Canadian National Railway Co Q3 FY2022 Earnings Call

Good afternoon. My name is Abby, and I will be your operator today. Welcome to Canadian National Railway’s Third Quarter 2022 Financial and Operating Results Conference Call. All participants are now in listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. During which we ask that you kindly limit yourself to one question. I would now like to turn the call over to Paul Butcher, Vice President of Investor Relations. Ladies and gentlemen, Mr. Butcher.

Merci beaucoup, Abby. Good afternoon, everyone, and thank you for joining us for CN’s third quarter 2022 financial results conference call. Before we begin, I’d like to draw your attention to the forward-looking statements and additional legal information available at the beginning of the presentation. As a reminder, today’s conference call contains certain projections and other forward-looking statements within the meaning of the US and Canadian Securities Law. These statements are subject to risk and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements, and are more fully described in our cautionary statement regarding forward-looking statements in our presentation. After the prepared remarks, we will conduct a Q&A session. And I do remind you to please limit yourself to one question. The IR team will be available after the call for any follow-up questions. Joining us on the call today are Tracy Robinson, our President and CEO; Rob Reilly, our Chief Operating Officer; Doug MacDonald, our Chief Marketing Officer; and Ghislain Houle, our Chief Financial Officer. It is now my pleasure to turn the call over to CN’s President and Chief Executive Officer, Tracy Robinson.

Thank you, Paul. Welcome to our CN call. I’m very pleased to be here with you all today, whether you’re with us by phone or webcast. I appreciate your joining us. I will start today with some comments on the year. When I joined this team earlier this year, we were coming out of a tough fall and winter. We declared then that we would lean into a scheduled operation and focus on moving our assets more quickly. We committed to intentionally building our business to ensure that we capitalized on the strengths of our network and operating plan. Through this, we aimed to improve customer service, consistency in our operations, and interactions with our supply chain partners. We initiated this on April 1 and progressively leaned into this program over the last six months. I am very pleased with the efforts and focus of this team and the results they are producing. Our operating and service metrics, along with our financial results, reflect this. Our intention was to show that this discipline would translate into growth from our top line to our bottom line, and we are achieving that. The team has done an outstanding job advancing this program. While we are not finished yet, we have made a strong start and gained positive momentum. As a result of this work, we are adjusting our expectations for the year. We now expect an increase of about 25% in EPS, up from our earlier expectation of 15% to 20% growth. We also expect to generate free cash flow of approximately $4.2 billion, an increase from our previous guidance of $3.7 billion to $4 billion. This success is thanks to every member of our team working towards a unified plan. I am proud of our collaborative efforts and excited about our potential. For the third quarter, our performance has placed us in a position to achieve the results I just mentioned. Rob, Doug, and Ghislain will cover the details of the quarter and our outlook for the remainder of the year shortly. Before they do, let me emphasize a few key points regarding our Q3 performance. Volumes improved this quarter, up 5% on an RTM basis. Combined with solid pricing, fuel surcharge revenues, and a lower Canadian dollar, we achieved record revenue. Although we are noticing some early signs of softness in certain markets, we expect to be very busy through the fourth quarter, especially in the western parts of our network. Doug will provide details on volumes and our top-line performance. We made good progress in Q3, adhering to our plans with an on-time performance of nearly 90%, which is close to optimal. Our car velocity was 212 miles per day this quarter, the best third-quarter velocity since 2016. Rob will share more insights on operations and significant safety movements. Lastly, as we increased volumes in Q3, we were able to positively impact our bottom line as well, achieving EPS of $2.13, a 40% increase on an adjusted basis, marking a quarterly record alongside an operating ratio of 57.2%. Ghislain will discuss the key drivers behind that performance. Overall, we had a very successful quarter delivered by a strong team. I mentioned when I joined earlier this year that I would assess the team as we progressed with our plan. I am pleased to announce that Doug MacDonald, who has been serving as our Chief Marketing Officer on an interim basis, has been officially appointed to that role. Congratulations to Doug, and we will continue to evaluate the team as we advance further in our plan. Now, let me pass it on to the team, starting with Rob.

