Q3 2022 Canadian National Railway Co Earnings Call
We'll drive the growth in our top line to the bottom line and we're doing just that.
This team has done a great job of driving this program forward and we're not finished yet, but we have a great start and some positive momentum.
Now as a result of this work, we're adjusting our expectations of our results on the year.
We now expect to deliver an increase of about 25% and EPS this year.
This is up from what we expect it to be 15% to 20% growth earlier. This year as we came out of winter.
And we expect to produce free cash flow of approximately $4 2 billion.
Up from our previous guidance of $3 74 billion.
And this comes as a result of every member of.
This team leaning into a single plan.
I'm proud of how we're all working together and I'm, even more excited about what we can create.
Now the third quarter.
Our performance this quarter has put us in a position to deliver the results that just spoke of.
Rob Dog inches Lam will go through the details on the quarter and what we see for the balance of the year in just a moment, but before they do let me highlight just a few key points about our Q3 performance.
Volumes turned positive this quarter up 5% and in our 10 basis.
When combined with solid pricing fuel surcharge revenues and a lower Canadian dollar we delivered record revenue.
While we're seeing some early signs of softness in certain markets. We will continue to be very busy through the fourth quarter, particularly on the western part of our network Doug.
Doug will provide you with the details on volumes and on our topline performance.
We continue to make good progress in Q3 on the discipline of running through our plants.
We're running at nearly 90% on time from an origin perspective, probably close to optimal or.
Our car velocity was 212 miles per day in the quarter.
Is the best third quarter car velocity since 2016.
Rob will provide you with a few more insights on the operating side and on some very important improvements in safety.
And finally as we grew volumes in Q3, we were able to deliver to the bottom line as well.
Of $2 13 up 40% on an adjusted basis, representing a quarterly record and an operating ratio of 57, 2%.
<unk> will provide you with the key elements that are driving that performance.
So a very good quarter delivered by a very strong team.
And on the team I mentioned when I joined.
Earlier this year that I was launching with 15, but I would assess as we leaned into our plants.
I'm very pleased today to announce that Doug Macdonald, who stepped into our chief marketing officer role on an interim basis has now been officially made our chief marketing officer, Congratulations Doug and we'll continue to assess the team as we move further into our plan and on that note. Let me pass it onto the team starting with Rob. Thank.
Thank you Tracy and congrats Doug.
Thanks to the team on delivering another excellent quarter of operating results I also want to take an opportunity to acknowledge the outstanding efforts of our engineering team that worked around the clock to restore service for our customers in the northern Alberta After a bridge fire.
The branch line was returned back to service in just over a week's time in an area where customers rely heavily on rail to ship their products to market.
The third quarter demonstrated the power of adhering to the plan we put in place as we laid out last quarter. We have been focused since early in the second quarter on running to the plan ensuring trains leave on schedule.
Our origin train performance at <unk> has continued to trend upward, reaching 87% this quarter up 12% from last year.
More trains are also reaching destination on schedule.
This resulted in better utilization of resources like cruise, where we've seen daily average deadheads and re crews declined by 12%, 38% respectively versus the same quarter last year.
We are moving cars across the network with more speed and consistency our third quarter average car velocity was 212 miles per day, which is a 5% improvement over the third quarter of last year.
This is the best performance since Q3 of 2016, and we achieved this despite handling 10% more GTS over that same period.
Also with grain season in full swing now we're off to a very good start recording the second largest amount of Canadian grain we've ever move for September and just two weeks ago, delivering an all time weekly record as well.
What I'm most proud of is what we've achieved.
We've achieved these outstanding results, while maintaining a safe operating railroad.
Our accident ratio improved 19% versus Q3 of 2021 and our injury rate has improved nearly 30% versus the third quarter of 2021.
And its now been 658 days since our last fatality and 469 days since the last serious injury, both streaks representing the longest in our company's history.
These are the results that help us live up to our safety vision of an uncompromising commitment to the health and safety of our employees the customers, we serve and the communities and the environment in which we operate.
On slide eight we are prepared to meet our customers' needs in the fourth quarter with.
We've laid out a solid operating foundation and we have alignment with Doug and his team. So they understand where there is and isn't excess capacity on the network, which informs their commercial decisions and we have the resources in place across the network. Approximately 400 conductors have been qualified so far this year with an additional 1000.
Currently in training.
47 locomotives acquired this year are now in service in Poland trade and we have an additional 10 coming early next year.
We remain committed to add to our railcar fleet to accommodate growth opportunities. We've added 500 high capacity grain Hopper cars. This year with more to come in 2023, and we will be adding 800 box cars by the end of next year.
We have continued with capacity investments this year, particularly in western Canada, with new sidings and sections of double track that are in service to support the operation This fall and winter.
And finally, we released our 2022 2023 winter plan, which sets out the actions we are taking to improve our resiliency and enhance our capabilities during periods when winter impacts our ability to operate the railway at normal levels.
While winter will provide its challenges our preparations will help mitigate its impacts.
I'll now pass it over to Doug to provide some color on the marketing side Doug. Thank.
Thank you, Rob and congratulations to you and the operating team for another stellar quarter.
