Canadian National Railway Co Q2 FY2023 Earnings Call

Good afternoon. My name is Emma, and I will be your conference operator today. Welcome to CN's Second Quarter 2023 Financial and Operating Results Conference Call. All participants are in a 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 Stacy Alderson, Interim Assistant Vice President, Investor Relations. Ladies and gentlemen, Ms. Alderson.

Thank you, Emma. Good afternoon, everyone, and thank you for joining us for CN's second quarter 2023 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 laws. These statements are subject to risks and uncertainties that may actually cause results to differ materially from those expressed or implied in these statements. They 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. I do want to 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; Doug MacDonald, our Chief Marketing Officer; Ghislain Houle, our Chief Financial Officer; and Ed Harris, our Chief Operating Officer. It is now my pleasure to turn the call over to CN’s President and Chief Executive Officer, Tracy Robinson.

It has been a couple of months since we gathered in Chicago for our Investor Day, and we are continuing to implement the strategy we shared at that time. We are conducting a scheduled operation that efficiently moves our assets and consistently serves our customers, which is the core focus, and we are pursuing growth initiatives based on that foundation. Our roadmap over the three-year period discussed in Chicago and beyond is clear. The long-term fundamentals are strong, and the growth opportunities are tangible. We are making progress on that growth agenda, grounded in robust service and disciplined adherence to our strategy. However, the immediate outlook is a bit uncertain. Our team has faced several external weather-related challenges over the last few months, along with a West Coast port strike recently. Currently, we also see some economic weakness that was not anticipated earlier this year. All of this is temporary, and our team is adeptly managing through it while focusing on the long-term. The heat and wildfires in parts of Canada have affected our operations and those of some customers, temporarily impacting volumes. In addition, there has been a generally softer volume market, especially in certain commodity segments. I am impressed by our team’s efforts. They are navigating these challenges while remaining committed to our strategy, resulting in improved year-over-year velocity, network train speeds, dwell time, and customer service. This is evident in our operational statistics. Their performance highlights not only the team's capabilities but also the effectiveness of our plan, which is functioning well. Looking ahead, we aim to remain agile, adjust to the lower near-term volumes, and prepare for the eventual upturn. We are refining our operating strategies to align with the current volume levels, consolidating train starts, and reducing locomotives and cars where appropriate. This helps maintain balance in our network, keeps our assets moving efficiently, sustains service levels, and controls costs. As previously stated, we are adjusting our hiring plans to align with the slower expected return in some commodity segments, while also advancing locomotive engineer training to ensure readiness for the medium to long term. These measures are prudent actions to lessen the impact of reduced volumes without compromising our ability to respond when recovery occurs; it will come, and we will be ready. This situation is putting some pressure on our margins currently, but we anticipate margin leverage to return with increased volumes. To summarize, our second quarter earnings per share of $1.76 is down 9% compared to last year on an adjusted basis, and our operating ratio stands at 60.6%, which is 160 basis points higher. This reflects the softer macroeconomic environment and the challenges posed by weather events in Canada. Based on the trends from the second quarter and what we are experiencing in early July, we have reassessed our year-end outlook and now project that economic recovery will extend into 2024. Therefore, we expect year-over-year changes in annual adjusted EPS to be flat or slightly negative. The team will share more insights on this. Before I pass it on, I want to briefly address the situation at the Canadian West Coast ports. We are pleased to report the end of the work stoppage and are actively working to realign the supply chains. We expect to move most of the volumes that were delayed in early July during the coming weeks. This situation serves as a reminder that disruptions in one area of the supply chain can affect the entire network. Significant disruptions, such as the ILWU strike, wildfires, and recent flooding in Nova Scotia, impact the North American supply chain. It is essential for us to respond collectively as a supply chain community to minimize these effects and reinforce confidence in the North American and global supply chain performance. This is our approach at CN, and I take pride in our team’s ability, demonstrated once again this past quarter, to respond effectively to minimize impacts for our customers, employees, supply chain partners, and the communities in which we operate. I will now turn it over to the team. Ed will first provide more insights regarding our operations and how his team is working to address these challenges. Doug will follow with an update on market conditions and what our customers are indicating about future volumes. Lastly, Ghis will summarize with the numbers. Ed?

