Canadian National Railway Co (CNI) 2017 Q3 法說會逐字稿

Welcome to CN's Third Quarter 2017 Financial Results Conference Call.

I would like to turn the meeting over to Paul Butcher, Vice President, Investor Relations. Ladies and gentlemen, Mr. Butcher.

Thank you, John, and good afternoon, everyone, and thank you for joining us for CN's Third Quarter 2017 Earnings Call. I would like to remind you about the comments already made regarding forward-looking statements.

With me today is Luc Jobin, our President and Chief Executive Officer; Mike Cory, our Executive Vice President and Chief Operating Officer; J.J. Ruest, our Executive Vice President and Chief Marketing Officer; and Ghislain Houle, our Executive Vice President and Chief Financial Officer. (Operator Instructions) I will be available after the call for any follow-up questions.

It is now my pleasure to turn the call over to CN's President and Chief Executive Officer, Mr. Luc Jobin.

Thanks very much, Paul, and welcome, everyone, to our third quarter 2017 earnings call.

Well, we had a very strong quarter and needless to say, I'm extremely proud of what the team at CN has accomplished. Make no mistake about it, very few organizations can deal with this scale and speed of change and demand patterns better than CN. As a reminder, through 2015 and 2016, we experienced 6 consecutive quarters of defining volume, which finally turned positive in the fourth quarter of last year.

Starting 2017, we were optimistic, armed with a good value proposition in our markets and prepared for what looked like moderate growth on the basis of our customers' limited visibility. We quickly realized in the first quarter and into the second one, that volume was picking up momentum, growing by double-digit RTMs. 2017 has evolved along a hockey-stick-shaped recovery path for CN. Arguably, an invariable position to be in. This momentum was sustained through the third quarter with continued double-digit volume growth in RTMs. In fact, we achieved a record in terms of workload in the third quarter, exceeding the previous peak dating back to 2014.

Let me give you a few examples of what kind of RTM growth we've been seeing. Year-to-date when compared to 2016, frac sand RTMs are up over 100%, coal is increased by 41%, automotive is up 18% and intermodal increased by 11%. To deliver this kind of volume growth while maintaining service levels consistent with comparable workload and clocking in a sub-55% OR is truly remarkable.

Here are some of the highlights which the team will expand on in a few minutes. J.J. will give you a full view of our markets for the third quarter, but in essence, we have witnessed strong growth across a broad range of business segments, including frac sand, intermodal, coal and Canadian grain. This translated into 10% growth in RTMs versus 2016 and we've maintained as well our inflation-plus pricing approach. He will give you some insights in terms of how we continue to work hand-in-hand with our customers to best meet their evolving needs and give you some color on our market outlook.

On the operations front, Mike will explain how the team has swiftly stepped up our resource plans throughout the year and across people, equipment and infrastructure to deal with the surge in demand. He will highlight how we continue to make thoughtful decisions across operating dimensions to enhance network resilience, maintain service and manage cost through efficiency gains. Mike will illustrate how working closely with our supply chain partners, including 4 terminals and customers, is really key as they themselves are facing challenges in coping with the increased demand. We will give you a sense as to how we are increasing our 2017 capital envelope with targeted investments to improve resiliency and position ourselves for future growth opportunities in 2018 and beyond.

Turning to our financial, we are again coming in with strong results for the third quarter. We maintained discipline and continued to strike a balance between leveraging operating flexibility to accommodate high volume growth, while being mindful of service levels. This paves the way for further opportunities to invest in service and efficiency gains as we look forward. This remains a cornerstone to realizing sustainable value creation and to deliver superior results while positioning CN for the future.

Our adjusted diluted EPS in the quarter grew by -- grew to $1.31. That's an increase of 5% versus last year. We also generated strong free cash flow of $2.3 billion year-to-date in 2017. Ghislain will give you more details and actually, will update our financial outlook for the year.

All right. So now let me turn it over to Mike and the team to -- for their comments and details on the quarter. Mike, over to you.

Well, thank you very much, Luc. The third quarter saw a continuation of the growth story in relation to workload volume with GTMs up 12% versus Q3 last year. Every quarter this year, we've exceeded the previous record for GTMs handled in that quarter. This quarter, as Luc mentioned earlier, beat the previous overall record in Q3 2014.

Now as I was stated, 2016 has not been a good comparable for workload or our current operating performance. I've been using a 2015 quarterly comparison. However, using that comparison against Q3 '17, our workload is actually 7% higher. And this measure represents growth over our entire network. When you look at the 7% difference in workload, it's certainly not spread evenly across the network. For example, workload was 14% higher over our Edmonton to Chicago corridor and 11% higher over our British Columbia territory.

Coupled with a fairly dramatic increase was a heavier than normal work block season. This included an intensive PTC installation plan across our Midwest division. That's our line that runs through Minnesota and Wisconsin to Chicago as well we had large work blocks in Western Canada.

We responded to the increased traffic with our continued approach to productivity. Trainload was up 8% from 2015, and in some parts of our network, up as much as 20%. This growth was relatively rapid and in some respects, not visible in line with the timing needed to create additional capacity.

With the rapid growth in its concentration, we did see velocity metrics drop compared to both 2016 and 2015, but in typical CN fashion, we are responding to the challenge. Operating crews have proven to be our biggest challenge, which is not surprising based on the concentration of the workload increase. As we commenced calling back laid-off employees, we found the rate of return was less than predicted and not sufficient to handle the workload increase.

This was generally due to the length of the layoff and strong economic and job markets in the areas of need. As a result, we've stepped up our hiring of personnel as we saw the volume increase at a faster pace than was earlier visible. We've ramped up our hiring and training plan and are in the process to fulfill employee demand. We have over 250 people being qualified in Q4 and another 400 that will be ready in Q1. Along with operating employee replenishment, we're actively training other craft in line with our demand and volume growth potential.

On the locomotive front, we are receiving the 22 new AC locomotives that we ordered earlier in Q1 this year. The balance will be received by the end of the month. We are in the process of injecting 100 locomotives into our active fleet that were in long-term storage. This includes 50 overhauls that have been advanced to this year's locomotive plan. If need be, we will look at other options to increase our fleet should it be necessary both in the short and long term.