My team continues to work closely with the operations organization as we lean into this operating plan to deliver for our customers let.
Let me take a few minutes to highlight our solid top line performance in Q3, as well as speak to our expectations in a number of key markets for the balance of the year.
We delivered record revenues of $4 5 billion up 26% over Q3 of 2021.
Driven by a 5% increase in our Tms across all major business segments.
Your fuel sale fuel surcharge solid pricing gains and a lower Canadian dollar also attributed contributed to the revenue growth in the quarter.
We saw a rapid uptick in Canadian grain starting in September when the new harvest started coming off the field.
We were quick to deploy resources and our customers are very impressed with how the whole team both commercial and operations came together to efficiently meet the surge in traffic.
As we laid out in our Grand plan earlier. This year, we are confident that we have the resources to move this year's crop over the crop year and we expect to see continued strong Canadian grain volumes well into next year.
Petroleum <unk> chemicals continues its strong performance in the third quarter with sustained strength in refined products are export propane programs and higher volumes of crude oil as we filled some of the available capacity.
Due to the lower Canadian grain volumes earlier in the quarter.
Our forest products and metal segments remained strong through the quarter as demand persist at above empty car supply.
On the intermodal front volumes overall were flat, but we continue to get a good traction in Halifax with our second daily train as Halifax volumes were up 21% or 10000 containers in Q3.
We continue to achieve inflation plus pricing as contracts come up for renewal.
Turning to slide 11, we continue to assume low single digit RPM growth for the year, which implies a strong volume uptake in Q4.
Canadian grain will be the feature of Q4 volumes as we continue to execute on moving the new crop.
With the recent change in the water levels in the Mississippi River U S. Grain now looks very strong in Q4 and into Q1 2023.
The U S crop on CN lines came in very strong.
We are seeing positive demand from a number of other segments.
We expect automotive demand to remain strong for the balance of the year and well into 2023 as manufacturers continue to ship into the backlog that we are being told is nine to 12 months.
With metallurgical and thermal coal prices, both remaining strong demand remained solid for western Canadian coal and U S call. We will also be moving some of the call backlog now that the west shore coal terminal is back up and running following their strike.
On the other hand, we are seeing some signs of market softness.
We are seeing demand roll off rate international intermodal as inventory levels remained elevated and the supply chain continues to sort itself out.
Lumber prices have dropped to about $500 per thousand board feet from a high of <unk> hundred dollars earlier in the year and some mills are taking downtime to adjust inventory.
We are seeing flattening demand in chemicals with some impact due to the economy slowing.
While we expect another strong propane season for the export and domestic demand refined fuels are coming down as people and trucks are driving less.
Before I pass it onto just lane, let me double click on our recent announcement on the E&P program.
CN is proud to announce our exclusive partnership with Union Pacific and Norfolk, Southern in the equipment management program or E&P program effective October eight.
The <unk> fee program as a domestic interline service, providing extensive coverage throughout North America offering a fleet of more than 40000 containers that E&P program provides seamless access to all major cities within Canada, the United States and numerous major markets in Mexico.
E&P shippers will benefit from <unk> double stacked scheduled intermodal service to and from all Canadian origins and destinations from coast to coast.
<unk> will continue to invest in broadening our range of intermodal services in North America and over the next three years, we will invest in approximately 2500 containers and chassis to position ourselves for the future growth.
<unk> expense of three coast network and industry, leading service provide increased flexibility and expanded reach for shippers throughout North America.
In all we believe this opportunity over time could represent an incremental 5% in volumes for our domestic intermodal segment.
With that I will pass it onto his land.
Merci Beaucoup, Doug <unk>.
<unk> is a valid and those extra amount as we've touched was imprimis.
I would thought to page 14 of the presentation, which will provide more visibility on our third quarter performance.
These results highlight the strength of our franchise as we delivered volume growth of 5% in terms of our Tms and 26% growth in revenues. Despite some headwind from Canadian grain at the beginning of the quarter.
The top line performance combined with solid operating performance drove record earnings in the quarter.
Let me provide you with more details on the quarter and I will speak to the adjusted numbers, which excludes a merger termination fee received in the third quarter of 2021.
Labor expense was up over $40 million in the quarter versus last year, driven by a $47 million incremental wage accrual for the tentative agreement reached with our unions in the U S.
Going forward, we will adjust our labor expense on the basis of this tentative agreement.
Our fuel expense was up 80% FX adjusted as fuel prices remain high in the quarter relative to Q3 of 2021.
We have an effective fuel surcharge program that deals with fuel price fluctuations that we've seen this year, but it does create some noise in the short term.
In the quarter, we benefited from a favorable fuel surcharge lag versus last year.
We delivered operating income of over $1 9 billion in Q3 up 31% on an adjusted basis, which is a quarterly record.
Our Q3 operating ratio came in at 57, 2%, which was 180 basis points lower than the adjusted operating ratio for the same period last year.
Diluted EPS of <unk> 13 for the quarter was up 40% versus last year on an as adjusted basis and also represents a quarterly record.
We generated free cash flow of over $1 3 billion in Q3 up nearly $600 million from last year, mainly due to higher earnings.