Thank you, Tracy, and congrats Doug. And 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 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've been focused since early in the second quarter on running to the plan, ensuring trains leave on schedule. Our origin train performance at key yards has continued to trend upward, reaching 87% this quarter, up 12% from last year. Our trains are also reaching destination on schedule. This resulted in better utilization of resources like crews, where we've seen daily average deadheads and re-crews declined by 12% and 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 GTMs 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 moved for September and just two weeks ago delivering an all-time weekly record as well. What I'm most proud of is that 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. It's 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 environment in which we operate. On slide eight, we are prepared to meet our customers' needs in the fourth quarter. 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 1,000 currently in training. All 47 locomotives acquired this year are now in service in Poland freight, and we have an additional 10 coming early next year. We remain committed to adding 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 boxcars 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.

Thank you, Rob. 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 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 RTMs across all major business segments. Higher fuel surcharge, solid pricing gains, and a lower Canadian dollar also 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 green plan earlier this year, we're 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 Chemicals continues its strong performance in the third quarter with sustained strength in refined products, our export propane programs, and higher volumes of crude oil as we filled some of the available capacity due to lower Canadian grain volumes earlier in the quarter. Our Forest Products and Metals segments remained strong through the quarter as demand persisted above empty car supply. On the Intermodal front, volumes overall were flat, but we continue to get good traction in Halifax with our second daily train as Halifax volumes were up 21% or 10,000 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 RTM growth for the year, which implies a strong volume uptick 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, US grain now looks very strong in Q4 and into Q1 2023. The US 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 shift into the backlog that we are being told is 9 months to 12 months. With metallurgical and thermal coal prices both remaining strong, demand remains solid for Western Canadian coal and US coal. We will also be moving some of the coal 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 for International intermodal as inventory levels remain elevated and the supply chain continues to sort itself out. Lumber prices have dropped to about $500 per 1,000 board feet from a high of $1,400 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 on to Ghislain, let me double-click on our recent announcement on the EMP program. CN is proud to announce our exclusive partnership with Union Pacific and Norfolk Southern in the Equipment Management Program or EMP program effective October 8. The EMP program is a domestic interline service providing extensive coverage throughout North America, offering a fleet of more than 40,000 containers. The EMP program provides seamless access to all major cities within Canada, the United States, and numerous major markets in Mexico. EMP shippers will benefit from CN's double-stack scheduled intermodal service due and from all Canadian origins and destinations from coast-to-coast. CN 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 2,500 containers and chassis to position ourselves for the future growth. CN's expansive 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.

I will refer to page 14 of the presentation, which will give further insight into our third quarter performance. These results showcase the strength of our franchise, as we achieved a 5% increase in RTMs and a 26% rise in revenues, despite facing some challenges from Canadian grain at the beginning of the quarter. The combination of strong top-line performance and solid operating results led to record earnings this quarter. Let me share more details about the quarter, specifically the adjusted numbers that exclude a merger termination fee received in the third quarter of 2021. Labor expenses rose by over $40 million compared to last year, mainly due to a $47 million incremental wage accrual for the tentative agreement reached with our unions in the US. Going forward, we will modify our labor expenses based on this tentative agreement. Our fuel expenses increased by 80% when adjusted for FX, as fuel prices remained high this quarter compared to Q3 of 2021. We have an effective fuel surcharge program to address fuel price fluctuations we have encountered this year, although it does introduce some short-term variability. This quarter, we benefited from a favorable fuel surcharge lag compared to last year. We reported operating income of over $1.9 billion in Q3, a 31% increase on an adjusted basis, marking a quarterly record. Our Q3 operating ratio stood at 57.2%, which is 180 basis points lower than the adjusted operating ratio from the same period last year. Diluted EPS for the quarter was $2.13, a 40% rise compared to last year on an adjusted basis, also a quarterly record. We generated free cash flow exceeding $1.3 billion in Q3, nearly $600 million more than last year, primarily due to higher earnings. This brings our year-to-date free cash flow to over $2.9 billion, an increase of almost $900 million through the end of September. Under our current share repurchase program, which runs from February 1, 2022, to January 31 of next year, we have bought back nearly 23 million shares for $3.5 billion as of the end of September. Moving to page 15, after a solid performance over three quarters and strong volume expectations in Q4, we are increasing our 2022 financial outlook and now anticipate adjusted EPS growth of around 25% and free cash flow approximately $4.2 billion. We still expect an operating ratio starting with a five and an ROIC of about 15% for the year. From a volume standpoint, we continue to project RTMs to rise in the low single-digit range for the year, anticipating strong growth in Q4, primarily driven by a top-five all-time Canadian grain crop that began moving in September. We now estimate that in 2022, the average WTI price will be around US$95 per barrel, and the value of the Canadian dollar will average approximately $0.77 for the year. We are not anticipating any major service disruptions for the remainder of the year. In conclusion, let me highlight a few points. Volume expectations in Q4 remain strong, driven by Canadian grain, and we are maintaining discipline on pricing. We have a robust bulk franchise, including grain, potash, and coal, that is less vulnerable to economic fluctuations, along with a current backlog of lumber and automotive traffic. Our network is functioning smoothly, and we continue to operate a scheduled railroad with a focus on car velocity. We are closely monitoring inflation's impact on our costs to ensure we manage our expenses effectively. Our strong balance sheet provides us financial flexibility, and we will allocate our capital to enhance long-term value for our shareholders. I will now hand it back to you, Tracy, for some closing remarks.