On the network side, we continue to invest for the immediate period and long-term future. For example, investments were made in Toronto in order to handle the record intermodal volume at our Brampton Intermodal Terminal. To address the short-term situation, we opened up a dormant subsidiary yard and added track and crane capacity both there and at our Brampton Intermodal Facility.

On our Wisconsin territory, work has begun on new bypass tracks in Fond du Lac. This will expedite trains through this pinchpoint on our Chicago to Winnipeg corridor. To handle the large increase in frac sand, we have commenced expansion work in our Blair yard as well as commenced the building of a siding in our Stevens Point to Chicago corridor.

In Western Canada, we have commenced work in our Edmonton to Jasper corridor with a frac sand and intermodal increase has resulted in less resiliency than we find optimal. Along with these more immediate improvements, work has begun to start projects earmarked for 2018 to allow for a quick start-up after winter. Ghislain will speak further to our increasing capital this year.

We fully believe that this capital injection as well as the strong hiring and training program will return us to operating metrics more in line with the capability of this operating team, which I'm extremely proud of. Along with these immediate capital improvements, we've continued to work closely with our supply chain partners to ensure their needs are met. For instance, we are working collectively with our partners through the West Coast port expansion by sharing assets, stepping up communication and visibility and creating more flexibility through our service offering. Our aim is to continue to support the supply chains we are in through this tough period of volume growth.

Overall, the team once again delivered extremely solid results in a world of record Q3 volume, and we stand ready to support continued profitable growth.

So with that, over to you, J.J.

Thank you, Mike, and thank you, Luc. So first off, we're very proud of our team result. We had very strong growth in 2017 with our revenue ton mile up 14% year-to-date and approximately $1 billion FX adjusted of incremental top line revenue so far. As you heard from Mike, we have a solid plan to address future demand.

So going back to last quarter, revenue was up $207 million or 7% above last year or 9% at the constant currency. Year-to-date, we are 11% above last year. CNTL carloads were up 11% versus the industry average of 3%. The mix of our growth was overweight to bulking a train type business, long-haul international containers and shipper-supplied equipment.

Also very important to us is the source of our revenue growth remained very diversified. We had a couple of home run on international intermodal, frac sand unit train, coal and petroleum coal export unit train. We also had some very solid base hits with automotive, especially the imports, and with Canadian grain and potash long and heavy unit train. We also generated same-store price above the rail inflation at 2.3% for the quarter and 2.3% for year-to-date.

I will now provide some color on the major volumes for the last quarter. Frac sand carloads were up a solid 130%. On the international container, Vancouver volume was up 29%. Prince Rupert volume was up 36%. Our joint marketing plan with DP World produced above our own expectation and as a terminal on-dock rail construction was still ongoing, Rupert got congested and Cosco agreed to divert one vessel.

On the East Coast, the Port of Montreal and the Port of Halifax rail volume were up a combined 13%. Potash carloads were up 11%. Potash export via the East Coast port of St. John remains solid. Year-to-date, we exceeded 1 million ton of West Coast diversion toward the East, mostly adding eventually to Brazil.

Canadian grain carloads were flat to last year, but revenue was up about 5%. Coal revenue grew by 23% because of the strong export business mix. Our volume for lumber, plastic pellets were down. The strong Canadian dollars created a $75 million negative headwind on our reported revenue, while our fuel surcharge program was a $32 million positive tailwind on reported revenue.

Now looking forward to the progress of our commercial agenda. As mentioned earlier, we are adding network capacity to better serve specific segment for which we have good demand visibility, the very segment that we featured in our last June Investor Day.

On the West Coast, where some terminal partners are also in the process of completing capacity addition. The DP World Prince Rupert on-dock rail construction will be completed at the end of this month and no more ship diversion are required. We're back. Deltaport also continued to add its own on-dock rail capability, but it will need a few more months.

On the bulk side, we foresee export of Canadian coal, Canadian grain and pet coke to be nicely positive while U.S. coal and U.S. grain will be down from last year. For crude and it is by choice, we will take a bit of a growth pause and we will look for a more attractive entry point for the spot market when we have built up incremental capacity.

For merchandise, the business will be slightly up, except frac sand, which will continue to be exceptional. In intermodal, we are completing at the end of this year the 15% terminal capacity expansion in Ontario, that is 15% more capacity than the end of last spring to be able to grow our domestic intermodal business. The international business will continue to grow. The last quarter, we produced an exceptional 20% volume, outpacing any comparable that you might use.

For the next quarter, our reported revenue will continue to be negatively affected by the strong headwind from exchange, and we will get a little bit of tailwind help from the higher fuel surcharge program.

To wrap this up. In conclusion, as we head into Q4, we have good demand visibility, and we expect volume and RTM to be up over last year and last year was a strong comparable. We are committed to provide superior service to our customers in order to pursue superior organic growth for our long-term shareholders. We are training new employees, injecting new capacity and we will generate growth opportunities.

I'm going to pass it on to Ghislain.

Thanks, J.J. Starting on Page 12 of the presentation, I will summarize the key financial highlights of our solid third quarter performance.

As J.J. previously pointed out, revenues for the quarter were up 7% versus last year at slightly over $3.2 billion. Fuel lag on a year-over-year basis represented a revenue headwind of around $15 million or $0.01 of EPS, mostly driven by an unfavorable lag in this quarter. Operating income was $1,459,000,000, up $52 million or 4% versus last year. Our operating ratio came in at 54.7% or 140 basis point higher than last year. Higher fuel prices had a 40 basis point impact on the increase this quarter.

Net income stood at $958 million or 1% lower than last year, with reported diluted earnings per share of $1.27. Adjusted earnings per share was up 5% to $1.31 from year earlier EPS of $1.25, excluding the impact on deferred income tax expense from the enactment of a higher state corporate income tax rate this quarter.