This brings our year to date free cash flow to over $2 9 billion.
An increase of nearly $900 million through the end of September .
Under our current share repurchase program, which runs from February one 2022 to January 31 of next year, we have repurchased nearly 23 million shares for $3 5 billion as.
As at the end of September .
Moving on to page 15, following our solid performance after three quarters and strong volume expectations. In Q4, we are raising our 2022 financial outlook and now expect adjusted EPS growth of approximately 25% and free cash flow to be around $4 2 billion.
We still expect an operating ratio that starts with a five and an ROIC of approximately 15% for the year.
From a volume perspective, we continue to expect our <unk> to be up in the low single digit range for the year.
This assumes strong growth in Q4 led by a top five all time Canadian grain crop that started to move in September .
We now assume that in 2022, the average price of <unk> will be approximately $95 per barrel and the value of the Canadian dollar and U S currency will average approximately 77 for the year.
We are not modeling any major service disruptions in the balance of the year.
In conclusion, let me reiterate a few points.
Volume expectations in Q4 remained strong driven by Canadian grain and we remain disciplined on pricing.
We have a strong bulk franchise, including grain potash and coal that is less impacted by economic fluctuations and a current backlog of lumber and automotive traffic.
The network is fluid and running well as we continue to run a scheduled railroad with a focus on car velocity.
We are closely monitoring the impact of inflation on our cost, making sure that we control our expenses.
We have a strong balance sheet that provides us financial flexibility and we will allocate our capital in a manner that drives long term value for our shareholders.
Let me pass it back to you or Tracey for some closing comments.
Thanks Suzanne.
I'm pretty proud of this team delivered another solid performance in Q3, we have strong momentum heading into Q4, and we know that we will have a busy end of the year from a volume perspective.
Team is delivering on what we said we would do we're running the railroad to the plan and were doing an integrated way at every level of the organization and the driving topline growth to the bottom line.
I'm comfortable.
But we will deliver on our upgraded guidance of 25% EPS growth.
2022, and we remain committed to deliver value to our customers to our employees and to our shareholders and with that we look forward to your questions.
Thank you we will now begin the question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
Thank you I would like to withdraw your question again press Star followed by the number one on your telephone keypad.
As previously mentioned, we ask that you kindly limit yourself to one question.
The first question comes from Ken <unk> from Bank of America. Please go ahead.
Okay.
Hey, good afternoon, and congrats on a great job Tracy and team great to see it really coming together.
Tracy a few times throughout the conversation I guess, you and Doug and Rob mentioned kind of capacity in the <unk>.
We use spare capacity to move some oil we kind of then the grain crop is coming back so maybe talk a bit about the balance you see here in terms of being able to meet the expectations, particularly given that kind of government focus on available capacity with the need to catch up capex or is.
Their need to catch up on some capex or where we could see congestion.
If we see certain areas stay stronger than you expect.
Thanks, Ken it's an important question and.
As we've leaned into the scheduled railroad and it's one of the points of scheduled operations that you get a pretty good look at where you have capacity and where you don't until we focus Doug in his organization and making sure that we installed properly into the capacity in the network and that's what's allowing us to deliver consistently to our customer.
The worst thing you can do in cell capacity, but you don't have so as we as we were running the railroad well as our velocity continues to improve that frees up the next level of existing capacity as we look forward.
In order to for the supply chain in its entirety to run we need a number of things.
We need to have some visibility in advance of what volumes are coming our way all of us across the supply chain, we need to have the.
Ability to anticipate.
The volume whether it would be on.
Through an economic swing or in a more emergent basis.
We need the ability to communicate with each other.
And to respond to glitches in the supply chain, whether they'd be in the railroad and the tracks on the terminal or that our shippers facilities and to coordinate our response to that very effectively so the supply chain only runs when all of the pieces of the supply chain are running well.
<unk> collaborations and.
We are willing we're at the table and all of the supply chain that our customers are involved in and generally we are very willing to invest as we see growth coming those are conversations that we have with all of our customers and where we have sustainable growth.
We're eager to step into investing in capacity over the long term with our customers.
Great. Thanks for the thoughts.
Your next question comes from the line of David Vernon from Bernstein. Please go ahead.
Okay.
Hey, good afternoon everybody.
Glen can you talk a little bit about what's in the labor number for the accrual associated with some of the collective bargaining in the U S and as you think about.
The resources that.
The team is going to be adding next year in terms of locomotives in terms of cars in terms of the training pipeline.
How comfortable are you on the incremental margin outlook are we are we still resourcing sort of a little bit ahead of demand right now or are we a little more balanced than that in terms of how we should be thinking about.
The incrementals developing into 2023.
Yes, Thanks, David I can start and then Rob you can jump in a little bit on resources, but in terms of the accrual as I said in my opening remarks. So we did have an accrual for the U S wage that tentative agreement of $47 million. So that was taken in the third quarter. So when you look in.
You look forward in terms of labor cost I think what you need to do to have a sense of what that looks like as you need to remove that $47 million and that run rate will be good for the fourth quarter and the first half of next year and then in the U S. As you know you will add another 4% for the second half.
