Canadian National Railway Co Q3 FY2023 Earnings Call

Good afternoon. My name is Julianne, and I will be your operator today. Welcome to CN's Third Quarter 2023 Financial and Operating Results Conference Call. All participants are now 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, Assistant Vice President, Investor Relations. Ladies and gentlemen, Ms. Alderson.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for CN’s third 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 U.S. and Canadian securities laws. These statements are subject to risks and uncertainties that may cause actual 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. As usual, 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.

Thank you, Stacy, and welcome everyone. I want to start today by saying a few words about the evolution of our operational structure. We were very pleased last week to announce the appointment of Derek Taylor to Executive Vice President and Chief Field Operating Officer; and Pat Whitehead to Executive Vice President and Chief Network Operating Officer. You've all met both Pat and Derek. They are both accomplished and experienced operating officers, and they will play prominent roles in CN's future and our success. This isn't splitting a role into two. We're making this bigger, focusing on work that we haven't done before. The structure we're creating will strengthen the competencies that are core to our future of driving profitable growth. It recognizes the equal importance and the distinct nature of competencies around building the plan and running the plan. Derek and his field team will focus on improving the daily execution of our scheduled operating plan across our three operating regions and our intermodal terminal. They will drive on-time performance, with continued improvement in dwell and in first mile, last mile delivery to our customers. Pat and his network team own the plan, focusing on optimizing our volumes and improving velocity. They'll also drive a focused longer-term plan, including resourcing and the execution of the capital plan to maintain and expand our network in a cost-effective manner. This structure splits the critical day-to-day focus of running the operation from the specific work we need to do to ensure that we continue to perform well while we grow. I'm looking forward to working with Pat and Derek as we refine this model. I'm excited about the performance and innovation they will deliver in this next chapter. They're both in the room with us today, and while they don't have speaking roles and aren't mic'd up, they are here with us. It's Ed, who will carry the operations dialogue on this call, and he's ready to go. Before he speaks, I want to thank Ed for your willingness to step back in. I appreciate your partnership in creating our path forward and your leadership in ensuring that we have the right winning conditions for our operations team during this transition. You've made a real difference. Now, let me share some comments about the business and the quarter. Our railroad continues to perform very well. It is the test of our operating plan that we maintain fluidity, velocity, and customer service levels through challenging conditions. We've demonstrated this over the past few quarters. Our operational performance remains strong and consistent, even through the worst fire season in Canada's history, the flooding in both the east and west, and the West Coast port strikes. Our on-train performance and velocity have remained steady. Service has improved consistently over the last two quarters, maintaining over 90% service levels compared to around 80% last year. This performance is the foundation of our growth plan. In volumes, we see variations across market segments. Our bulk business remains strong, especially grain, coal, potash, and fraction. Our merchandise business continues to firm up, while our intermodal business is still murky. Domestic intermodal volumes are relatively stable, aided by initiatives like the EMP and Falcon Service, but international intermodal has been impacted by destocking of overall consumer consumption and the West Coast port strike. Although Canadian destined volumes have returned, U.S. destined volumes moved to U.S. ports and have not fully come back yet. This is a temporary situation. We're confident in the value proposition that Canadian ports provide regarding both service and cost, and we continue to work to regain volumes through the Northern gateways. We believe we have seen the bottom in volumes and have begun a controlled ramp-up of operations to support growth. Our growth plan continues to progress, tied to economic strength and specific customer initiatives, and we expect considerable margin leverage as volumes increase. I am confident in the resilience of the North American economy. Our team has managed extremely well in response to softer volume conditions, ensuring that what we can control continues to improve better than planned. Now, turning to our third-quarter results, I’ll keep it brief with a few highlights. Our third-quarter EPS was 21% lower than last year. Our operating ratio of 62% was higher than last year but remains near the best in the industry. I am proud to say that our customer service and operational efficiency have been top-tier for six consecutive quarters. The team will walk you through the details for the quarter. I’ll turn it over to them now, starting with Ed. Ed, thank you again, and let’s make this a good one.