Thanks, Ghislain. I'm pretty proud of this team. They've delivered another solid performance in Q3. We have strong momentum heading into Q4, and we know that we'll have a busy end of the year from a volume perspective. This team is delivering on what we said we would do. We're running the railroad to the plan, we're doing it in an integrated way at every level of the organization, and we're driving top-line growth to the bottom line, and I'm comfortable that we will deliver on our upgraded guidance of 25% EPS growth for 2022, and we remain committed to delivering value to our customers, our employees, and our shareholders. And with that, we look forward to your questions.

Thank you. We will now begin the question-and-answer session. The first question comes from Ken Hoexter from Bank of America. Please go ahead.

Hi. Good afternoon and congratulations to Tracy and the team on a fantastic job. It's great to see everything coming together. Tracy, you, Doug, and Rob mentioned capacity several times during the conversation, particularly how we utilize spare capacity to transport oil. With the grain crop recovering, could you discuss the balance you foresee in meeting expectations, especially given the government's focus on available capacity? Is there a need to catch up on some capital expenditures, or do you anticipate potential congestion if certain areas perform better than expected?

Thank you, Ken. That's a significant question. As we focus on the scheduled operations of the railroad, we gain valuable insights into where we have capacity and where we do not. We work with Doug and his team to ensure that our sales align properly with the capacity available in the network, which enables us to consistently deliver to our customers. Selling capacity that we don't possess is the worst outcome. As we efficiently operate the railroad and improve our velocity, we free up additional existing capacity. Looking ahead, for the entire supply chain to function effectively, several factors are crucial. We need advance visibility into incoming volumes across the supply chain. We must be able to anticipate volume changes, whether due to economic fluctuations or more immediate needs. Effective communication and coordination are essential to address any issues in the supply chain, whether they arise in railroad operations, truck transport, terminals, or at shippers' facilities. The supply chain operates smoothly only when all components are functioning well. This requires collaboration, and we are actively participating in all the supply chains in which our customers are engaged. Generally, we are eager to invest as we identify growth opportunities. These discussions occur regularly with our customers, and when we recognize sustainable growth, we are enthusiastic about investing in long-term capacity alongside them.

Great. Thanks for the thoughts.

Good afternoon, everybody. So, Ghislain, could you talk a little bit about what's in the labor number for the accrual associated with some of the collective bargaining in the US? 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 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 can provide some insights on resources. Regarding the accrual, as I mentioned in my opening remarks, we did have an accrual for the US wage tentative agreement of $47 million, which was recorded in the third quarter. Therefore, as you project labor costs, it's important to exclude that $47 million. This run rate will be applicable for the fourth quarter and the first half of next year. Additionally, in the US, there will be another 4% increase for the second half of next year. Regarding resources, as Rob noted, we are acquiring some locomotives and cars. We need to continue improving our margins, which is crucial. We have reiterated the importance of maintaining a tight operation. By improving our margins, optimizing operations, maximizing asset utilization, and enhancing velocity, we will create capacity, allowing us to drive revenue growth with minimal incremental costs. Rob, would you like to add anything about resources?

Yes, David, just on the resource side, regarding manpower, we'll still have needs from an attrition standpoint, some of our hard-to-hire locations. So we'll continue to hire those locations. If and when we start to see the volumes drop, we can modulate our hiring plan, taper it out over time to adjust to that. From a resource standpoint, in terms of cars and locomotives, we've proven through downturns, we're really good about laying those up, and we'll do that in a very quick manner if and when we see that. Thanks for the question, Dave.

Good afternoon. Thanks for taking my question, and congrats on a great quarter. Tracy, I want to ask you, this is your first time leading a Class I railroad. How do you plan to approach a potential economic downturn scenario from a railroad perspective? And how do you kind of really prepare for that scenario where you don't know what's going to happen here?