<unk>.
Next year.
In terms of resources I think as Rob mentioned.
We are getting some locomotives we are getting some cars.
I think we need to continue and we will continue to improve on our on our margins I mean, that's the that's the key and I think we've said it before I think that.
We need to continue but to do this we need to have a tight operation. So we need to improve on our margin appetite operation sweat our assets improve velocity that will create capacity and that will allow us to bring.
Topline at low incremental costs I don't know, Rob if you want to add on resources, Yes, David just on the resource side regarding manpower, we will still have needs from an attrition standpoint, and some of our hard to hire locations. So we will continue to hire those those locations.
If and when we start to see the volumes drop we can modulate our hiring plan tapered out over time to adjust to that from a resource standpoint in terms of cars and locomotives. We've proven through downturns. We are really good about laying those up and we will do that in a very quick manner, if and when we see that thanks for the question Dave.
Thank you.
Your next question comes from the line of Qunar Gupta from Scotia Bank. Please go ahead.
Good afternoon. Thanks for taking my question and congrats on a great quarter.
Please see I wanted to ask you. This is your first time, leading a class one railroad how do you plan to approach a potential economic downturn scenario.
From a railroad perspective, and how do you kind of haven't really prepared for a bad scenario, where you don't know whats going to happen here.
Great.
Question that we're all talking about a lot and I know, it's on your guys' minds as well I'm going to start to soften I'm going to hand, it over to Doug. So this is going through various economic Ken.
Ups and downs as something that this railroad and every other railroad has managed over time. So we have a pretty good sense of how these things go we have the ability now it's important to note that we have a pretty diverse book of business not all of it is sensitive to a recession type of environment.
Doug can go through some more details on that in a moment. So we're looking very closely we're watching as too.
Those areas that are more recession sensitive whats happening on the.
And.
As we look forward, we are positioning our resources in a manner to respond.
Rob just said I think we have a track record of turning to park, the least efficient locomotives as we need them. We calculate cars pretty quickly we started to do that already in the international side, we need to keep our velocity up alright.
And so.
So we'll contract where we need to contract.
But there's a big chunk of our book that is not going to be hit by the recession. So theres some muscle in this organization around how to do this.
Watching it pretty closely Doug do you have did you want to comment on where we're seeing.
What we expect from a recession for something so.
No great question and some of the major commodities that normally you would think would be hit by a recession.
It's changed strictly mostly because of the Ukrainian war. So as an example, we're going to see a strong green in the U S and Canada no matter, what moving forward, we don't see any impact from an economic standpoint from any recession same thing with coal coal is also very strong mainly due to the war going on over there.
With that comes some other commodities like potash and fertilizer all very strong and we expect to see going over the next 369 months. So its not going to be your typical one.
Lumber, we expect to see very strong as well so strictly because we our fleet is sold out even anything above one 3 million housing starts and.
And lastly, automotive is going to be strong for at least the next nine to 12 months of the backlog anyone out there trying to buy a car I think you'll find us about the wait period still.
Thanks for the question. Thank.
Thank you.
Your next question comes from the line.
<unk> of Chris Wetherbee from Citi. Please go ahead.
Yeah, Hey, great. Thanks, Good afternoon guys.
I wanted to maybe ask a little bit about yields whether it be revenue per carload or cents per RPM, obviously very strong in the quarter wanted to get a sense of how you think about this sort of progressing into <unk>, but also maybe an early look into into the into 2023 seems like fuel surcharge, maybe decelerate sequentially, but just wanted to get a sense roughly of kind of how to.
Think about yields we can talk about pricing and FX in there too that would be super helpful.
Let me start that off Chris and then I'm going to hand, it over to Doug. So as we've kind of leaned into this scheduled operational philosophy has improved.
That's given us.
An opportunity to.
To improve the customer service, we've had some strong demand those are some pretty great pricing environment.
And Doug and team have done a great job of leaning into that and interest kind of dealing with some of the.
The issues that we needed to deal with upfront as we look forward you're going to see that kind of discipline continue Doug will tell you that he's got to put a mandate on his team of inflation plus pricing, but Doug I'll, let you.
Add a little detail to the way we are looking at that.
So thanks, Tracy so listen we've been very successful in getting inflation plus pricing rate throughout all of 2022, and we're seeing that continue into 2023. So we're renewing contracts on a regular basis, we're still able to get inflation plus pricing.
And honestly with the service that we're providing we think it's a very fair settlement with our customers.
Thanks for the question.
Your next question comes from the line of Cherilyn Radbourne from TD Securities. Please go ahead.
Thank you very much good afternoon.
As you look ahead to next year, you've given us a good rundown on where you have more versus less visibility.
Hoping that you could speak to the opportunity to recapture market share that was temporarily lost by Vancouver, and Prince Rupert to L. A long beach.
Fly chain congestion and interrelated vein.
Potential to arrange more backhaul traffic for network balance now that you've got access to a large grain crop.
Thanks, Cherilyn, it's Doug So great question. So you would look at today and I will say, we're still very much sold out at Prince Rupert and Halifax on the intermodal side.