Thank you, Tracy, for the kind words. Before I jump into the quarter, I just want to take a moment to talk about Derek and Pat. I've really gotten to know them over the past year, and they are among the finest operators I have ever had the pleasure to work with. Investors got to see a glimpse of their great chemistry and relationship back in May at Investor Day. The entire network benefits from their collaboration. I’m very confident in the company’s future with these two leading the way while expanding their responsibilities and pushing the team to improve day by day. This quarter has been a great example of how well they work together, especially during a tough operating environment in Q3. We began by dealing with a two-week port strike on the West Coast. We then faced constant disruptions from forest fires and flooding until September. Running to a plan makes a significant difference. For instance, we had a two-day outage on our mainline east of Edmonton in the quarter. In the past, that could have taken us a week or more to recover, but this time it took just two days. The team really stepped up in September, with improvements in car velocity, train speed, dwell times, and origin and destination performance. Earlier in the year, we decided not to furlough train crews, and with grain volumes coming on strong, we’re beginning to see the benefits of that decision. Overall, we're set up well for a strong fourth quarter. I'm very proud of the entire operating team this quarter, particularly the leadership from Pat and Derek. Regarding our quarterly performance, car velocity averaged 209 miles per day, which was down 1% compared to last year. Other key metrics, like train speed and train length, were also slightly down. But considering the disruptions we faced this quarter, it speaks volumes about the quality of the people running the network and the resiliency of adhering to a plan. Our yards performed exceptionally well; our origin train departure improved to 89% in Q3, aligning with the targets we set. This is crucial for delivering results for our customers. In terms of safety, we recorded six additional reportable injuries and two more reportable FRA accidents than in the third quarter last year, impacting our quarterly metrics. However, our year-to-date injury frequency ratio is still 11% better than in 2022, maintaining our best-ever year-to-date performance and keeping our year-to-date accident ratio on track with a 16% improvement from the previous year. As Tracy mentioned, this will be my last quarterly call as Chief Operating Officer. I will continue to support the team through the winter to ensure a smooth transition, but officially I will hand the reins over to Derek and Pat on November 15. I'm extremely confident in both of them and in the team moving forward. When I returned from retirement last year, Tracy gave me two priorities: to get operations running smoothly again, and to mentor the next generation of operating talent. As I move to my fifth retirement, I feel a tremendous sense of accomplishment knowing we excelled at both. This organization is operating better than I've ever seen it, and the next generation is ready. Thank you, and now I'll hand it over to Doug to discuss top-line performance and market outlook.