Happy to address the question that is on many minds. I will begin and then turn it over to Doug. We're navigating various economic fluctuations, which every railroad has managed over time. We have a solid understanding of these cycles. Our business is quite diverse, and not all segments are impacted by a recession. Doug will provide more details shortly. We are closely monitoring the areas that are more susceptible to recession pressures. Looking ahead, we are aligning our resources to respond effectively. As Rob mentioned, we have a history of positioning our less efficient locomotives as needed and quickly setting aside cars, which we've already started doing on the international side. It's essential for us to maintain our efficiency, so we will make adjustments when necessary. However, a significant portion of our business will remain unaffected by a recession. Our organization has the expertise to handle this situation efficiently. Doug, would you like to share your insights on what we’re observing and our expectations regarding the recession?

Yes. So, great question. Some of the major commodities that normally would think would be hit by a recession, that has changed strictly mostly because of the war in Ukraine. So, as an example, we're going to see strong grain in the US and Canada. No matter what moving forward, we don't see any impact from an economic standpoint from any recession. Same thing with coal. So, coal is also very strong, mainly due to the work going on over there. So, with that come some other commodities like potash and fertilizer all very strong. We expect to see going over the next three, six, nine months. So, it's not going to be your typical one. Lumber, we expect to see very strong as well, mainly because our fleet is sold out even above 1.3 million housing starts. 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 that the wait period is still substantial. Thanks for the question.

Thank you.

Yes, hey. Great, thanks. Good afternoon, guys. I wanted to maybe ask a little bit about yield, whether it be revenue per carload or sense per RTM, obviously, very strong in the quarter. I wanted to get a sense of how you think about this sort of progressing into Q4, but also maybe an early look into 2023? Seems like fuel surcharge maybe decelerate sequentially. But just want to get a sense roughly of how to think about yields. We can talk about pricing and FX in there, too, that would be very helpful.

Let me start that off, Chris, and then I hand it over to Doug. So, as we've kind of leaned into this scheduled operational velocity has improved, that's given us an opportunity to improve customer service. We had some strong demand. Those are some pretty great pricing environments. And Doug and team have done a great job of leaning into that. And then, truthfully, kind of dealing with some of 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 put a mandate on his team for inflation-plus pricing. But Doug, I'll let you add a little detail to the way we're looking at that.

So thanks, Tracy. So, listen, we've been very successful in getting inflation plus pricing right throughout all of 2022, and we're seeing that continue into 2023. So, we're renewing contracts on a regular basis, and 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.

Thanks very much. Good afternoon. As we look ahead to next year, you've given us a good rundown on where you have more versus less visibility, but I was 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 at the height of the supply chain congestion. And in a related vein, the 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 look at today, and I'll say, we're still very much sold out at Prince Rupert and Halifax on the intermodal side. So, that's great news for 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 US business has softened somewhat for us. So, having all those containers though has been great. We're going to continue to move those inbound. And as the supply chain decongests in the Montreal and Toronto markets, we expect that to come back to normal very quickly. Those containers, obviously, are going to be great for the grain crop. We're moving surplus containers into the Western Prairies for stuffing right now at record paces. That's about to start up very quickly. The crop always comes in a little bit later than what moves in carload. So we're expecting volumes to pick up by the end of the month.

Thank you.

Thank you. Appreciate taking my question. Just a couple of follow-ups. First, Doug, on the price above inflation, can you give us an idea of how you're thinking about cost inflation going into 2023, just to kind of anchor this pricing comment that Doug just gave? And really, my main question is, winter has always kind of been challenging for your network historically. And I think you've always mentioned time over time, you've always kind of learned how to deal with winter better. I'm just kind of wondering, coming out of the last nine months of operational focus, again, are you approaching winter any differently than you have in the last five years? What are some of the things you're doing perhaps differently to kind of ensure, I mean, you don't lose that operating momentum you're coming out of right now going into the winter?

Thank you, Fadi. Regarding the outlook for cost inflation next year, that's indeed a significant question. We have insights from this year's experience and recognize that some material inflation may show a delayed effect. We have a clear understanding of wage inflation in the US and have started collective bargaining in Canada. It is still premature for us to predict what cost inflation will be this year. However, we will certainly aim to set prices above inflation. Doug, do you have any comments? Rob, I’ll hand it over to you for the winter plan.

I would just say a good proxy to use is the AAR index, the all-inclusive index, less fuel. It's as good a proxy to use as any for all the railways. Rob, you want to talk.