Recall that last year in the third quarter, we highlighted a recalibration of our effective tax rate that created a favorable impact of approximately $0.03 of EPS. The impact of foreign currency was $22 million unfavorable on net income, or $0.03 of EPS in the quarter.

Turning to expenses on Page 13. We continue to tightly manage cost in a high volume growth environment. Our operating expenses were up 10% versus last year at $1,762,000,000, mostly driven by stronger volumes. Expressed on a constant currency basis, this represents a 12% increase.

At this point, I will refer to the variances in constant currency. Labor and fringe benefit expenses were $525 million or 8% higher than last year, as increased wages and incentive compensation expenses were partly offset by higher capital credits and lower pension expense. On a full year basis, we now expect pension expense to be around $25 million lower than last year.

Purchased services and material expenses were $424 million or 14% higher than last year. This was mostly the result of higher outsourced services and trucking and transload expenses, mostly driven by higher volumes.

Fuel expense stood at $312 million or 24% higher than last year. Higher volumes accounted for a $27 million increase and higher fuel prices was an unfavorable variance of $24 million versus 2016. Fuel productivity was unfavorable by 1.4% in the quarter versus last year, mostly due to mix and lower velocity.

Depreciation stood at $316 million or 3% higher than last year, mostly as a result of net asset additions. Equipment rents were up 21% versus last year driven by increased car hires.

Casualty and other costs were $78 million, which was $13 million higher than last year, mostly driven by a 2016 onetime favorable CP legal settlement, partly offset by higher provisions for bad debt due to the Hanjin bankruptcy in September 2016. For the fourth quarter, we would expect to be in the $100 million range for casualty and other.

Moving to cash on Page 14. We generated free cash flow of $2,321,000,000 through the end of September. This is $578 million higher than in 2016 and mostly the result of higher net income, lower capital expenditures due to timing and lower cash taxes.

Finally, our 2017 financial outlook on Page 15. We achieved solid volumes in the first 9 months of the year, reflecting strong performance across most segments. We continue to see favorable economic trends in both Canada and in the U.S. Consumer confidence remains positive, while the ongoing energy sector recovery is driving shipments of frac sand, steel pipes and heavy crude. As J.J. mentioned, Prince Rupert dwell times are back to normal, and we expect to continue to benefit from the port expansion.

We expect volume growth in the fourth quarter to be more challenged as comparables with 2016 will be more difficult. We believe this environment should continue to translate into volume growth of approximately 10% in terms of RTMs for the full year versus 2016 with overall pricing remaining above inflation. Remember last year's RTMs were up 4% in the fourth quarter versus negative RTMs for the first 3 quarters in 2016. So as J.J. said, expect some positive volume growth in the fourth quarter but at a more modest number. Frankly, at this point, we did not change our annual RTM of volume growth guidance from 10% for the year as we think going to a quarterly volume guidance would imply a false sense of precision.

We continue to experience a strong Canadian dollar versus the U.S. dollar. And assuming that the current spot rate of around $0.80, this will remain a headwind on earnings going forward. As a reference, $0.01 appreciation in the Canadian dollar versus the U.S. dollar results in an annual headwind on net income of approximately $30 million or $0.04 of EPS.

We remain confident about achieving our guidance and continual to expect to deliver adjusted earnings per share in the range of $4.95 to $5.10 versus 2016 adjusted diluted EPS of $4.59.

On the capital front, we remain committed to reinvesting in our business to support safety, service and growth. Given the strong volume growth we have experienced this year and to continue to support future growth opportunities, we are increasing our capital envelope this year by $100 million to approximately $2.7 billion. We have good visibility and we consistently invest to ensure the company is well positioned for the long run. We still expect CapEx to be around 20% of revenues for the year.

Furthermore, we continue to deliver sustainable value for our shareholders and reward them with consistent dividend and share buyback returns. We are completing our current $2 billion share buyback program on October 29. And I'm pleased to announce that our Board of Directors has just approved a new normal course issuer bid program for the repurchase of up to 31 million shares, and we have set aside approximately $2 billion towards completing this over the next 12 months.

In closing, we remain committed to our agenda and continue to manage the business to deliver sustainable value today and for the long term. On this note, back to you, Luc.

All right, thanks very much, Ghis. So let me sum it up. Our outlook remains positive for the remainder of the year. We'll be showing positive but lower comps as we lap in Q4, the beginning of our pivot to growing volumes last year.

We're bullish on the North American economy where the environment remains very supportive and the prospects for export commodity is also positive. Although as we've seen in the last couple of years, that can be a bit volatile at times.

J.J. highlighted some of the future opportunities that we see and describe how we manage volatility of demand and our growth prospects while remaining focused on delivering superior service to our customers.

Mike talked about how we are adjusting and optimizing our resources to meet the demands of our growing franchise and our commitment to safety, service and efficiency. This operating team is the best and most nimble in the business. We thrive in challenging circumstances.

Ghislain reaffirmed our EPS guidance and outlined our resolve to deploy additional capital in support of both our short-term business needs and longer-term opportunities to profitably grow CN while delivering superior shareholder value.

Our strong cash generation and solid balance sheet allow us to continue developing our unique 3 coast franchise, while maintaining strong shareholder distributions with growing dividends and once again, with a substantial share repurchase program just announced today.

So we have a solid plan, a very strong leadership team and the best team of railroaders in the business bar none to execute against this plan. We remain confident in our ability to deliver for our customers and position CN for long-term value creation. This has been our strategy at CN since 2010. It's not a new religion. And we remain disciplined set on sustainable, long-term approach through the market cycles, up and down.

Thank you very much, and we'll turn the call over to you, John, to entertain some questions.

(Operator Instructions) Our first question is from Walter Spracklin from RBC.

So I just -- my one question is going to focus on some of the comments Mike made, with regard to employee ramp up and obviously, there's going to be some training involved. And Luc, at your recent Investor Day, you did kind of give us a 10% annual EPS growth expectation for the next 5 years. My question is whether some of the capacity constraints that you had this quarter and the reaction here now with hire employees and a bigger CapEx envelope combined with the work that, that will take up on your system, is that going to create any inefficiencies going into 2018 that might see us dip a little bit below your 10% bogey you gave us in terms of EPS growth going forward?