So thats, great news to Europe , and Vancouver is a little bit slow right now so.
The majority of our business is actually coming into Montreal, and Toronto and the U S business has softened somewhat for us.
So having all of those containers has been great. We're going to continue to move those inbound and as the supply chain decongest in Montreal, and Toronto markets, we expect that to come back to normal very quickly those containers, obviously youre going to be great for the grain crop, we're moving surplus containers into the western priorities for stuffing right now at record.
<unk>, that's about to start up very quickly.
Crop always comes in a little bit later than what moves in carload. So we're expecting volumes to pick up there by the end of the month.
Thank you.
Yeah.
Your next question comes from the line of Debbie Simone from BMO.
Please go ahead.
Okay.
Thank you I appreciate taking my question just a couple of follow ups.
Price above inflation.
Can you give us an idea with how you're thinking about cost inflation going into 2023, just to kind of anchor this pricing comment.
Justine.
And really my main question is.
Winter Winter have always kind of had been challenging for your network historically and I think you've always mentioned time over time, you've always kind of learning from home.
The deal was winter better.
I'm just kind of.
Wondering coming out of the last nine months of operational focus again.
Approaching winter any differently than you have in the last five years, what are some of the things you are.
Sure.
Youre doing perhaps differently to kind of in store.
Don't lose that operating momentum coming out of this right.
Right now going into the winter.
Maybe I'll I'll start I'll start with that John fatty. Thanks.
As to what the cost inflation look like next year, well isn't that the question around what inflation is going to look like.
You know what we've experienced this year, we do know that there's that there can be a bit of a lag to some of our material inflation, we have a clear view of wage inflation in the U S.
We are have commenced some collective bargaining in Canada. So it would be very early for us to make a statement of what we think cost inflation is going to be the share, but without a doubt whatever that is.
Doug and team will be looking to <unk>.
Price above that for Doug any comments and then Rob over to you for the winter plan I would just say a good proxy to use as the index. The all inclusive index less fuels, it's as good a proxy to use as any of us for all the railways, Rob you want to yes.
Yes he is.
<unk> winter.
We're always preparing for it we actually have a very robust winter action plan ever.
Every winter we go through we learn different things when we prepare for adding those lessons learned so our winter perhaps started some time ago in the yards and locomotives winter arising those our Aircard fleet, which we have 100 of is now up and ready to go we've replaced more air gaskets and air valves in cars and <unk>.
We've ever done going into a winter as you know air is the enemy in winter and we're doing everything we can to make it as seamless as we can we know when it gets to minus 30 minus 35 minus 40, it will present challenges and our efforts are really to try and mitigate that thanks for the question Benny.
Okay.
Your next question comes from the line of Brian Awesome back from Jpmorgan. Please go ahead.
Hey, good evening, thanks for taking the question.
Maybe one more on end markets for for Doug can you just talk about the impact of the stronger U.
Okay Thats starting to show up in any specific commodity types and whether or not you think there'll be a net positive for volume outlook for next year and then just wondering if you can just clarify the $47 million accrual. That's all prior period adjustment just wanted to be sure about that thank you.
Brian you cut out right at the beginning so im not sure what the part of the question you asked there.
Okay, well hopefully you can hear me now, but I was asking about the stronger U S dollar and what that impact was on your end markets, good bad and different across the commodity lines.
Just link and clarify the $47 million accrual on the labor side, if thats all prior period.
Okay.
Yes, no we got it we got it all we just missed the stronger U S. Dollar parts. So no the stronger U S dollar definitely helps us in certain areas.
It also probably hurts us and a few other areas.
Balanced.
Our approach we have to it.
And honestly, we don't see a major impact overall.
Yeah and on the $47 million.
Brian It's all prior period.
Alright, thank you.
Thanks.
Your next question comes from the line of.
Rob.
Thanks, Jordan capital market.
Please go ahead.
Okay.
Yes, good afternoon, everyone and congrats for the strong results and a strong operating matrix. So we.
With the back to basics approach that yields great results within or 57, 2% in Q3, what kind of initiatives or action that are still to be implemented that could yield to further or improvement going to 2023 and beyond.
A bunch of well I'm going to start that and then I'll hand, it over to Rod.
I'm really happy with the way the team has leaned into this scheduled operation and as you mentioned all our metrics to better removing on time, we're moving faster with delivering better to our customers now it's taken a whole bunch of our team working hard together across the organization to make this happen. We all know that we have traction.
But we also know that there's more opportunity here.
And making sure that we're resource properly you heard Rob talk about all the work that we're doing on that to ensure that we drive the service and we drive the next level of speed and that we're able to deliver the growth, which we're looking forward to talking to you about in May at Investor day, but Rob do you want to make some comments on that yeah, you bet. So there.
There's always room for improvement very happy with the progress that the teams made will continue to focus in on I know Tracey talked about 90% on time be an optimal we're not going to accept that we're going to keep pushing even higher we want to get closer to 100% on that there is always opportunities to improve the first mile last mile there's going to be opportunities to make a more.
<unk> intermodal service out there that the team will work on working with our hubs and then we're focused in on the grain right now so we're in the middle of our Canadian grain, that's very strong and our focus is on delivering for them.
