was down and pension probably wouldn't be a sequential headwind. So ultimately though.
Ultimately, though should we be thinking about give or take 50% incrementals for repair.
For better or worse going forward and then maybe just two specific modeling questions. Other revenue was down 25% year over year down sequentially any thoughts there and then comp per employee was up 12% year over year any thoughts there just a couple of big.
Saying you want to expand on the earlier question.
Yeah I think.
I think as I said, the the the bonus and the the accrual that I've just talked about and labor explains part of it for sure and I think.
I think that's that's what it is.
And then if there are other parts and other revenue and the questions and other revenue in comp per employee going forward.
James you want to talk about other revenue, yeah, I think where our vessel revenue was slightly down on a sequential basis as would be expected and we came in at coal that I'm talking on the range here on the iron range here, we had a lot of activity on the iron range very good results, but we are drawn down the inventory at a very very.
The fast pace with our with our vessel fleet.
So we had slight decrease on.
On the vessel side of the revenue the other revenue decrease I'm not a I'm not seeing that so.
Yes, so we move less our renewal by vessel Yep Yep, no third quarter than we did the year before yes.
Okay. Thank you.
Thank you. The next question from Walter Spracklin from RBC capital markets. Please go ahead. Thank you very much good afternoon, everyone.
So I'd like to turn to to Halifax, and certainly with the strike at the Port of Montreal, you had the opportunity to see.
To see how Halifax, what would react to.
Not to some of the volume that was diverted there now obviously that came they were you know that was unexpected preparation obviously had to come in fairly quickly, but Judy when you look at and assess how Halifax did and how it stepped up with regards to a win win the port of Montreal went down.
How would you characterize it and what what was learned from that that can be improved does and its hopefully volumes expand into the east where capacity a pinch points might you be able to address in the future.
Yeah, So maybe I'll take that one so the Oh, we never served the city of Montreal of substance to be among the greater Montreal is always serve directly with vessel coming in right into the city.
So we are usually not set up to serve the city, 100% by rail from another four and would only a 72 hour notice striking orders, obviously, what kind of happening. It is actually one of the reason why our mix in the third quarter was worsened because we have to send empty train two halifax to pick up the import.
We have basically sort of a one way freight the export were already indicated that the port and it couldn't couldn't get out of the port because of the strike and then.
And then we were bringing freight to Montreal and the other is one where faith and not a whole lot going back so from a from a profit yield point of view. This strike was not the best from a from a sales point of view yes.
Other thing is when you get a 72 hour notice you have all the tsunami of freight coming out are you on a short notice to our.
Total impasse role we have to open temporarily a terminal in valley field. We also have grew up open temporarily a ramp in the <unk> and those are.
No just close to the office here because of the.
It's kind of a onetime.
In fact, if you wish but from a PSC and CN point of view, obviously, we're a little more notice in 72 hours. We can we can move a lot more freight from the maritime and we could also move its very violence, you know with the work typically what would be coming out of Montreal. So I'm not sure that this for the exercise was a b the conclusion of.
Anything because it.
And in strike time when unit, we only get very short notice.
I mean, if no customer ready get the kind of service the we'd like to get when the visual out of position and train out of position and terminal are not fit for Florida labor required to respond overnight to something over that but we did the best we could to help the city of material Yeah Walter I'd.
To add a little piece of that and as we're not we're not a one trick pony here.
It Wasnt just that we have vessels that 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 in Philadelphia that we handled very well so we have multiple outlets for our customers.
And each one of our goal.
Gateways, where we can handle the freight so that you have to take all of that volume together and look at it versus just one place.
That makes sense appreciate the color. Thank you. Thank you.
Thank you. The next question is from Brian Ossenbeck from JP Morgan. Please go ahead.
Hi, good afternoon.
One more question on on mix, but from an operational side can you quantify just how much impact that had in the system with the mixed shift in some of the dislocations you saw during the quarter and they'd be more onetime in nature compared to the topline impact and then when you look at the service metrics.
Intermodal and bulk both those were trending down year over year in the quarter was that something that was impacted because of the mix shift or what caused that and now that there is lets start the fourth quarter.
Maybe ryanair can starting into the personal onto James but to think about this to become a part of Montreal Thats, obviously, just a onetime right there.