Right. Well, let me respond first, Walter, and then I'll give Mike an opportunity if he wants to chime in a little bit on the more specific aspects of the employee ramp-up. So when we provided a long-term EPS guidance, what we said was that we were looking at -- we had the scope to do about 10% overall, on average, over the next 5 years. So this is -- it's not necessarily implying that every year for the next 5 years is going to be 10%. Having said that, I think you can see that we have some very good growth. We've been able to accommodate that growth with a sub-55 OR, and we do have an opportunity to lay out a little bit more capital to deal with it in a way that's going to give us -- continue to give us the service levels that we're looking for. And at the same time, that really is an opportunity. When we see the growth, we see the opportunity to deploy reasonable capital to achieve even higher efficiency levels. So now the road to growth is not a linear one. And so in this year, what you've seen is we've taken onboard quite a chunk of business in one swoop and we're going to be busy digesting that a little bit. But frankly, we are quickly going to be on our feet and prepared to absorb even more growth through 2018. So there's a little bit of short-term adjustment that's required. There's going to be an opportunity to deploy capital. And if you look long term, our return on invested capital is actually quite attractive. So we have a track record of being able to balance this. And of course, if you're trying to look at it on a quarter-to-quarter basis or even the year-to-year, it can be a little bit bumpy, but that's the -- we look at the longer term and we are confident that we can sustain the momentum that we've established over the last several years. Mike, you want to comment a little bit in terms of ramping up the training?

Yes. All of us are going to say, Walter, is fluidity, resiliency, and those are things that without the appropriate people, you can't have. Both of those really are key for us to drive our operating margin and leverage that. And you've seen that in the past. Back at Analyst Day, I showed a slide effectively both capital and applying the resources where you need it. We know how to make money out of that. What we're doing now is really, we're catching up in some areas where we got a little surprised by the return rate from people laid off. So it was a learning for us. And then with that, we'll just do as we normally do, bring these people into the fold. And again, for us, it's fluidity and resiliency and capital in people are 2 important components of that.

The next question is from Ravi Shanker from Morgan Stanley.

Just want to clarify on the guidance. I think on the last call, you had said that you could achieve the high end of your EPS guidance range if FX stayed where it was, which I think the last time, it assumed was $0.80. Since having FX will actually come towards you, and you also had the pension deal win of $25 million, but offset by some of the service issues you have in the quarter. I just wanted to see if you still think that you can do the high end of your guidance range?

Ravi, this is Ghislain. Yes, we're still in the ballpark of the upper range of our guidance. Again, assuming that FX remains at $0.80, absolutely.

The next question is from Fadi Chamoun from BMO Capital Markets.

So let's see, first -- so given the strong demand environment that you just highlighted on this call and also at the June Analyst Day, I'm wondering if there's an opportunity here for you to move the pricing up a little bit as we go into 2018, how's that pricing environment looking like, given all this. And in relation to that, also like the incrementals, obviously, this quarter were suppressed a little bit by all these bottleneck issues that you've talked about. When do you envision some of these investment to capacity start to sort of produce a typical incremental margin we have seen in the past from CN? Is this like a Q2 next year story or Q1? Like how quickly can you get back to that kind of run rate?

So J.J., maybe if I can take the first part of pricing and Ghislain can take the incremental margin. On the pricing side, and like just -- and I'd like you to think in some of yield and pruning and pricing. So as capacity gets tight, a little tighter in some segment, as we have mentioned, for example, we were probably not pressed as hard on crude because crude does not provide the same kind of yield. So it may reflect in part the same-store price, it may reflect that over time as to what kind of business we do more of, business we do less of. Therefore, the yield of the book of business, as opposed to only this is how we adjust the same-store price on each contract. Ghislain?

Yes. And Fadi, on the incremental margins, I mean, if you look at year-to-date right now, we're very much still in the ballpark of 50%, which is what we indicated in the first half of the year. So we're running in that ballpark, year-to-date at the end of September. So we're delivering.

Yes. And just to amplify a little bit on that side, I mean, you were asking where do we see a little bit more, perhaps a little bit more leverage? Well, I wouldn't expect to see that really through the winter because we're going to go into a different part of the year that we're more focused on providing good service and dealing with the challenges on the weather side. But I would say by the second half of next year, you'll definitely see the benefits of that and it'll come in 2 ways. I mean, you'll see efficiency gains and operating numbers that might describe, but that will be indefinitely moving up quite a bit. And I think, again, the service will improve significantly. Although again, I mean, we've already seen in some places, you look at our Brampton Intermodal Facility in Toronto, I mean, J.J. pointed it out. I mean, we've got the leverage right now, and we're going to see more of it through the first and the second quarter of next year. So it's going to be coming most in the second half, but there are good signals already showing through and we feel pretty good about it.

The next question is from Jason Seidl from Cowen.

Guys, you kind of mentioned your CapEx that you're going to be about that 20% of CapEx, and it feels like you're maybe investing a little bit more now that you're seeing the growth. Is this the level that we should expect you staying at as you look into '18 and maybe '19? Or do you think that might start ramping down a little bit?

Yes. Jason, it's Ghislain. Listen, I think, like I said for this year, I think we're still in the 20% of revenue, which is very much related to the guidance that we gave at the Investor Day in June. For next year, at the end of the day, I mean, we'll look at it. I think we've always said that our first use of cash is for the business. So again, now if we had better visibility and we're going through our exercise as we speak, with J.J. and Mike for next year, where we're looking at 2018 and beyond, and if there's some good use for capital and we can ramp up a little higher then and it makes sense and it provides a good return for the business, then we'll certainly take it under advisement and look at it and possibly go there. So stay tuned. I mean, we're doing the exercise as we speak. We'll -- and we'll provide that guidance as we usually do in January. But obviously, if there's some good use for cash and for CapEx for the business providing good return, then we'll certainly will look at it very, very precisely.