Thank you, Tracy. The second quarter has been challenging, and I want to acknowledge the entire operations team for their exceptional efforts in maintaining network operations despite these difficulties. Tracy recently mentioned the floods in Nova Scotia, which have caused significant disruptions near Halifax. We are working tirelessly, and I especially want to express our gratitude to Millbrook First Nations in Nova Scotia for their support in providing meals for our engineering team during this period. Partnerships like this contribute to smoother and safer railroad operations, and we strive to support the community as well. We are committed to reopening the affected track as quickly as possible and are thankful for the assistance we've received on-site. As I mentioned at Investor Day in May, our operational plan remains unchanged despite challenges from weather and volume fluctuations. Our scheduled operating model is robust enough to handle various economic cycles. Looking at the quarter, our car velocity averaged 216 miles per day, an increase of 3% from the previous year, which is a significant improvement given the current challenges. It's important to remember that we are building on the improvements that our team began implementing last year. We are focused on maintaining car velocity moving forward, and I'm pleased with our speed, as it provides fluidity and capacity across the network. This was achieved while moving 9% fewer gross ton miles, laying an essential groundwork for the anticipated demand recovery. We have observed enhancements in our origin train performance, with the team achieving over 90% this quarter, earning them high marks. We aim to sustain this level of performance. These results were accomplished despite facing several unexpected hurdles this quarter. Record wildfires in Eastern and Western Canada impacted network operations and influenced our customers' capabilities. In response, we have implemented proactive measures to safeguard our infrastructure, including sprinkler systems on at-risk wooden structures. Additionally, our Poseidon firefighting train has been active since May; for those unfamiliar, Poseidon converts a flat car into a rail-mounted fire suppression unit that disperses water from connected tank cars. We have also decided to invest in two more Poseidon trains to enhance our network protection and support the local communities. In Western Canada, we saw a nearly 800% surge in heat-related delays, totaling almost 750 hours compared to 80 hours last year. Heat impedes train speeds, affecting overall network speed and car velocity, prompting us to introduce a new extreme heat condition category. Furthermore, we managed traffic in and out of the West Coast ports affected by recent work stoppages efficiently, which, while necessary, incurred additional costs. Although these incidents were impactful, they did not derail our execution of the plan. In this environment of lower volumes, we diligently adjusted operations, scrutinizing every train start, local service, and crew scheduling to enhance efficiency. By June, intermodal train starts were reduced by 15%, and manifest train starts dropped by about 5% from the first quarter, all while maintaining car velocity and high levels of customer service. That said, certain operating metrics, including train length, fuel efficiency, and locomotive utilization, experienced short-term setbacks due to the reduced volumes. Fuel efficiency was also affected by disruptions caused by the wildfires. Even as circumstances changed rapidly, we need to keep railroading straightforward. By focusing on a scheduled operation, we can recover from issues and disruptions more swiftly. Before passing it on to Doug, I want to stress the importance of safety. I know I speak for Tracy and the entire leadership team in saying that safety is paramount and must remain central to our operations. We were deeply saddened by the loss of one of our team members on April 28. We've made significant progress in recent years, but it is all for naught if we don’t ensure everyone's safety at the end of the day. With that, I’ll hand it over to Doug for insights on our top-line performance and market outlook.