Thanks, Ed, and best wishes on your well-deserved retirement. I also want to congratulate Pat and Derek. I look forward to collaborating more closely with you as we deliver for our customers together. On the Q2 call, we stated our commitment to providing industry-leading service to our customers, and we continue to uphold that promise. In terms of volume, we believe the worst is behind us. We hit the bottom in July, and we've seen improvement in August and September, which we expect to continue throughout the rest of the year. I'll provide more details shortly. We continue to achieve core pricing ahead of CN inflation. The pricing environment remains strong, and our service levels are facilitating pricing discussions with our customers. We began the quarter in a challenging position due to the port strike on the West Coast, which impacted international intermodal more than any other business segment. Additionally, we are experiencing residual effects from cargo diversions to U.S. gateways. We ended the quarter with the UAW strike affecting the Detroit Big 3, but fortunately, this had only a limited impact on our Q3 volumes. In Q3, revenues approached CAD 4 billion, down 12% year-over-year due to lower fuel surcharge rates and reduced volumes, although this was partially offset by solid pricing. RTMs were down 5%, but excluding overseas, were up 1% for the quarter as we see a recovery across other business lines. In merchandise, metals, and minerals, we experienced our best quarter this year, supported by increased drilling programs in Western Canada driving strong shipments. Demand for forest products remains below pre-COVID levels due to a challenging macro environment. Although petroleum volumes were impacted by spot crude unit trains moved last year, we should have a better comparison in the fourth quarter. Plastics and chemicals have shown sequential strengthening, indicating positive trends in industrial production. Automotive continues to benefit from strong pent-up demand with limited strike impact. In intermodal, storage revenues normalized this year following last year’s supply chain issues, impacting around $100 million in the quarter. Domestic intermodal saw monthly year-over-year growth in Q3, driven partly by our Falcon service between Canada, Detroit, and Mexico. International intermodal remains weak due to the West Coast port strike. We're witnessing lighter U.S. discharges at Rupert and Vancouver and are working diligently with our customers to recover this volume. The bulk business has continually outperformed, particularly with grain, which saw a strong ramp-up in Canadian shipments in September. Our service from the previous crop year has set a solid foundation, and we expect strong volumes through to at least next spring. We achieved record potash volumes in Q3 destined for export markets. The operating team is providing exceptional service for this increased volume, but we're being careful not to overload the network. Looking ahead to the rest of the year, we're seeing substantial momentum across nearly all markets. With bulk leading the charge, Canadian grain is nearing full capacity. U.S. grain is also projected to perform well, akin to 2022, benefiting from low water levels on the Mississippi and limited barge capacity, although tempered by demand in China. We expect solid potash demand in line with the Q3 run rate, and increased strength is likely with our robust export market. Canadian met coal should be strong for the remainder of the year, and we have already set an annual export record with one of our largest customers. For overseas intermodal, we're observing positive trends, with destocking nearing completion while wholesale inventory-to-sales ratios remain elevated. We anticipate gradual improvement throughout 2024. On the domestic side, both retail and wholesale are performing favorably compared to last year. Domestic growth initiatives will also contribute positively. Finally, in merchandise, we maintain a strong outlook for drilling with frac sand demand, bolstered by our network capacity enhancements in Northern BC. We foresee automotive outperforming due to continuing pent-up demand, contingent on the duration of the UAW strike. Additionally, we expect positive trends in chemicals, plastics, metals, and stable forest products. October has started on a good note, consistent with our quarter projections. Before I turn it over to Ghislain, I'd like to review some of the unique growth initiatives we discussed at Investor Day. We announced our new long-term agreement with AltaGas yesterday, which will boost LPG export carloads through Prince Rupert and Ferndale, Washington. Our collaboration with customers and supply chain partners continues to enhance the Rupert Gateway, highlighted at our May Investor Day. We're also building momentum for our Falcon product, which has developed into a reliable service. Recently, we saw our first loads with STG Logistics, and we’re actively pursuing opportunities to build density to and from Mexico as major RFPs approach. CN's Eastern Fuel Strategy is progressing, with a new distribution terminal in Toronto set to begin receiving cars in December. In line with projections made at Investor Day, we expect volumes to grow throughout 2024. We continue to work with our customers on building the electric vehicle supply chain, now having five projects announced on our network in Eastern Canada. This opportunity will take a few years to develop fully, but we're thrilled to report the first shipments of raw lithium moving on CN for export from Quebec City. Our Northern BC strategy is also advancing with the completion of our first capacity project in the area this month, allowing CN to increase frac sand and propane shipments on the network. In summary, I am optimistic about the coming year, and I will provide further updates on these opportunities in January. Over to you, Ghislain.