Thanks for the question.
Thank you very much.
Your next question comes from the line of Amit Mehrotra from Deutsche Bank. Please go ahead.
Okay.
Okay.
Q Scott can you remember.
Okay.
Hey, Scott it's amid here can you guys hear me.
Yes, we can hear you.
Okay I just wanted to wanted to ask about I know winter happens pretty much around the same time, so I'm just wondering if.
If there is anything to read into kind of the sequential implied decline in earnings from the guidance and then the other thing as you know Canadian National is the only railroad that is a AAA credit rating, which is fantastic.
And maybe that's really important to the company.
But.
Is there an opportunity to kind of remain solidly in investment grade just not AAA and use some of that balance sheet capacity to further reduce the share capital base of the company. Thank you.
Okay. I was just going to ask you to clarify the first question.
Going into winter.
At there.
I was just I was what I was trying to get at is.
The 25% growth in earnings implies lower earnings <unk> versus <unk>, just on an absolute basis and you've got more grain.
Mix improvements in volume volume improvement I understand winter can maybe introduce some risk, but I'm just trying to understand what the puts and takes are in terms of the implied down earnings <unk>.
Yeah, well, let me say that we haven't modeled in.
Any significant impact to operations from weather or from any other events.
But we are looking at Ed volumes than at a range of outcomes over the fourth quarter and this is we've landed on the 25% pretty comfortable with that number and our ability to deliver it as far as our balance sheet and our capacity.
Has to be there you are right. It is it is.
Great thing to have particularly staring down at the potential for a slowdown or recession.
Are looking as part of our strategic planning on what we'll do with that capacity.
And what are the right sweet spot is for us and we look forward to sharing.
Our plans with you in May when we get together at Investor Day.
Okay very good thank you very much.
Your next question comes from the line of Scott Group from Wolfe Research. Please go ahead.
Thanks, and sorry about that earlier, the operator on muted me.
The last question.
Wanted to just ask.
The timeline on the E&P volume wins that you were talking about and then.
Labour side, you guys, just announced a 3% deal small deal in Canada with 3% annual wage increases obviously, the U S deals or where.
Much bigger increases do you think that that's sustainable.
Sustainable spread between the two or do you think that the Canadian labor deals youre going to have to catch up to what we're seeing in the U S.
Okay. Thanks, Scott, it's Doug I'll start off with the E&P. So we started the conversion a couple of weeks ago, it's going to take a while to work them all through our system, but every day, we're adding more and more in so it's going extremely well and I think we'll be fully up to speed by the end of the quarter. So it will be able to give a much better update next quarter.
And Scott as far as the Labor you are right. We did come to an agreement with IBEW on a 3% increase and we're pleased for both both them and us in terms of getting that done as far as future negotiations I'm, certainly not going to prognosticate on and where that will end up will go into it.
It will be very open and transparent with our teams and hopefully we get to a quick resolution. Thanks Scott.
Okay.
Your next question comes from the line of Jon Chappell from Evercore ISI. Please go ahead.
Okay.
Operator are you there we are not getting anything from John .
Let me move on to the next one.
Yes, absolutely.
Next question comes from the line of Walter <unk> from RBC capital markets.
Your line is open.
Thanks, very much operator can just checking it can everyone hear me.
Okay awesome.
So Tracy when you first took over the role you pointed to four key areas that you wanted to focus on you want to improve operations you want to curate the book of business better align sales and op and invest for growth and I wanted to zero in on where you are what part of number one and two in terms of improving operations and particularly security in the book.
Business do you think your what inning you're in on those two.
Particularly I'm curious security in the book how much of your business do you believe you still have the opportunity to significantly reprice to get the return better or to shed.
If the return is not conference a Tory.
Thank you Walter.
I don't know if there is if this is for 12 inning game of what this is but this is a long term focus for us as to how we're going to run our railroad the way we believe in providing the service to our customers. So we will continue to tweak and refine as we go forward I'm really happy with the launch of this scheduled operating plan and with what the team has done with it.
Both from an operations perspective, as well as from a commercial perspective, because you can only deliver.
What you will have the capacity and the operating model to provide so there were some things we needed to look at.
Early on.
As far as the book goes I'm comfortable that we've taken care of those that are most urgent we've got right now the book that fits our network.
<unk> is something that will be intentional about as we go forward and as we look at growth.
Going to be doing it through the same lens, we are prepared to invest in our network and invest our growth, but we will do it very intentionally to make sure that as Doug and team. So we have both the capacity and the operating model to deliver to our customers as we go forward. So it's going to be an ongoing.
<unk>.
So we are.
Long term game here.
Okay I appreciate the color Tracy Thanks, Rob.
Your next question comes from the line of Tom <unk> with.
Please go ahead.
Okay.
Yes, great. Thank you.
I guess this is a little bit of a variation on that last question, but.
Your services improved you've executed very well on how youre running running the network.
So I think thats helpful on price, but.
Also as you take a look back I think Tracey you said, there is not really urgency to kind.