Thanks, Ed. I wanted to take a moment to acknowledge the operations and customer service teams. They have been helping our employees, customers, and communities affected by the ongoing wildfires in Canada. Throughout the quarter, the teams remained engaged and our customers are saying that CN is providing the best service in the industry. Before turning to the quarter, I'd like to recap the current situations with the wildfires and the ILWU strike. Ed gave some good color about the impacts of the fires on our operations. The wildfires have affected customers, some of whom were forced to take intermittent shutdowns. This mainly affected forest products customers but also our coal, sulfur, frac sand, and NGL customers. Most of the business impacted in Q2 will not be recoverable. But I can say that CN did not lose any market share with customers. Customers are simply shipping less and matching the demand in the economy. For the ILWU strike, there was a minor impact on Q2 results as we took steps to meter flows into the port terminals before the strike began on July 1. The strike lasted 13 days, plus a 24-hour wildcat last week. CN's recovery plan kicked into action on July 14. We are running additional trains out of Vancouver and Rupert to clear the backlog and we expect it to take up to eight weeks to be current if all areas of supply chain work together. Second quarter revenues were $4.1 billion, down 7% versus last year on 8% lower RTMs. We saw a softer-than-expected demand environment for consumer-related products with significant volume step-downs in intermodal, both international and domestic, as well as forest products. In particular, lumber shipments were down with depressed prices and some producers running at cost. As mentioned, the wildfires in Northern Alberta and BC, as well as Quebec, also impacted forest products volumes. Petroleum and chemicals volumes declined, reflecting lower spot crude business this year and softer demand for chemical feedstocks. Most bulk business lines continued to be strong with RTMs up 12%. Met coal remains solid in the second quarter, but we did lose some trains due to the wildfires. Thermal coal volumes were weaker due to lower export demand, but volumes are picking up in Q3 already. US grain volumes were down year-over-year, reflecting strong US corn and soybean shipments down to the Gulf last year due to strong export demand. Canadian grain was the bright spot in the quarter with close to 50% more RTMs versus last year. We continue to deliver for our grain customers and to engage closely to optimize the supply chain. In April, the Canadian Transportation Agency announced a 12% pricing index increase for the upcoming 2023/2024 crop year for CN. We saw positive growth for both domestic and export potash in the second quarter due to the optionality of CN's network going to St. John. Core pricing remains strong and we continue to price above rail inflation. But notably, we had more intermodal storage revenues this year and that headwind will continue through the back half of 2023. Let me take this opportunity to update you on our Falcon service. We started the premium service back in May. The product is performing well, meeting the posted transit times and in some cases exceeding them, and volumes continue to grow. Turning to the outlook on Slide 10. For the remainder of the year, we see continued uncertainty in the economy. Aside from the impact of the strikes, the broader environment for intermodal continues to be challenging. We see improvement being pushed into 2024. Pricing for short-haul domestic lanes will be under pressure due to the increasingly available truck capacity. Lumber also remains under pressure but commodity prices have started to pick up. There is still a shortage of about 7 million homes in the US that need to be built. Chemicals and petroleum production may be soft for the remainder of the year due to the extended recovery. For Canadian grain, we are now anticipating the 2023/2024 crop to be in the mid-60 million ton range, below last year's 74 million ton crop, and we are closely monitoring the moisture levels across the prairies. This revised view will not affect volumes in 2023. We will be running full outcome harvest, but will be a headwind next spring. Canadian coal demand will be steady and potash should be strong in Q4. Automotive should continue to outperform with new import business via Vancouver. To finish, there is no doubt lots of uncertainty right now. What is certain is that we are working closely with our customers, we are committed to providing industry-leading service and we will be ready when the economy improves. We remain on track to deliver on our longer-term growth plan that we outlined at Investor Day. With that, I'll pass it on to Ghislain.

I will discuss Slide 12 of the presentation, which will shed light on our second quarter performance. As you heard from Ed, we achieved strong operating results this quarter despite challenging conditions, but our financial results reflect the current demand environment. Overall, volumes were significantly affected, with an 8% decrease in RTMs compared to last year. Let me share more details about the quarter. My comments will reflect adjusted results, excluding advisory costs related to shareholder matters from the second quarter of 2022. We reported operating income of around $1.6 billion, which is 10% lower than the adjusted operating income from last year. Our operating ratio was 60.6%, an increase of 160 basis points compared to the adjusted operating ratio for the same period last year. EPS for the quarter was $1.76, down 9% year-over-year on an adjusted basis. We estimate that the impact of wildfires negatively affected EPS by $0.07 and diluted the operating ratio by 100 basis points. In terms of expenses, labor costs increased by over $50 million on a currency-adjusted basis compared to last year, primarily due to an 8% rise in headcount. Given the current environment, we have slowed or paused hiring in some cases. Fuel expense was over $200 million lower than the same period last year on a currency-adjusted basis, largely due to a 30% decrease in price and a 9% reduction in workload measured in GTMs, partly offset by a 6% decline in fuel efficiency. Operational disruptions, along with shorter trains, have negatively impacted our fuel efficiency performance. The fuel surcharge lag was favorable this quarter. Moving on to Slide 13, I want to provide some clarity regarding our revised guidance for 2023. We now face several unexpected challenges that have influenced our outlook for the full year. Firstly, second quarter results were below our expectations. Secondly, we expect the demand environment to be weaker and prolonged, with the recovery in intermodal pushed to next year and weakness in forest products continuing into 2024. We are relieved that the port strike is behind us, with volume recovery efforts already underway, and we expect to regain some business, although not all of it. As of July, volumes on an RTM basis are down about 11% year-over-year. Consequently, we are revising our full-year outlook and now expect flat to slightly negative EPS growth in 2023, compared to our previous guidance of mid-single-digit growth. This assumes foreign exchange of approximately $0.75 and WTI at US$75 per barrel. We remain committed to distributing to our shareholders, and under our current share repurchase program, we have bought back over 11 million shares for about $1.8 billion. We still anticipate delivering on our budget of around $4 billion for our current program, which runs until January 31, 2024. In closing, I want to reiterate a few points. Our team is dedicated to the scheduled railroad model through all economic cycles, ensuring reliable service for our customers. We expect volumes to continue to be soft, with recovery pushed to 2024. Given our results so far this year and the ongoing weak economic environment, we are now guiding for flat to slightly negative EPS growth for the year. We maintain a strong balance sheet that allows us financial flexibility, and we will allocate our capital in a way that creates long-term value for our shareholders. Now, I will pass it back to Tracy.