So Jason, it's Luc. It is in a straitjacket. I mean, it's an overall guidance over time. And again, there's also the ins and outs of investing behind PTC that play into that number. So we want to do the right thing as it relates to continuing to grow the business and generating return on capital. That's really what drives us. So stay tuned. We'll be providing more color early in the new year, but we like the prospects, we like the visibility of the business that's coming our way and that's a good position to be in.

The next question is from Cherilyn Radbourne from TD.

I wanted to talk a bit more about Prince Rupert. Clearly, you're ahead of schedule in selling out the new capacity, but that growth was a little bit tough to handle all at once. Can you just talk a little bit about at what point in the quarter you started to encounter issues up there? And then I think you said in your remarks that Cosco is back calling at Prince Rupert. Can you just clarify when port calls return to normal?

So thank you, Cherilyn. It's J.J. So the Prince Rupert original capacity for the expansion was 850,000 TEU. Some time in the month of July, basically the terminal in our South, we were running close to 1.1 million TEU, which was too excessive because the construction was still ongoing. So when you guys all came in for the opening day, you saw the terminal was really busy. In fact, it was full of container. And then we ended up the third quarter, basically, just slightly above 1 million TEU, which was probably a more reasonable number for a terminal under construction. So July, August, is when we start to hit the -- there was too much of a good thing too early. The constriction, as I said, will be finished at the end of this quarter. Cosco -- there was discussion between that the different parties here with Cosco as to doing some ship diversion to help the congestion that we had last summer. And in the end, Cosco did divert one ship, which went to Vancouver and offloaded. I think were 700 unit, some of them went to my competitors, some of them went to CN in Memphis. And after the one discharge, it was decided to stop the diversion and just restart the regular service back at Rupert. So that's kind of where we're at. And then the other, 2M Alliance, they had reversed their rotation. But as you know, the 2M players, the 2 company, actually do business with CN in both ports so it's really for us, it's the same thing that we pick it up at a different location, which is just good to basically help Rupert to get back on its feet. But we're basically there at this point and the good thing in all this is that, yes, we're ahead of the premarketing of the new capacity.

Next question is from Brandon Oglenski from Barclays.

This is actually Van Kegel on for Brandon. In the context of the surge in growth we've seen this year and some of the investments we're making to address the near-term service challenges on the operating side, could future growth be at least optically dilutive to margins? And would you view that as an investment in growth for the future? And kind of related to that, how flexible are you willing to be maintaining a sub-55 OR, obviously, excluding accounting changes?

Yes. As what I would describe here is, again, we take the long view and we've said time and time again, we are set on growing and growing profitably and creating long-term value for our shareholders. And we're set on doing that in a way that preserves the service and allows us as much as possible, to have a continuous investment by way of capital and also flexibility through the operating side, i.e., the operating ratio and if you want to call it the incremental margin. So we're not fixated on the OR. We are very mindful of where it is and we continue to enjoy the fruits of a great level of efficiency in this company. But sometimes, the business is a bit lumpy and if we have to take on business, which is a little bit higher in terms of cost to serve in the short term, that provides us further opportunities for continued investment and efficiency gain. So I would say that again, we've guided long term to remain within the mid-50s in terms of operating ratio, excluding any of the accounting changes that we're going to see in the next year or so. And in the short term, we just got to do what's right. I mean, if there's a little bit more cost to be absorbed in terms of either bringing on the business or dealing with existing business, which is growing with existing customers, we're quite confident that we can manage that and again -- so if you look quarter-to-quarter, it may bounce around a little bit. But longer term, our sites are still on the same targets and that is maintaining a strong cost position, but not at the expense of service, and enjoying and delivering great return on invested capital. So no change in terms of strategy. But the contour of growth, as I said, is not always linear so it goes into step functions. And we've just seen over the last couple of quarters, 3 quarters, 3, 4 quarters, we've gotten a bit of a lump here, and we're dealing -- we're quite excited, I mean that's a really great position to be in. We're excited, we're adjusting and adapting very quickly. And for us, the prospects going forward, remains very positive. So that's kind of where we are on that. Thank you for your question.

The next question is from Steve Hansen from Raymond James.

Just wanted to circle back on the crude opportunity and the decision to take a brief pause there. Could you perhaps just provide a little bit more color around the opportunities that you might see out there? How visible it is, the size of the magnitude or any sort of just parameters you could put around that? And again, some additional color on your related decision to take a pause.

Thank you, Steve. It's J.J. So as I said, first and foremost, we have very real visibility on all our business, which is right there, right now for us to serve Canadian grain, Canadian coal, Canadian potash, and the crude is something that's still unfolding. We get the sense that customers still have capacity in the pipeline, otherwise, they may be behaving differently. They would be more willing to make commitments. Some more solid commitment will be more specific about what they can do. So it may be a 2018 story or it looks to be definitely a 2019 story, but there is new production from all CN upgraders that's coming on stream this year and next year. You always have to speculate whether the data from the industry, when you talk about how much capacity is really available in the pipeline, whether these are (inaudible), how much flexibility that there is. When you get the sense at some point, they will hit the wall whether it's 2018, 2019, especially if the pipeline industry can't find a way to complete some of these projects and/or increase the pressure in some of the existing pipeline. But as we said in June, to us, it's a whole card, right? It's something that will come and then it will go. So it's tough to build a long-term business on that, so it's a whole card. If there is good business, and it has a decent price and we have the capacity, we'll do that. If the price is not attractive and there's something better to do, then we'll do something else.

The next question is from Tom Wadewitz from UBS.

I think, J.J., you were asked a bit about price and may have -- I guess, I don't know if I didn't understand the response or maybe just wasn't clear from where you were talking. It seems like you're hitting some capacity constraints and that really high level of growth you've seen this year would set you up for stronger price next year. I'm just wondering if that's something, I mean, I guess, you can kind of manage that. You can choose to focus more on that or not. Is that something we should expect just from a kind of tactical perspective, you would focus on getting more price next year, and maybe prioritize that more? Or is that maybe out of step with the way you kind of look at longer-term approach on volume versus price?