Yes, Fadi. As far as winter, we're always preparing for it. We actually have a very robust winter action plan. Every winter we go through, we learn different things and we prepare for it, adding those lessons learned. So our winter prep started some time ago in the yards and locomotives, winterizing those. Our air car fleet, which we have 100 of, is now up and ready to go. We've replaced more air gaskets in air valves and cars than 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, Fadi.

Hey, good evening. Thanks for taking the question. Maybe one more on end markets for Doug. Can you just talk about the impact of the stronger US dollar starting to show up in any specific commodity types and whether or not you think that will be a net positive for volume outlook for next year? And then Ghislain, if you can just clarify the $47 million accrual, that's all a prior period adjustment. Just wondered if you share about that. Thank you.

Brian, you cut out right at the beginning, so I'm not sure what part of the question you asked there?

Okay. Well, hopefully, you can hear me now. What I was asking about was the stronger US dollar and what that impact was on your end markets, good, bad, or indifferent across the commodity lines. And if Ghislain can clarify the $47 million accrual on the labor side, if that's all prior period.

Okay. Yes, no. We got it all. We just missed a stronger US dollar part. So – no, the stronger US dollar definitely helps us in certain areas. It also probably hurts us in a few other areas. But it's a balanced approach we have to it. And honestly, we don't see a major impact overall.

Yes. And on the $47 million, Brian, it's all prior periods.

Yes, good afternoon, everyone and congrats on the strong results and a strong operating metrics. So with the back-to-basic approach that yields great results with an OR 57.2% in Q3, what kind of initiatives or actions are still to be implemented that could yield further OR improvement going into 2023 and beyond?

Benoit, I'm going to start that, and then I'll hand it over to Rob. I'm really happy with the way the team has leaned into the scheduled operation. And as you mentioned, all our metrics are better. We're moving on time, we’re moving faster, we’re delivering better to our customers. Now it has taken the 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 in making sure that we're resourced 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?

Yes, you bet. Hi, Benoit. So there's always room for improvement. Very happy with the progress that the team has made. We'll continue focusing on it. I know Tracy talked about 90% on time being 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 are always opportunities to improve the first mile, last mile. There's going to be opportunities to make a more consistent 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 a Canadian grain that's very strong. And our focus is on delivering for them. Thanks for the question.

Hey Scott, it’s Amit here. Can you guys hear me?

Yes, we can hear you.

I wanted to ask about the sequential decline in earnings from the guidance and if there's any significance to that. Additionally, Canadian National holds a AAA credit rating, which is impressive. Is there a chance to stay in investment grade without being AAA, and could the company use some balance sheet capacity to further reduce its share capital? Thank you.

Okay. We're just going to ask you, Amit to clarify the first question. Going into winter, what are we looking at there?

What I was trying to highlight is that the 25% growth in earnings suggests lower earnings in the fourth quarter compared to the third quarter, purely on an absolute level. Additionally, there are improvements in grain, mix, and volume. I recognize that winter might present some risks, but I'm trying to understand the factors that could lead to the expected decline in earnings from the third quarter to the fourth quarter.

We haven't anticipated any major impact on operations from weather or other events. However, we are analyzing volumes and various potential outcomes for the fourth quarter. We feel confident about the 25% growth target we've set and our ability to achieve it. Regarding our balance sheet and capacity, it's beneficial to have that flexibility, especially considering the possibility of an economic slowdown or recession. We are assessing our strategic options for utilizing that capacity and determining the optimal approach. We look forward to discussing our plans in May during Investor Day.

Thanks, and I apologize for the earlier confusion. Can you provide the timeline regarding the exploration and production volume wins you mentioned? Additionally, you've recently announced a deal in Canada with 3% annual wage increases. The wage increases in the US were significantly higher. Do you believe this difference is sustainable, or will the Canadian labor agreements need to align more closely with the increases occurring in the US?

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. I think we'll be fully up to speed by the end of the quarter. So we'll be able to give a much better update next quarter.

And Scott, as far as the labor, you're right, we did come to an agreement with IBEW on a 3% increase, and we're pleased for both them and us in terms of getting that done. As far as future negotiations, I'm certainly not going to prognosticate on where that will end up. We'll go into it and be very open and transparent with our teams. Hopefully, we get to a quick resolution. Thanks, Scott.

The conference call has now ended. Thank you for your participation. You may now disconnect your lines at this time.