Thanks, Ghis. And Emma, let's open the line for questions, please.

Thank you. We will now begin the question-and-answer session. The first question comes from Cherilyn Radbourne with TD Cowen. Your line is open.

Thanks very much, and good afternoon. In terms of your latest view that the recovery will be pushed into 2024, I was just hoping for a bit of color on what you're expecting for the peak season this year and whether your thinking is that the 2024 recovery will be evident prior to or after the Chinese New Year holiday?

Hi, Cherilyn. It's Doug. Thanks for the question. Right now what our customers are telling us is they're expecting a weaker than expected Q3, Q4, which is why we've actually changed our guidance. So we're not really sure what's going to happen in Q1 and beyond. But what we are doing is we're kind of forecasting a normal year beyond that. And that's as far as we've gone based on what the customers have told us.

Thank you. That's all from me.

Thanks for taking mine. Maybe as a follow-up to that question, I think your macro-outlook for the rest of the year going into '24 is a touch more bearish than what you've heard from many of your rail and trucking peers so far. So again, do you feel like it's something reasonably unique to the end markets you're exposed to, the geographies you're exposed to, or do you feel like are you being more conservative? Or do you feel like it's just some realization that hasn't fully sunk in yet for everybody else?

That's a great question, Ravi. It's Doug again. So listen, we can only forecast based on what our customers are telling us. So really, everyone's a little bit bearish right now for the year. It's a little bit more positive starting in 2024, and that's really all we're forecasting, all we're guiding towards.

Coming over top of that a little bit, Ravi, I mean, I think that without a doubt, this is something that nobody knows for sure. And so as we approach the way we're going to operate this railroad, is we are ready for whatever happens. And I think that we've demonstrated that we can be nimble in turning our service levels up or down to the plan. And so we're ready. If it comes, we'll be there. And if it's not today, it waits a little longer, then we have a plan for what we're going to do in that case as well.

Hey, thanks. Afternoon, guys. So you said a couple of times adjusting the hiring plan. Any color on exactly what you're doing with headcount going forward in the back half of the year. And then I thought I heard a comment about short-haul pricing slowing a little bit. Maybe just talk more broadly about what you're seeing from a pricing renewal standpoint and how pricing is holding up. Thank you.

I'll start with that one, Scott, and then I'll pass it over to Doug. I think he can discuss pricing. I believe you misunderstood the comment. From a hiring perspective, we have been clear from the start that our first priority is to evaluate the number of hires we are making. We have done that. As Ghis mentioned, we have paused hiring in some areas. We have also significantly slowed our hiring in locations that are difficult to staff and retain employees, considering that we expect those employees to be operational around Q1 or Q2 next year. We are still managing a certain level of attrition as we look ahead. So, regarding full-time equivalents and staffing levels, you can anticipate that they will stabilize for the rest of the year. If anything changes, we have plans in place to address that too. Now, Doug, the floor is yours for pricing.