So Tom, yes, it's J.J. So yes, to answer the question more directly, yes, we are looking for inching up, kind of bit by bit, our same-store price for next year, don't expect you just stepping down because to the point you just made, we do want to build up a book of business that will last, that will stay with us and be part of our marathon. So we want to be onboarding large chunk of business, commodity is climbing up, new contract with our customers. And in that mindset, we want to do that in a way that is conducive to keep the story going for the next 3 or 5 years at 10% EPS growth. So we think there is room for slight improvement in the same-store price versus the current run rate, but we also mindful of 2019 and 2020 and beyond.

The next question is from Allison Landry from Crédit Suisse.

I wanted to just ask about the share loss that you saw with your competitor due to some of the congestion issues and specifically, if you expect to fully recapture these volumes and over what time frame? And finally, when should we expect the reported service metrics to begin to inflect?

Thank you, Allison. It's J.J. Which one are you referring to, you're referring to when you say share loss? Or industry?

It's -- yes, so some of the port -- the container losses at the ports?

Okay. So in a case of the port, as I said, there was a lot of noise about diversion from Rupert. When the 2M Alliance diverted products -- has changed their rotation between Rupert and Vancouver, they're actually doing 100% of their business where they're switching it in both port, there's no loss. It's just -- we pick it up at a different -- it might get picked up in Vancouver instead of picking it up in Rupert. In the case of Cosco, there was one vessel, which in the end was diverted. It diverted 7 units in Vancouver, or less than that. It's a million dollar basically. We can get it down to the specific. There was a $1 million in our book of business for the third quarter was $3.2 billion. So I think you put in perspective as a onetime or -- I mean it is what it is. Just to -- and I think if you look at scale, right? So in the third quarter, CN on intermodal had a 20% volume growth, and my competitor had a 1% decline. So we had a 21 point in favor of CN. In the last 3 weeks, you look at (inaudible) stats, we're up 24%, they're up 3%. We still have the 21 point lead. So I think the spread is huge, and it's hard to talk about share loss when in fact, you have such a large spread and the spreads stay consistent.

Yes, Allison, I mean -- 700 containers is a very small amount in the scheme of things. And then frankly, we work very closely with DT World and our customers to ensure that we do the right thing in terms of getting their business to market. So I think that was we felt it was the right thing to do. It gave a chance for the Rupert terminal to get back, gain a little bit more flexibility. So I would be very cautious in terms of share loss because in many respect, our ability working with our supply chain partners to address some of the challenges, is quite quick. And again, we put all of ourselves working together and come up with creative ways and solutions, and Mike certainly referred to some of the work that we did as an example in the South Shore and Vancouver and other opportunities that we find to try to bring the gateway service back to where we would like to see it. But this is a lot of growth for our partners and ourselves to deal with. So Mike, you want to add a little bit of color?

Yes. On the second part of your question about when we expect the operating metrics to get back. Let's put it a little bit more in context. Again, it's pretty tough to compare to last year with the significant volume difference, even '15 is difficult. So if you look at '14, we're only 2% higher. All of our operating metrics are better with the exception of train speed, and that's primarily a mix issue in Eastern Canada, which isn't a big segment for us, but it was enough to bring our train speed down in '17 versus '14. If you then -- really, our priority is winter as the first piece. And with this layering on, on this volume, our focus right now is immediate. Our focus is on getting the resources in place, the people, the locomotives, doing whatever we can -- pinpointed, mind you, in those segments that are very heavy. So the West Coast right through to Chicago where this volume resides, to get capital into the ground before winter hits. And starting in the first ability right after winter, that's when we'll go further into our capital plan to bring the metrics up. But the story on the metric -- this is about service, this is about growth at the right profit margin, we'll get the metrics to where they need to be, but it won't be overnight and it'll be more towards the second half of last year, as Luc spoke to.

And then, Allison, just to close it up. We live with a constant view of continuing to raise the service levels. And I think, again, we look at this as an opportunity. We've actually, as Mike pointed out, we've been able to bring it on and you've got to compare workload to workload, and we've done that quite successfully. But are we satisfied with that? Absolutely not. Last year was a much lighter volume environment, and we certainly were -- our service metrics were stellar. And that creates a short-term high-water mark that all of us are pointing to, and that's kind of where we are going to be heading for. And where and how we get there, you're going to have to trust us on that, and we're very much set on that, on those targets. But we want to do this in a way, again, that is thoughtful and that will be gradual over the course of the next year and perhaps, again, depending on what the contour of other growth will be. Thanks very much for your question, Allison.

The next question is from Chris Wetherbee from Citigroup.

I wanted to come back to pricing a little bit and sort of maybe understand some of the opportunities on pricing relative to sort of the cost inflation of the business as you guys are sort of improving the network and I think metrics take some time to get better. Just kind of curious if you see maybe a timing mismatch between sort of the gradual increase that you're talking about on getting pricing in 2018 and sort of maybe how we should be thinking about how cost kind of lay out over the course of the next several quarters. Are those cost going to be sort of in advance of some of those pricing gains or it's going to be a little bit more better match? Just trying to get a little sense of that, if you can give us some color, it will be great.

I think maybe I'll start with the pricing and then I think one of my colleagues can talk about the cost. But on the pricing, it's market related, obviously, which has to do with the outside environment, and it will be progressive. And I would prefer to use the word yield, profit margin yield than just price because there's many way, and it's actually many more lever you could do by working on your yield than just your price. So which business you select, which business you do a little more of, which business you do less of, do I want to move my frac sand in long heavy unit trains or do I want to move it in block of 10 cars, all these things add up to profit margin and to yield management, including same-store price, obviously. And at the end, we always talk about same-store price. Same-store price is on your last quarter, on the full book of business, including your legacy contract, same-store price is not so-called what you're renewing -- what you renewed your last contract, which only talks to maybe 5%, 10% of your book business. Same-store price talks to your full book of business. So therefore, that volume, that metric doesn't move as much as fast because that's a big aggregate of all your business as opposed to talking about the price to get on your renewal. And when he talks about the price you get on your renewal, we get as good as anybody else in the industry.