Thank you, Doug. Before I begin, I want to express my gratitude to Ed for everything he's done this past year. I've known Ed for a long time and wish him and his family a long, healthy retirement. Congratulations to Derek and Pat on their appointments. Moving to Slide 12 of the presentation, which offers visibility on our Q3 performance. Year-over-year, volumes in terms of RTMs declined by 5%, influenced by the external disruptions discussed by Ed earlier. We reported operating income of around $1.5 billion, which is 21% lower than last year. Our operating ratio came in at 62%, reflecting a 480 basis point increase from last year, but remains slightly higher on a year-to-date basis. EPS for the quarter was $1.69, a 21% decline compared to last year. The estimated impact of external disruptions in Q3 unfavorable to EPS was $0.10, contributing to a dilution of the operating ratio by 130 basis points. Regarding expenses, labor costs remained flat relative to last year, primarily due to a 6% increase in average headcount and general wage hikes, offset by the U.S. wage accrual true-up related to new labor agreements in 2022, along with lower incentive payouts this year. We've slowed and, in some cases, halted the pace of new hires during the quarter. Fuel expenses were more than CAD 175 million lower than last year, largely due to a 20% drop in prices and a 6% reduction in workload measured in GTMs. Rising fuel prices led to an unfavorable fuel surcharge lag, impacting EPS by CAD 0.10 for the quarter, translating to a CAD 0.20 decrease on a year-over-year basis. We generated nearly CAD 2.3 billion in free cash flow by the end of September. We're investing in our rail car fleet and continuing steady investments in track maintenance, aiming for capital efficiency to ensure we're prepared for an eventual rebound. Moving to Slide 13, let me provide insight into the full year. Despite uncertainties in consumer-related sectors, many other areas show signs of strength. The bulk segment is performing exceptionally well. We believe the worst is behind us, and we anticipate operating leverage to improve as volumes rebound. We are still projecting a gradual recovery in customer-related freight demand for 2024. Given this perspective, we are reaffirming our full-year guidance of flat to slightly negative EPS growth in 2023 compared to 2022. For the remainder of the year, we expect foreign exchange to remain between $0.70 and $0.75, while WTI will range from US$80 to US$90 per barrel. Regardless, our full-year assumptions continue to hold at $0.75 for foreign currency and WTI at US$80 per barrel. We're committed to shareholder distributions and are confident in our long-term growth narrative. We've increased our current share repurchase program budget to approximately $4.5 billion, up from an earlier budget of around $4 billion, which runs through January 31, 2024. Under this program, we've repurchased nearly 20 million shares for just over $3 billion as of the end of September. In conclusion, I want to emphasize a few points: the team is dedicated to the scheduled railroad model that delivers reliable service for customers. Apart from international intermodal, we're witnessing strength across various segments, with volumes improving sequentially. Given this context, we're reaffirming our full-year 2023 guidance. We maintain a robust balance sheet that offers financial flexibility, and we will manage our capital allocation to enhance long-term value for our shareholders. Now, I’ll pass it back to Tracy.

Thanks, Ghislain. Operator, I think we're ready to take questions.

Our first question comes from Walter Spracklin from RBC Capital Markets. Please go ahead. Your line is open.

Hi, this is James McGarragle. I'm on for Walter this morning. Thanks for taking my question. We've been tracking some TEU trends out of Prince Rupert, and some of the weakness from the port strike in July looks to be extended into August and September. My question relates to the extent this might be structural versus temporary. I know you addressed this in your opening comments, but could you speak more specifically to some of the servicing cost benefits you have versus U.S. alternatives and your confidence in volume recovery? Any update on your conversations with shipping lines and how quickly do you think we could see that come back? Thank you.

Good afternoon, James. Yes, as we mentioned earlier, we believe this is a temporary issue. Prince Rupert has structural advantages, both economic and service-related. We've set up Prince Rupert with a premium container service into the U.S. market, which has proven effective. As you mentioned, the port strike caused some business to shift to U.S. ports, but the structural advantages remain intact. We're actually two days faster in deliveries from China to Chicago compared to other alternatives, and our competitive edge also benefits from factors like currency. We’re optimistic that this business will gradually return, and we’re working closely with our customers to restore their confidence. We're actively enhancing our structural advantages through the development of new logistics, such as the announced export logistics park. We are ahead of our growth plan in this corridor, and feeling positive about it.

Thanks for the insights. Just a quick question on BILL C-47 and interswitching. I’ve seen some companies posting about this on LinkedIn, but have you noticed any traction from customers on interswitching? Any early commentary would be helpful. Thank you.

Our focus is on maximizing the performance of our supply chains across the continent, and we’re prepared to invest in capacity and that performance. The concept of interswitching does not support the high-level supply chain performance; it slows down services and does not encourage further investment. So we've raised our objections to this. However, we haven't seen significant impacts yet.