Yes. For the pricing that we mentioned, it's really talking about the intermodal product. And obviously with lots of, I'll say, trucking industry issues right now, our biggest competition is within the short-haul trucking market. So that's where we're seeing some price pressures, just in that market. Most of our market in intermodal is long-haul, so it's not a big portion. But we just like to highlight the fact that there is some pressure there and that we are starting to see it.

Thank you very much. Good afternoon, everyone. Ghislain, when you talked about the impact, you grouped everything together, including lower demand, wildfires, and the import strike, which collectively affected your original forecast by 10%. I wanted to understand more about the non-recurring elements, specifically the wildfires and the port strike. If we exclude those, could you quantify their impact? I'm curious whether this unexpected hit has affected your outlook for this year compared to what you anticipated when you established your guidance. Is there a possibility for a higher growth rate in 2024 since you're moving past these significant non-recurring challenges? Or have there been any changes in your outlook for 2024? Additionally, as you adjust your grain, does that counteract what could have been a higher growth rate in 2024?

Thank you for the question. As I mentioned earlier, we quantified the impact of the wildfires in the second quarter to be $0.07 per share or 100 basis points of operating rate. In our current guidance, we are not expecting significant impacts from wildfires moving forward. Some wildfires are still ongoing, but they are not affecting our network or our customers. Therefore, we are not anticipating wildfires to be a factor in the future. Regarding the strike, it has affected us for the month so far, but we believe we will recover a significant portion over the next couple of weeks, so it should not have a major impact going forward. We are assuming that the tentative agreement will be ratified. Additionally, as we have stated before, we expected some level of recovery in the second half of the year, but now with clearer visibility, we anticipate that much of that recovery will be delayed until 2024. Combining all these factors has informed the guidance we shared today.

Hey, good afternoon. Doug, maybe first question for you on the set of market opportunities you kind of laid out for us back at Investor Day. It is a pretty bullish set of volumes out there. How should we be thinking about that opportunity set in relation to a weaker 2023? Should we be fixing those numbers kind of in the same range and they will be incremental as the economy recovers or is that scope of opportunity been adjusted for or should we be adjusting that scope of opportunity in line with the economic weakness?

No. It's a great question. Thanks, David. So with respect to our 2024-2026 plan, I think that's all still on target. Those are very specific projects that we outlined. None of them are really being impacted right now. We have two projects that were due to start that we highlighted out to the team with respect to in 2023. One of those is our Northeast BC where we're putting in a new siding to add capacity. That is moving ahead. We have the volumes kind of locked in there. Ed's team is busy building that siding as we speak. And we still have our Toronto Fuels terminal, which should be up and running in Q4 to receive volume, and that's moving full steam ahead. So right now, everything is on time and on target, so it's actually doing really well.

Yeah. I think that we are looking at CapEx very closely, David. We always do. We are looking at every project. We are making sure that there's an appropriate return. We are continuing to do our basic maintenance and when typically when volumes are lower, it allows the engineering team to actually get better work blocks. And we can actually put rail and ties at a lower unit cost. So we're continuing that program. But as volumes, if volumes continue to weaken, absolutely we're looking at discretionary CapEx and making sure to question ourselves whether we need to spend the money or not. But so far, I mean, I think our plan is continuing. And we're continuing to add capacity in Western Canada because we believe that we will need it. And yes, volumes are a little lower. So maybe you'll have a little bit of the time value of money. But the team right now is being very productive putting their capital, especially the construction capital in with lower volumes, so.

Ed Harris here. I can add that we are taking advantage of some disruptions by strengthening the railroad. We are spending wisely. For example, at the washout in Halifax, we are installing larger and more culverts to prevent similar issues in the future. The same approach is being applied to areas affected by fires, where we're seeing opportunities to install sprinklers and pumps. We can't continue to experience this type of disruption.

Good afternoon. Thank you. Apologies if you have this out in the press release, I didn't see it. But what is the RTM growth guidance for this year? Maybe more so for the back half year, Q3, Q4, if you give us some clarity about what you're assuming in guidance in terms of RTM growth. But the main question maybe for Doug, Prince Rupert has kind of struggled, underperformed relative to most of the North American ports even prior to all of this kind of BC strike issues and some of the issues that we saw this year and going back into the supply chain issues last year. Do you characterize some of these issues that are hampering Rupert more kind of transitory? Are you from conversation with your partners at the port and customers seeing the change in behavior and how people view that port and the service of that port into the US. I'm just wondering if this is just kind of a trend that's already issued because of the supply chain and obviously the weakness in the demand that we saw this year or if there's more to it than that?