Yes. Chris, and on cost, I think, again, we're managing cost. I mean, we're going to continue to manage cost. If you look at what we've done in the quarter, 54.7% OR is not anything to be ashamed of, I think, which is best in industry by the way. And I think that as we input -- as we put capacity investments that Mike alluded to a little bit, then again, productivity, it will continue to kick in, there's a bunch of initiatives from the technology side that we've highlighted at the Investor Day as well, that we're working hard on. And I think you can expect that cost will be well managed in a very disciplined manner. And again, we're very confident that we'll continue on an ongoing basis, to deliver in the mid-50 OR range, and we're committed to that.

The next question is from Bascome Majors from Susquehanna.

So you've been pretty candid about adding resources and capital to a few places in your network that have become bottlenecks with all the volume growth that you've seen over the last few quarters here. But if you take a step back and we look beyond CN, are you starting to see pinch points form in other parts of the North American rail work -- network? And as a follow-up to that, where are those pinch points today if you're seeing them? And how are they affecting your interline business with your rail partners?

Well, if you look at some of the West Coast ports have also seen a little bit of a lift in terms of volume, but nothing of the magnitude that we have seen. So I think it's one of two things, it's less apparent as to growth has been more subdued from most of the other railways. I think the industry on the whole is looking at carload growth, somewhere in the, what, 2%, 3% -- let's call it 3% or so, and that is actually, a gradual range, which allows, typically allows people to adjust a little bit more quickly to it and they still are operating at levels well below their peak. So in the short term, I don't see a whole lot of issues out there. I think -- and you can see it because people are still managing towards tightening up, whether it's labor or otherwise. So -- and that's good. I mean, they're playing to their game. We'll see if and when they're prepared to respond when some of the business may come back and it may be short term, maybe longer term, depends on the commodities and it depends on, as I said, the type of growth that you're dealing with. So at this point, I don't think we see any major issues generally speaking, in terms of other platforms. But again, this typically shows up when the growth is concentrated in certain lanes, in certain particular corridors. And as a result of circumstances and commodities where the growth is large, it is not easily anticipated. So -- and we've seen it. I mean, back in '14, '15, when the crude and the energy renaissance was going full blown, we saw a lot of that and some of our -- some of the other class Is did find themselves in a bit of a bind. And subsequently, some of them have in fact put out some significant capital spending to address it. So any -- we won't see anything major out there.

So just to wrap that up, at this point, you don't see any major competition for some of the people and equipment resources you hope to add to your network over the next 2 or 3 quarters?

No.

The next question is from Scott Group from Wolfe Research.

So J.J., I just wanted to follow up on the market share question. So firstly, on grain, because that is an area where if you look the last several weeks where you had seen this inflection with CP doing better than you guys. And I know at the Analyst Day, you guys had talked about we've won grain share, what will think will continue to win grain share. So maybe just some thoughts on what's happening right now and how long you think that continues? And then on the intermodal side, clearly, you guys are still have won a lot of share this year. I'm wondering if your -- maybe you can share some insight from some of your conversations with customers. Do you think the service issues this year put a pause on the intermodal share gains, not this year, but next year? Do you think it makes for an easier sales process or conversion process for CP or it makes your job any tougher?

Okay. Thank you, Scott. So starting with the Canadian grain. I mean, our game plan hasn't changed. We do are working hard and have as a still goal, and that's the game plan and we execute in the field to earn market share in the Canadian grain space. We'd like to gain a couple of points. We said we've won 5 points over 3 years. It's a marathon. It's not just the last couple of weeks. The last couple of weeks, we've moved grain, but maybe not quite as much as last year the same time. But our objective has not changed. And all those customers that we talked at the Investor Day, we actually have decided to build the elevators on CN are proceeding forward and are counting on us and we are counting on them. On intermodal, all business in intermodal, just like in automotive, while all business are service sensitive, but intermodal maybe more so than some of the segment, so we need to produce, and we know that. And we need to produce not alone, but with our partners, the terminal operators. So the constructing of the port are quite key. We have a lot of construction behind us. It's pretty much all done. That's a positive thing. We are expanding Brampton. As I mentioned, Mike and his team are expanding Brampton, 15% versus what we had last spring. That 15% is not all in place, but it's coming and there will be some more expansion next year, and I think Mike talked about another satellite terminal like (inaudible). So we've taken -- we've earned -- we had to work hard to get last year's major contract. We may or may not grow in the year to come to shift the business from one account to one railroad to another. It may be more about how we help the current account to grow and other perform. How we help the current account to penetrate the Midwest further, right? We are the railroad of the Midwest, of the Mid-America and that's what points to Ohio. And when you come to our 2 port, you could reach a lot more space than what you might be able to do with our smaller competitors. And I think we've definitely intend to leverage that. And we would love to be able to sell out Rupert next year, if that's all possible. So they brought in 500,000 fuel capacity. The last quarter we ran at roughly a little more than 1 million TEU. There's another 350,000 TEU to be sold. Typically, a contract for the shipping line run from May to May, and we would love to see some more of the capacity to consume some time in the second quarter next year. So competition is great, keeps us fit, and intermodal space is one of those space which is exciting. So more to come, we'll see.

Scott, it's Mike here. Just a little color on the grain. It is early in the year, and we've had a couple of big derailments out in our Western prairies, both of them are more on the transient side. I mean they were wind related, a couple of empty intermodal trains that put us out for a few days, which slowed down our movement to the West Coast. And as well, we've had a few issues with Prince Rupert with weather. Again, transient is early in the year, we're ready to move the grain just like we did last year, and that's how we'll deliver it.

No changes.

Just so I understand, you don't think that the grain is just a natural reversal of last year that'll continue this crop year?

No, and neither the future, Scott. As J.J. pointed out, the bulk of the new grain elevator is being built around our line.

Yes. And it's a good crop, fairly decent crop this year. Last year, it was 72.5 million tons. We used our customer stat, not the government stat. They tell us, this year, it looks like -- it feels like a 70 million ton crop and we will grow hard after it. The race is one.