Hey, Buck in operation and actually one of the shipping line has added one call in other effects as a result of the.
But the you know their dissatisfaction with the fact that was the labor disruption.
On the West coast that was a tsunami afraid coming in.
And then it took a little while for the export to resume our train balance it's going to get a little better air time, meaning the export from North America back to Asia was eventually get back to a level that is conducive to the amount of imports, but the real thing that is sort of secular that we'll have to work on is there's not as much crude.
Not as much a diesel and jet fuel is not as much products. Then that's a fact you will take a while before the energy market recovery.
And then when we were going to be moving more domestic intermodal freight more overseas freight more grain and ER and therefore as I said earlier when we allocate the slot on the on the network, we want to be mindful of which strain get the green light and.
And that's a each train that gets a green light is a train that's worth it to be on on the network because weve invested capital money.
To create that that capacity. So I think I don't think anything else you want to add Keith regarding when with exports out to be more balanced with import the RDR frankly, they are yet we have a we have a lot of.
Boxes that are heading to the prairie to pickup exports.
And all of our other transloads across our network.
I would also say that as as James said records again for our grain movements.
In the second quarter, we talked about record grain movements in containers, we did.
We didnt get closed we didn't get as close to the record levels of containers.
With grain in them, but it was very very close up are up significantly over last year. So I think we are there with the balance and Brian as far as how the railroads running well, we're very fluid and in really good shape going into the winter, we're actually handling more volume than we did this time last year and a really good shape. So.
We've worked through a thanks Brian.
Yeah, very solid the Roseland model right now the network. Thank your for adding that Rob. Thank you Brian.
Thank you. The next question is from the corner group tough 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 the margin improvement into 2021 next year. That's volumes are recovering here, obviously into the year end and heading into the next year and you are onboarding new contracts, obviously be heard a lot about the opportunities you have.
But do you have kind of feel like coal intermodal grain automotive and all those things, but how should we think about margin improvement coming from those contracts and organically. Thanks.
Sure you want to talk about this without getting into guidance.
Yeah, I think listen I think has as a 2021 comes and if you look at the you know.
Census came out this week actually that the you know people believe that next year, either GDP or industrial production will be up four or 5% versus the 2020. So obviously you know.
You know not only us as the railroads, but economists are seeing a recovery.
Coming next year and as we do recover and Robert talked about this where we're not adding people one for one.
And we have done some permanent some permanent changes.
During the pandemic there.
Therefore, you can expect our margins to continue to improve and as we continue to deploy our technology remember that we have.
You know very exciting technology technological projects that that are and will create value. Then you can expect that with all of this and then our focus on yield management. You can expect that all of this will that 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 add any of you have some key.
Earlier on on costs for for just broadly speaking for next year right. We have a we have really good momentum as I talked about we figured out ways to do it more efficiently through this pandemic and we expect that to stick. So we're seeing that 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 and some day they will take place next year.
I I didn't hear hear all that im sorry, 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 double down on what we did this year and have some new initiatives as we go into 2021 to take a more cost and we will have the full year effect of what we've done. This year next year, we'll have the full year effect of those takeouts. So.
So I think we're quite optimistic about about our plan going forward Con art.
Thanks. Thanks for the question. Thank you. Thank you.
Thank you. The next question is from Jon Chappell from Evercore ISI. Please go ahead.
Thank you good afternoon, 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 and Vancouver, taking share from some of the congestion related issues in long beach in L.A. and given the fluidity of your network that you've spoken about what's your confidence in being able to maintain that market share when.
The imbalance across entire North American system somewhat normalizes.
Thank you yeah. Thanks, Jonathan.
We we pride ourselves on creating these so these opportunities for the supply chains to be.
Servicing customers in us Midwest and Canada for long periods of time, if you look at whether it's a shift.
Of.
Business away from the U.S. West.
West coast or if its a.
Change from.
One carrier to another carrier I think that they all know that the Rupert end, the Vancouver gateways into the U.S. Midwest on CN 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 10 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. It allows them to have a profitable economic round trip.
Spirits and you know we.