Hey, Fadi, it's Doug. Thanks for that very long question. So I'll kind of address it in two parts. So listen, we're expecting for the RTM forecast at being above industrial production. That was always what we've said. We continue to see that moving forward into Q3 and Q4. We will finish the year above industrial production, and we're very confident in that. With respect to Rupert, it's a great question. Listen, before the port strike, we are starting to see actually some green shoots if you want for Rupert. We're starting to pick up some there again. So Rupert's one of those cutting-edge ports. It is in a great location. It's really there to serve both the US market and Canada. As we see some of the volumes are starting to shift there and then we had a port strike. So we're waiting for that to recover. We've actually added four trains into the network right now that are moving, extra business for it. So we're going to recover and then we're going to see where those markets are. But it continues to be, listen, the jewel in the crown for us. The customers love it. The service has been excellent there for the last year and that's all they can talk about. And we're pretty sure we're going to see all that volume recover.

Hey, thanks. Good afternoon. I wanted to ask maybe two things around how you're looking at kind of the rest of the year and into next year. First on the macro side and then maybe a little bit more specifically to the business. But I guess what are the sort of indicators that you're looking at to get a sense of maybe how long some of this downturn may last. I know you said that you can do what the customers are telling you, you can kind of plan around what the customers are telling you. So I'm guessing that might be the answer. But if there's any sort of guidepost that you think are important to look for over the course of the next quarter or two, that would be great. And then, Ghislain, maybe one for you. When you think about incremental cost levers that you can pull, I know sort of protecting the workforce because it's been so difficult to acquire these employees is important to you. Are there other things that you can pull or at what point do you think it does make sense to look at the workforce and let attrition work its course to get it a little bit lower? Just kind of curious how you're thinking about that.

I'll begin with that, Chris, and then I'll turn it over to Doug and Ghis to provide some additional insights. Doug did an excellent job outlining the different commodity segments and our expectations. In summary, we have a robust bulk franchise that is performing well with strong demand. We've discussed the potential for our grain portfolio, particularly in potash and pricing expectations. Regarding our merchandise segment, it remains pretty stable and strong, although there are some softer areas. The main uncertainty lies in the consumer-centric aspects, specifically containers and lumber, given the current housing starts. It's clear that construction in North America needs to recover, and we're just waiting for that to happen. Similarly, for container demand, based on Doug's insights, we don't expect a significant peak before the holiday season, but we do anticipate some strengthening and a return to more normal levels next year. For the automotive sector, we believe consumer demand will remain strong based on feedback from our customers. On the cost front, we aim to effectively manage and respond to external impacts beyond our control, and I believe our team has excelled at this. For factors we can control, we are being strategic, as we demonstrated in Chicago, ensuring that when we act, we fully capitalize on cost mitigations while maintaining our customer service. We feel confident that we're taking the right measures. If our outlook changes regarding the economy or volume projections for next year, we will adjust our strategy accordingly, but for now, we are making decisions based on the best available information.

Yeah. Tracy covered that all really well. So the only thing I'll add in from a signpost is I always tend to look, Chris, at our petroleum and chemicals business and it's actually pretty flat. And that's always a leading indicator as the economy improves. And we just haven't seen it start to go up yet. So that's one of the indicators I would suggest you always watch for the economy, especially for the railways.

We are actively identifying and removing costs, such as parking a significant number of center beams, which are leased and have staggered expiry dates. This strategy allows us to return some vehicles to the lessors, thereby reducing our car hire expenses. Additionally, we are parking locomotives, especially the older, less efficient ones, which gives us a chance to refresh our active fleet. While we continue to evaluate our hiring practices amid good attrition rates at CN, we are cautious and slowing down hiring in some cases. However, we recognize that certain locations in Western Canada remain challenging for recruitment, and we will continue to hire there in the mid to long term as it is difficult to attract talent to those areas.