The next question is from Brian Ossenbeck from JPMorgan.

All right. So just getting back to the yield on the book of business, J.J. Cents per RTM on a consequently basis, you're down about 2% year-to-date. So is this a factor of the big jump on RTMs this year across the board and quite a few commodities that should normalize next year? Or should we think of this as something that might continue as you continue to build the book of business either through changing like the follower or maybe some greater proportion of private cars on the network?

Cent per RTM, one of my favorite subject. I don't believe in cent per RTM as a measure of anything, other than length of haul, other than your customers converting their frac sand business from carload to unit train. Business that we started moving more pulp and more lumber in CN provider railcars that we move more crude and more potash into a private equipment, you get all these things or our coal business. CN coal business, our carload I think it's down like 2% and our revenue is like 23%, right? So huge shift in business mix and then the exchange in fuel surcharge. Cent per RTM are -- I don't know exactly what to do with that, but I like same-store price, I like revenue to cross ratio, I like contribution per car a day. We also have now some new yield measure on contribution per locomotive hours, cent per RTM to me, it's more noise than measure of yield.

Yes. And Brian, I mean -- it's Luc. If you look FX adjusted, it's down 1%, and we've seen the amplitude of the number come down through the course of the year. So unless -- and again, there's always a lot of noise. As J.J. points out, I mean, the mix has changed. And to be honest with you, I mean, it's a little bit difficult to measure what's going on because we have a lot of changes, whether it's on the automotive side, on the bulk, on the various commodities. So a lot of noise. I wouldn't get too worked up about it. I think a lot of people think about it in a way that they think it's an indicator of price and price alone, which it isn't. So very much a number of things going on here. So anyways, it's a long-story explanation, but we look at other metrics, which for us, are more indicative of the quality of the business, of the profitability of the book, and those are the ones that we use more often. So.

In a very stable, very stable mix environment (inaudible) all equipment, unit train, carloads, it may mean something. But in a business where you're growing fast and you've got more of this and less of that, it creates -- it's basically a lot of noise, a lot of noise. My own view, anyway.

The next question is from David Tyerman from Cormark Securities.

Yes. It sounds like from the presentation discussion that there has been a decent amount of disruption, et cetera, this quarter. I was wondering if you could give us some idea of what you think the total impact of that is on profits, whether it's EBIT or whatever in dollars or percentages? And then also just on first quarter, it sounds like that some of us may continue into the quarter trying to get the CapEx in the ground now. Is it possible that the margins may compress in the first quarter or first half of the year or through the winter, at least, from these factors?

Yes. David, I'm not sure what you're referring to in the first part of your question. I'll respond to the second part and maybe you can clarify after that for us, just to give us a bit of a better sense of what you're looking for. But on the margin and on the operating ratio and the cost structure, I mean, going into winter in any event, is always tricky. So you're going to see the numbers bounce around a fair bit as we get into the fourth quarter and then the first quarter of the year. So I wouldn't put too much reading into it. Suffice it to say, we're quite happy that we've onboarded the business, we've got a lot of good initiatives going on to deal with it and improve substantially in the short term. We're also happy to be laying out capital to help us in the, what I call, the next little bit to resume operating metrics and service levels to a level that we strive for. And maybe just think and talk a little bit more about the -- if you're talking about some specific cost elements that were unusual in the quarter, maybe...

Yes. David, if you're referring to incident cost in the quarter in purchasing services as a material, we had about $10 million of a year-over-year increase in incident cost in the quarter. That's the order of magnitude.

Yes, maybe just to clarify to Luc's -- wondering what I'm trying to say. So you've outlined a bunch of different things in the discussion, whether it was challenges at Rupert, whether it was challenges where you didn't get as much headcount returning as you expected, I think there were a number of other things also mentioned. I'm just wondering like, I get the impression that you weren't running at the levels that you thought you would be able to if you were running the way CN would expect to run efficiently. And I'm just wondering, how much would all those add up to when you think of all of those -- of various things whether it's revenue losses in Rupert or inefficiencies because you don't have the right number of workers, et cetera?

Yes, I mean, David, we haven't spent much time trying to quantify it. The reality is, when we see the opportunities, we get engaged and we do the right thing. So we're looking to bring the business on, get the service levels up. And so for us, that's job one. We look at this situation as giving us an opportunity and we look -- we kind of look forward and we sort of rejoice at the opportunity that it presents to us. So we haven't really put a number to it. I mean, on the revenue side, I mean, J.J. gave you a sense, it's really very small. I mean, if you look at the intermodal situation or the diversion, and we're talking probably in the range of $1 million of revenue. So that's not to say there are not little pockets here and there where we have been making some tradeoffs, but by and large, I would say, on the revenue side, it's very small. And I think on the cost side, again, we try to balance these things, and so we're not too busy quantifying what we missed as opposed to what's the size of the opportunity we have before us. And Mike actually wants to step in and give you a flavor for where he's coming from.

We have very high standards, David. And it might not be in line with others, so we don't really worry ourselves about that. From the operating team, we believe we have lots of runway. And nothing here has stopped us from achieving very strong growth, achieving it with a controlled cost, but we always know we can do better because our standards are very high. And so what Luc -- to Luc's point, everything we do up to this point is to get -- is to continue to deliver higher standards. We don't quantify it, necessarily, globally, we quantify it over individual things that we find opportunities. And then we dig in, and we exploit those opportunities. That's what we're all about.

All right, John, we are now at the end of our call. We certainly would like to thank everybody for joining in. I hope you get a better sense and a better understanding of the quality of our results through the quarter and again, the quality of our prospects looking forward. This team is excited, this team is engaged, we've got lots going on and we feel very good about the future. And it is with that in mind that we go -- we were into the fourth quarter and we certainly look forward to next year. We will update all of you in January in terms of our fourth quarter results and we, at the same time, will provide guidance in terms of our outlook for 2018. In the meantime, again, thank you very much. And be safe, and we'll see you in the call in January. Thank you.

Thank you.

Thank you.

Thank you.

Thank you, John.