No we are priding ourselves on the putting the capacity in line with what our partners are doing as they increase their capacity. So that we are working in lock step. So that we don't have the pinch points that caused those problems where people have to move away from a supply chain that we created.
Yeah, maybe just to add Rupert.
Rupert is running at capacity right now writes a $1.25 million.
Many anti you annualize this fall so it's not about taking more freight it's about selecting the freight.
Thank you Jay.
Thank you.
Thank you. The next question is from David Vernon from Bernstein. Please go ahead.
Hey, good evening. Thanks for the time I wanted to ask you are keeping maybe JJ. If you look across the eastern ports in the network, you're going to be effectively doubling.
Jason I'm, just wondering how long do you think it will take to grow into that are.
Passive stance for support and do you anticipate any new to outstanding on the line a road to connect on that topic that is one is would today relatively low than anyone.
I think quite a few I think he was asked about the east coast, Yeah Yep Yep.
Yes, we just thought it was a little muffled it was harder to hear you.
Sorry, we yeah, that's okay as as our partners increased their capacities and as as we work with them from a marketing standpoint to increase the business that that's going through there are.
Our eastern network is underutilized you've heard JJ said numerous times before it was built for the industrial period, where a lot of manufacturing was was up and running that is not up and running now and the some of that railroad is the best we have I mean, it's a double.
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 I think we will you know.
The Halifax, the 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.
As JJ said, we have customers that want to bring vessels there today and we're continuing our marketing efforts with up with PS aid to fulfill that and I think Keith you also have some developments in the Mobileiron Obama, yes, I guess.
And our our our good partner Maersk has announced a.
A vessel that north normally our first call of Houston is now the first call Inmobi deal and that's a direct.
That's a direct service from Tucson Korea, So we hope to see automotive traffic on that it would go up into the U.S. Midwest and we also hope to see some other operators.
Opportunities for exports.
Going going that way as well so we're glad to see that our partner mask has a has put out.
As I put that first call first protocol and thank you to be cost network. Thank you David.
Thank you. The next question is from Jason Seidl from Cowen. Please go ahead.
Thank you operator, good evening, guys, Jay you talked a little bit about some of the long term threats and you mentioned autonomous trucks I was actually happy that you brought that up 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 does eventually show up in the marketplace Yeah.
So thank you for the question I think a number of US here you know when we look long term.
We know we are convinced that at some point the competition.
From the from the road.
It will get more intense therefore, we need to work on our costs, we need to go through where eventually.
Also work on how many how many people we have on the cab to be able to operate but driverless truck. There's a lot of capital moneys startup money going into driverless truck, it's something that we would like to study from the inside of the 10 more to come on that.
And then it's a question of when.
When is it going to happen how do we get prepared for it how do we leverage to our benefit and how do we understand it such that rather than being a victim of driverless truck that we are a one of the potential user of what that might do namely for intermodal network. So all I'm, saying, here's what I'll give you the detail of what we have in mind.
Recognize it is real and we don't want we don't want to be caught up on the blindsided. So they were recognized it and b, we're getting prepared for it so.
But if you look at the southern U.S. No snow wise nice Big Highway long haul yep.
Yep.
It will happen at some point in the next five years or so.
Depending on your Crystal ball.
Thank you for bringing that up it's actually an important point.
All right. Thank you for the time thank you.
Thank you.
Thank you. The next question is from Allison Landry from Credit Suisse. Please go ahead.
Hi, good afternoon bye.
So your competitor talked this morning about potentially being able to achieve that and they are.
Oh are 2021, and they love the DLR is not the end all be all but I was hoping you could do or how you're thinking about what the right balance between the l. our growth and our life is longer term.
Maybe I can start differently for your where you see anywhere into the balancing of the two right. So balancing atheists growth balancing free cash flow growth total shareholder return and balancing that.
So what does weather as you all are come in to be able to do that and.
And when we look at 2021, you also have to on this a little bit about crude contract and all of these things are.
Things are trying this coffee national contract with a I think it's about balanced what do you think just now yeah, I think I think Allison I mean, we've said this many times.
We're not to Jay's point, it's about balance were not enamored with the you are we want to preserve our foundation and we've implemented PSR 15 years ago, and we'd rather be a $25 billion a 59, the ore than be a $15 billion at the at 56, I mean, just do the math so.