Hey, great. Good afternoon. Just to clarify that last answer or part of it, Tracy. You kind of target volumes to outpace IP yet, I just want to understand this, with the fire strikes, floods cutting the grain crop, pushing intermodal volumes to next year, pushing demand into next year, you're still targeting outpacing IP is maybe, is IP much larger negative from your point of view or maybe just talk about that that perspective. And then you mentioned, Doug, you mentioned truck competition. You didn't mention anything about rail is your peer rail is being measured on rail-to-rail competition on gains. Have you seen that step up in any fashion in this environment? Thanks.

Hey, Ken. As you know, IP is a public number, and it does fluctuate a bit. It is still showing negative for the year when we sum up the total volume expectations based on what we've outlined. We believe, as Doug mentioned, that we will perform stronger than industrial production in any scenario. So we are quite confident in that. Doug?

The only thing I'll add into, Ken, is on the rail competition. We haven't really seen any market share loss with our customers at all both to rail or to truck. So we are seeing obviously, like I said, some price pressure on the trucking side for short-haul business. But outside of that, all of our customers are very happy with our service and we continue to push product. We've seen some temporary gains due to the port shutdown like moving potash to St. John instead of it going to Vancouver, but that's about it.

Thanks, operator. Hi, everyone. Good afternoon. I guess I wanted to stress test the 10% to 15% earnings growth framework, I guess, for next year. You guys are operating pretty well. If I look at the cost structure and you're responding at least in terms of what you can control pretty well. I'm just trying to understand if we're kind of in this lackluster volume environment. You've got headwinds on grain. You've got headwinds on forest products next year. But you've also got on the other hand a lot of volume opportunity that you outlined in Investor Day. So I guess, I mean, what's the likelihood that we're sitting here 12 months from now in a still weak environment and EPS is not growing or staying the same? Or do you feel like you have enough idiosyncratic volume opportunity where you can kind of move the needle on EPS? How much do you need that's out of your control to get to that 10% to 15% next year?

Amit, so I welcome you to the dialogue around our table. If we knew for sure what was going to happen from an economic, we could narrow in on this pretty quickly. So just taking you through what we're modeling next year and as Doug from a volume perspective, you're right. Our railroad is running extremely well and we're poised to capture the upside and send a lot of that to the bottom line as soon as it comes. So we have a plan in place for next year. If it's wrong, then we will adjust. The growth initiatives that we put in front of you in Chicago are there that exist outside of the economic ebbs and flows. And so Doug and Ed are continuing to work on actioning those. Doug talked to you about a couple that are going to come in and we'll be moving volume prior to the end of the year. And that plan remains intact. So that is something that will move us more positively than whatever is going on in the economic environment at that time.

Just to clarify, Amit, as well, the 10% to 15% we said was over the three-year period. So we did not specifically guide by year. Obviously, we're looking at what's happening. We're going to do our business plan with our board this fall as we typically do. And then we typically provide visibility on the year in January. So I want to clarify that the 10% to 15% was over the three-year period.

Hey, thanks. Good afternoon. A question for Doug. Can you just walk through the assumptions for the Canadian grain harvest? Do you think that sufficiently de-risked at this point given all the weather conditions that we're seeing out there in some of the crop conditions as well? And also the US grain forecast looks like it's actually raised, but similarly same sort of challenges out there from that crop. So can you just give some puts and takes around why these went opposite directions? Thanks.

Sure, Brian. Thank you for your question. Regarding the Canadian grain, we can't fully assess it until it's harvested. However, based on what we're gathering from our customers' crop forecasts, which are highly reliable, especially in Canada, as well as the government forecasts, we are looking at an estimate of around 65 million metric tons. We feel confident about this projection at this time of year unless there are significant weather changes that could affect the crops. The crop on our network has ample moisture, so we believe we are well-prepared to transport it through until the second quarter of next year, but we'll have to evaluate that later. In terms of the US crop, it initially faced drought conditions, but we've seen substantial rainfall across our network in the last month, leading to a significant improvement in our crop forecast for Illinois and Ohio. We are now anticipating a normal crop in the US. Of course, this could still change, as it also needs to be harvested, but the corn and soybeans have nearly recovered to average levels at this point.

Yes, good afternoon. Thanks for the time. Just a follow-up on the grain crop, if I may. It's obviously been dry and stressed as you indicated, Doug. I suspect we likely get an early harvest this year, which should provide some help on the margin, but I also think we're comping up against a pretty benign winter through Q4 and probably even more so in Q1 next year. How do we think about that in relative context? Can you actually move as much grain as last year if the winter is more normal?