Kind of changing the book of business, but what about opportunity for business. It may have been repriced over the last I don't know five eight years do you look at parts of the book and say.
Maybe there is an opportunity that something was mispriced.
Certain part of the business over the last 567 years or do you think.
Most of the book is kind of price the way it should be.
I would say.
This is Ed.
We've got this place running pretty well right now none of US would say we're done on that will keep leaning in.
But as we look forward, we lift our heads and say where are we going to take the place from a growth perspective.
So the first place we always start with that question is with our customers and what business with volumes Youre out there, where we can be helpful in providing solutions and how we need to invest in our network our capacity whether it be rolling stock track Stifel.
Our capability in order to provide those solutions.
Forward, and we'll lock arms with our customers and step into that.
Where we can see it on a sustainable basis all of that gives us the chance to.
To continue to look at our existing business as well and Doug will tell you that about a third of our portfolio comes up every year I would advise from expiring contracts that gives us an automatic mechanism to take a look at.
That business, which were already move and as we sit down with our customers. We're always looking at the business that we don't currently move and whether it is something that should naturally find its way to our network.
Okay.
Your next question comes from the line of Steve Hansen from Raymond James. Please go ahead.
Yeah. Good afternoon, guys. Thanks for the time and congrats on a great quarter.
Wanted to follow up on the pricing and yield discussion earlier I can appreciate you've been successful thus far at passing on inflation plus pricing both through <unk> and into early next half I'm just trying to curious, though just on some of the comments around looking backwards a little bit we had really outstanding pricing start to show in the fourth quarter last year.
And into the first half I am just thinking we're starting to lap some of those comps I'm just trying to make sure we're level setting expectations around pricing going forward given some of those tough comps that are ahead.
Thanks, Steve So listen we still expect pricing in that area. So inflation plus some of the things that happened last year. As we also saw a lot more storage fees for containers and things like that but with that came also congestion issues because we had the store them. So what we're expecting in 2023.
As.
As the economy evolves and as the supply chain to get back into a regular flex we will probably see some of those storage has come down, but we will see the increase in business to offset it.
Okay very good I appreciate that.
Okay.
Okay.
Operator are you there.
Hi, Jon Chapell can you hear me.
Yes, Hi, John .
Hey, Paul Alright, great. Thanks, Thanks for the second shot here.
The question I was asking before was if we go back a year ago, the casualty and other line was a big part of our initiatives.
And if we look at the first three quarters of this year relative to the last three quarters of last year. It's a run rate. That's much higher was that a series of unfortunate events, given weather and derailments et cetera or is that.
Being planned to be higher as you're preparing for a stronger volume in a more efficient network going forward and I guess the last part is how do we think of that run rate going forward.
Yes, Jonathan casualty another when you look at it every quarter the run rate is about $100 million to $120 million a quarter.
Theres some theres some things that goes in there obviously when did we do have unfortunate derailments I mean, a lot of the cost goes in there and some of those are they have they happen, they're one timers that the thing, but they happen. The other thing that we have and there is a bunch of things like.
No.
Updates on provisions for legal claims update for provisions on workers' comp. So theres a lot of different things in there, but I would tell you that that essentially when you look at a run rate of about 120 $100 million to $120 million of casualty and other.
But there may be some noise in that given quarter due to some things that may happen, but that's the runway and we did have a hurricane hit Nova Scotia in Q3, So thats part exactly so when you have some of these events Hurricanes you have you have you have.
No.
At the relevant.
Then.
Youll see some noise in that category.
Okay, great. Thank you for your time.
Okay.
Your next question comes from the line of Ari Rosa from Credit Suisse. Please go ahead.
Okay.
Hi, good afternoon. So I was hoping you could elaborate on the EMP program, maybe you could just give a little bit of <unk>.
Color around how you see it operating differently from from what was currently or what was in place before and then to what extent you've been marketing that to customers and what the reception has been and then how we should think about the incremental volume that could come from that.
So we were a minor participant in the E&P program. Prior to this what this does is it makes us the major.
Big Canadian player now we're the sole person in Canada on the E&P program. What that does is that we bring up a lot of cross border business from both the Upenn S. It comes into both eastern and Western Canada that allows us to refill those boxes with other with other customers right to go back down to the U S. We can also use.
As those boxes for some transcontinental freight as well as long as it conforms to the program requirements. What this allows us to do is really grow our customers. So we have a lot of customers that currently are already use it that are now calling on CN to continue to use the E&P program.
Increases our cross border traffic and intermodal, which is something we've been trying to grow for quite a few years and really really partners as well with the great service at NFS service that we're able to give now on this freight.
Okay.
Your next question.
The line of Dan of Glinski from Barclays. Please go ahead.
Hey, good afternoon, everyone.
Guess following up on that question, Doug can you talk more or less about the competitive landscape in intermodal I know you called out international being a little bit softer or is that a macro comment or is that also in relation to.
Share shifts in the marketplace.
While we haven't seen any so I'll talk about the international side outside of the share shift that was earlier way earlier in the year as we've seen very stable, but it's what has shifted from instead of having a normal U S volume coming through the Canadian ports, it's actually the increased Toronto, Montreal domestic freight that's coming in and Thats.