I think that really asset as we move forward and as we focus on you.
Focus on yield and as we get more and more benefits from our technology deployment I think that you can expect the or to improve and and I would say stay tuned I think that 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 the you know we don't we don't have a specific target Anwar for 2021, that's not the way we think at CN, we have opportunity and we are focused on executing on these opportunities and you are or will be the result of execution on these opportunities yeah yeah.
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 ought to make a good.
Good use of your capacity you don't give it out the revenue you make smart use of it you want to price it properly, but at the same time, you want to be able to grow when the business is available to us something that provides a decent.
Essentially turn investment and you know that.
The type of atheists grow there were looking for so far in itself I think in fact in our compensation system T.N.. We don't ever was 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 U.B.S. Please go ahead.
Tom.
Yeah. Good afternoon. So I just wanted to see if you could offer some thoughts on.
What the potential growth might be for monarchy in perspective in 2021, if we look at prior periods, where you came off some weakness. So if you look at like 2000, and I think you add 12% RPM growth.
Approaching 11 in 2017, so is it reasonable do you think to look at 2021 and they may be you can be kind of similar ballpark to that or are there reasons why you'd be kind of more muted than a 10 percentage type of number when you look to 2021.
Well, we are as I said earlier the problem, we have reopened or training center in Chicago in the win it back so that gives you a sense that the.
Hey, we want to be sure that we replace a notes with a normal attrition and b that we have we are creating capacity trains truck capacity to handle more volume. We also talked about the the mix of business post core business was pre cove. It because of the impact of course on the energy sectors were working on that mix aspect.
Same store price is always above rail inflation and then.
And then you know there's a lot of things tends to be on the owner can visit U.S. election baby can isn't that action.
How will this phase of a second wave that seems to maybe you will last or winter, how without shape out, but we would like to see definitely to 2021 to be a little closer or better than 2019 that would be that would be that we'd be one of our aspiration here for the sake of our employee and the for the economy.
But we're preparing for growth definitely and and time will tell what kind of economy is available to us, but whatever happens we want to at least right and outperformed you calling me. So we always said, it's kind of GDP plus so we want to be able to move the economy and slightly more.
Or which has always been our target for us in good time about time try to outperform the calling me all boat rise really calling me and we rise faster than the average.
We'll give you more of the first for the next quarter.
Next quarter call when we have guidance for 2021, and we will most likely what our guidance at that time.
Okay, but it sounds like you think looking back at 2019, and maybe doing better than that is that a reasonable framework.
A reasonable framework.
It would be nice.
So, we'll we'll wait to see little more than what the Crystal ball is from all the economist as we get later in the year and prepare a guidance for the third week of January.
Thank you Tom Great.
Great. Thank you.
Thank you.
The next question from Seldon Clarke from Deutsche Bank. Please go ahead.
Hey, good evening. Thanks for the question on just getting back to some of the earlier commentary on margin progression and operating leverage as you move through 2020, if he does normalize for the incentive comp accrual.
And try and think about the cadence of asset deployment relative to the recovery in volumes should should underlying operating leverage and improved from threeq to fourq relative to what you saw from Twoq to Threeq here.
Yeah, China, Southern like we try to get away from providing quarterly guidance cells and so I think.
I think I think frankly, you know we robs team did a tremendous job to adapt 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 into some key markets.
Versus others that created this mix issue that the that we've talked about and I think that the you know again, we were being very careful on the assets were bringing back on the railroad, we're being very careful and the people we're bringing back on the railroad not on a one on one and and then that's that's what I can offer as as as a bit of color.
And you know obviously, we're using the current situation to improve on efficiency and improving productivity and and I would say that that's what I can offer I think that I think that we're quite pleased with this quarter.
We're very pleased with this quarter and delivering a no war that starts with a five and I think that as I said, our volumes are up on a year over year basis in Q in October by six or 7% and and I think that the there's two more months to go and that the team is energized and we've got some good we've got better.
The 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, we are living a second wave of the pandemic. So we have to see and be cautiously optimistic about what's happening, but at this time or so far and we're quite pleased with the volumes coming at us in October.
Yeah leave no doubt that right now the railroad is busy I mean, a definitive railroad is busy and.