So for our network, Steve, it's a good question. So we think our network is going to have slightly lower, but not dramatically lower crop overall just because we've had there's been a lot more moisture across the North, right? So we feel pretty comfortable on our numbers. With respect to moving it, we had a fairly normal winter. I know we characterize it as a late winter sometimes, but we had the same number of cold days like below minus 30 as we do in a normal winter. We just with the operating plan that Ed put together with the team, they just delivered so much better than our prior years. So what we're planning, we're planning on moving the exact same type of volumes that we did before for our customers. And we think we'll be very successful with Ed and the team. Ed, I don’t know if you want to add anything?

No. I can tell you, I don't see any real problems at all. I mean, today's technology allows us to run repeater cars when it gets extremely cold. We always run distributive power on the loaded grain trains. We'll do just well this year as we did last year.

Thanks and good afternoon. I wanted to ask about the lag impact from fuel that's getting baked into the guidance for the second half and how that compares to what you saw in the first half. And then just to clarify on the volume guidance, could you share the industrial production number that you're using as a benchmark for this year?

The industrial production number is as you saw, census came out couple of days ago and it was negative 0.2. So it's in that range. And on the lag question, I think that we don't expect a lag. If fuel prices remain the same, we don't expect a lag in Q3 and neither in Q4. Now on a year-over-year basis, if you look at Q3, we had a positive lag last year of about $0.10 on a year-over-year basis that will be negative. It will impact negatively our year-over-year fuel lag in Q3 by about $0.10.

Hi. Thanks for taking my question. I guess just to recap a couple of things here, Doug, does the pricing hurdle or inflation hurdle remain mid-single digits because I think you had implied about 5% looking at your longer-term outlook and maybe even higher in 2023. Do you think you're getting that outside of some of the markets that you called out? And Ed, it looks like your service metrics this quarter were actually pretty decent despite some of those headwinds. So would you expect incremental efficiencies if you can get beyond some of these hurdles?

Absolutely. When I said it was a tough quarter, I meant it was a tough quarter. The fires, the disruptions we had to deal with, we are very well positioned going into third and remainder of third and fourth quarter. Headcount, power, equipment, we ought to be able to do even better than we did last year at the same time.

Yes. For the pricing that we mentioned, it's really talking about the intermodal product. And obviously, with lots of, I'll say, trucking industry issues right now, our biggest competition is within the short-haul trucking market. So that's where we're seeing some price pressures, just in that market. Most of our market in intermodal is long-haul, so it's not a big portion. But we just like to highlight the fact that there is some pressure there and that we are starting to see it.

Thank you. Good afternoon. Just tying a bunch of things together, Doug. You laid out a pretty detailed bottoms up view of a lot of the growth opportunities that your customers are pursuing. But now in the kind of more maybe uncertain macro backdrop, even you're looking at your CapEx budget going forward. Have you seen any type of reluctance to move forward with any of the projects that you've laid out from a shipper community as both some of the temporary issues have intensified and the uncertainty has probably been elevated as well?

We've not seen any reluctance at this time. Many of the projects are long-term and require customers to consider the immediate environment and look out two to three years. We are actively collaborating with them. For instance, the BH potash mine is currently under construction and won't be operational for another two or three years, yet we observe that they are not slowing down and are actually trying to accelerate their progress. There are numerous examples where clients are eager to take advantage of market conditions, and they are spending significant amounts of money, possibly more, due to increased labor availability. Each market and opportunity is unique, but our engagements have shown no signs of slowdown.

Thanks, Emma. So an interesting quarter from an external events perspective. I think we've managed it well and we're all looking for a few less interesting quarters coming up, but we'll manage what comes at us. Our plan though is clear and it's not changing. The discipline around building the plan, running the plan, selling the plan is doing exactly what we wanted to. It's working. It's delivering consistent reliable service for our customers and then making effective use of our assets. And as we've talked today as our volumes lift, we're going to see that operating leverage follow suit, and we're ready. We've got our eyes on our future, we're advancing our growth projects, preparing for the rebound and doing exactly what we said we'd do back in May. That being said, as you've heard today, we're reiterating our 2024 to ‘26 financial perspective of 10% to 15% diluted EPS CAGR. That's all for now. Thanks very much for joining us today.

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