Just a lot of over ordering people were afraid that was what they were going to have shipments late because of COVID-19. So we're seeing a dramatic amount of retail volumes sitting in warehousing in the Toronto, Montreal and other markets and what that now as Dennis has started to back up that supply chain all the way to Asia. So we're seeing we're going to see some blank sailings in.
Remember from the overseas side on the domestic side, we're still sold out in all of our slots. So things are going well, we're not seeing the premiums we are getting at the peak of the economy, but we are seeing very steady business and we continue to grow that in the E&P business has a solid add on to that will only help us grow that business as well.
Thank you.
Your next question comes from the line of Justin Long from Stephens. Please.
Please go ahead.
Thanks, and good evening.
Wanted to ask if you had any directional thoughts on volumes in 2023, assuming we're in.
The recession in July and you made a comment earlier about the need to continue improving margins how dependent is that on volume growth or is there enough self help opportunity to expand margins in an environment where volumes are down.
Maybe I'll start us off on that one so we're not we're not guiding at this point on volumes for next year I think Doug gave a pretty good overview of where we see the potential for some recessionary kind of impact on volumes and where we see strength and we're organizing our resource.
And that same pretty close to our customers as that unfolds. So we will be able to I think in January when we next talk give you a better sense on where we see volumes going and Doug can add whatever you.
<unk> two to that as well as the comment perhaps on on the pricing piece Doug.
Well, yes, so for the margin side, we expect that honestly to keep going at inflation plus.
As inflation.
Eventually decline back to more normalized levels, we still expect to be able to retain that inflation plus pricing on all of our renewals.
Okay.
Got it thanks.
Okay.
Your next question comes from the line of Ravi Shanker from Morgan Stanley . Please go ahead.
Hey, good evening everyone.
Tracy.
Maybe a little bit of us.
Sure.
Question, but.
Yes.
I think you are now at a point where.
You have the high quality problem.
Do you have a very high bar just given.
The traction you guys have demonstrated the earnings growth and the guidance you put up for this year.
So I think again I think.
Do you find yourself in a place where they see and what it would be six or seven years ago, where that kind of a bare case on the stock or that you cannot really sustain this level of earnings growth this level of or improvement.
So again, maybe this is again is a little bit of a preview to what happens at the analyst day, but what is that long term algorithm kind of going to be like do you are you confident that over the next three five years, you guys have enough kind of topline growth opportunities to keep that EPS growth engine humming.
Going beyond 'twenty three.
Well that sounds like a fantastic discussion for Investor day in May.
Which is what we intend to do the first.
Mission.
As we as I came into the railroad.
Given the schedule of operation going we've got a lot of muscle memory in this organization and while I'm very impressed with the traction that we have and so that was mission number one not declaring any kind of finish on that we've got a ways to go on that but that is driving the customer service that we've got and it's driving some of the margins you can.
Now with the efforts that Doug and team are making to make sure that we've got the right book of business and repricing profitably.
So that.
Presents and kind of crystallize as a baseline for that.
Sure.
A couple of days with our board this week talking about the growth opportunities. We see ahead of US we know that running that tight efficient operation is a necessary condition in order to kind of lift are heading grill, but we're pretty excited about some of the growth opportunities that we see as we go forward and around capitalizing them both in existing.
<unk> in our network as well is in some areas that.
We look forward to two investing.
To expand our capacity.
As I said, great conversation for us in May for Investor Day, we're looking forward to it.
Very helpful that we should say to you and thank you.
Okay.
Your next question comes from the line of Jeff Kauffman from vertical Research partners. Please go ahead.
Thank you very much congratulations.
<unk> team and thank you for squeezing me in.
I wanted to come back to your comment about the river levels Hasnt been a ton of discussion about this in your railroad runs in competition with the Mississippi River, probably better than just about anybody else's can you talk about what magnitude of opportunities. There are I know, it's a lot of grain and coal drown River steel up river.
And maybe address how much excess capacity do you have in your network to handle any potential business like could there be a limit to how much you could do if it was we need rails and boats just starting an option.
Thanks, Jeff There is there's always a limit.
Clear.
Eight opportunity, we do parallel the river the entire waste out.
We did move a lot of grain last year in Q4, Q1, and I think we can expect similar volumes moving this year.
We're working directly with the customers now listen we have three really nice terminals on our line in Louisiana, and they will be capped out probably at similar levels to last year. What it does do provide us though is now we can look at some of that north bound business. This deal the fertilizer or some of the other products that are down there that will have the opportunity to bring.
Back up north.
No.
It's a good problem to have I think we'll be able to actually do well.
But eventually it will rain in the river levels will come up. So we're looking at is the good Q4 potential maybe into Q1, and then we think things will be back to normal by that okay.
Great. Thank you.
<unk>.
Okay. Thank you I think that's the end of.
At the end of the call today, we very much appreciate your interest and your time today, we're happy with the with the railroad we're running right now and we're really excited about.
What's to come as we look into the future I look forward to seeing you all in January thank you.
The conference call has now ended thank you for your participation you may now disconnect your lines at this time.
Okay.
[music].