You know if we given your Fortunately Ti you know our track record to grow revenue I mean, we have we do have a track record the last decade and.
And we work on all our like everybody else, we want to be the leading back and we do same store price above inflation. So.
If we get could get little luck or a little better environment on the economic side, though.
I think we should have a decent year decent here in 2021.
Thank you Sheldon.
Please thanks.
Thank you. The next question is from Matt Jordan Alger from Goldman Sachs. Please go ahead yeah.
Hi, just coming back to a question that I think could come up earlier not sure. If it was directly answered on the cost per employee and perhaps head count 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 that would be great. Thanks.
So maybe maybe Rob you could just talk about that.
So we were on train right now and some of the positive impact on the train length train weight and Oh.
On the regular operation maybe help yeah, absolutely. So I mean, I said in my comments, what we saw with train lengths and how we're able to move more freight with fewer crew starts. Our crew starts were down 14% while volume was down seven we've continued with their focus into the fourth quarter were actually moving more freight with about 2500.
Less employees in operations year over year, our labor productivity for this third quarter was actually up 17% year over year. 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.
Railroad's running quite well we're in good shape, you're going in as evidenced by seven straight record months of grain movement and we'll be talking here in about 10 days 10, 11 days about on a straight so.
Very good thank you Jordan.
We take time for one more.
Certainly the next question is from Justin long from Stephens. Please go ahead.
Hello, Justin Thanks, Thanks for fitting me in in the prepared remarks near the beginning of the call you talked about pulling forward. Some of the modernization of the network I was wondering if that's something that changed the way we should be thinking about the framework for capex 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 reconsider the pace of your locomotive modernization.
Rob you want to talk about a rolling.
Rolling stock and technology.
Yeah, absolutely I think you'll you'll see us continue to invest in technology I'll, let just on answer the the capex, but the capex piece of it we haven't finalized that for next year anyway, but you can see you'll continue to see us invest in technology as we feel like we're a leader there in a lot of different things and all that.
Let's take take a few moments to talk about some of the things we are doing out there as I said, our economist track inspection cars are now in phase two that allows us to have a safer railroad. Those are in trained in regular revenue service and now in phase two were actually able to remove a regulated inspections as well.
On our Thomas inspection portals, we have 41 algorithms now we'll have 55 by the end of the year. We have seven of those portals. We'll have 100 by this time next year why that's important is that those algorithms will be ours.
That's really the value is the ownership of the algorithms anybody can put a portal in there but to use in the machine learning and artificial intelligence to teach it to find a defect on that the one hundreds of different types of cars with the different components on each car that is the value and that's what we're seeing.
Going 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 impact.
Impactful. So we'll continue to invest we've got a a new chief information Technology Officer here on board, who is all in terms of advancing this to the next level in terms of operations technology and <unk>.
And maybe maybe on Capex that Justin I think.
I think that again as JJ mentioned, we will provide more more color on 2021 in a on the January earnings call, but I can tell you that we're quite we're quite comfortable and if you look at historically, we've typically are our capital envelope was typically around 20% of revenue we.
Two years of elevated Capex, a little bit of catch up in 18, and 19 of 25% I think that we did we did caught up I think that now we're staying ahead of the game and I think that that you know I mean, where were comfortable in that ballpark and but again, we'll provide more color in January so.
Stay tuned on that one well.
Thank you. Thank you the slaying Robin. Thank you all for your question, maybe it's time to close it up here just want to be sure. Everybody. You know is a is a will remain to a commitment a very clear that we are we are pricing above inflation we.
We amended the commercial team is managing the yield and Rob steam is they're really driving productivity, we generated steady in southern solid cash flow, where the industry leader as it come through model, making the rail industry modern weedy industry leader on the USG not just on fuel, but on the USDA as well and we have good momentum right now and volume.
During the fourth quarter and it looks good for the remaining of the year and were positive constructive the positive.
About 2021, and what a 2021 might offer to us so focus on long term cnas about the long term cnas about sustainable profitable growth and all depth or good night to all of you. This is the end of the call and see you back in January thanks.
Thank you thank you Patrick.
Thank you you're welcome.
The conference has now ended please disconnect your lines at this time and thank you for your participation.
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