Our next question comes from Brandon Oglenski from Barclays. Please go ahead. Your line is open.

Hi. Good afternoon and thanks for taking my question. Apologies if this seems a bit near-term focused. Ghislain, could you walk us through some of the moving pieces in your implied fourth-quarter guidance? It suggests that operating ratio should improve sequentially. Could you elaborate on how you reach the full-year guidance based on current conditions?

Thanks, Brandon. We do see improvements in volumes sequentially. For instance, looking at our volumes in October compared to September, we are up by 7%. You can expect volumes to improve sequentially, and we are comfortable that we can deliver some operating leverage. Would you like to add anything, Tracy?

Sure. We're seeing the strength in volumes that Ghislain mentioned. Our pricing is meeting the mandates we assigned Doug, and I'm pleased with the margins we're being able to achieve, which have been at the top of the industry for the last five or six quarters. We're confident there is leverage, especially in the merchandise business, as volumes begin to rise again.

The next question comes from Cherilyn Radbourne from TD Cowen. Please go ahead. Your line is open.

Thanks very much. Good afternoon. I wanted to follow up on the new interchange relationships you have established with your rail peers. What changes do you think are needed to ensure these partnerships work better than in the past? And is there a willingness to cooperate even in more challenging situations where one of the carriers may need to accept a shorter haul?

Indeed, we are seeing a shift in the industry. Our intention is to collaborate with our partners and other carriers to design services that benefit our customers. The recent partnerships we’ve established, like the Falcon service and our work with NS and UP, aim to pull truck traffic off the road and improve delivery times. I believe you're going to see more of this cooperation, and we’re approaching discussions as if we were a single carrier, recognizing that it may be advantageous for one party over the other in different scenarios.

To add to that, it's all about service. The greatest transit times that can compete with truck traffic are what the operating teams from each railway are focused on. We are committed to ensuring that we can compete with trucking rates efficiently and improve our products. While it may take time to shift freight from trucks to rails, we are optimistic about our current offerings.

Our next question comes from Ravi Shanker from Morgan Stanley. Please go ahead. Your line is open.

Great. Hi, good afternoon, everyone. Ed, congratulations and good luck with your retirement, and congrats to the incoming team as well. I have a parting question for you: when you joined the team, was this timing for the transition planned, or did it come forward because of the traction you've had with your plan implementation?

Yes. When I came on board, I was in consultation for several months before formally joining. Tracy and I quickly agreed on the future of the operating department with both Derek and Pat, who have been excelling in their roles for months. I’m immensely proud of their contributions. Our third quarter operations were challenging, yet our metrics showed only slight reductions. That’s a testament to the team's commitment and we're all about moving traffic off trucks and making the whole industry more efficient.

As for the Falcon service, we find that the foundational aspect of any service offering is reliability. Competing for truck traffic means we need to be not just fast, but consistent. The collaboration between our three organizations focuses on achieving service reliability, and we are experiencing some initial success. It will take time to grow this service, but we are optimistic about its future.

Thank you. Our next question comes from Scott Group from Wolfe Research. Please go ahead. Your line is open.

Hi, thanks, everyone. Best of luck to Ed. Regarding the CAD 0.20 in headwinds from fuel and external disruptions in Q3, should we assume these entirely dissipate, serving as a bridge to your full-year guidance? Moreover, as we think into next year, do you believe your long-term goal of 10% to 15% earnings growth is achievable?

That's correct, Scott. The fuel surcharge headwind in the quarter was a CAD 0.20 year-over-year, accounting for external disruptions totaling CAD 0.10. While we faced these challenges, we still achieved a 62 operating ratio, which we're proud of. I'll now turn it over to Tracy for next year’s outlook.

Regarding the CAGR of 10% to 15% EPS growth, we maintain that guidance. Thus far, our railroad is performing quite well, demonstrating resilience despite the challenges this year, thanks to our incredible team. We have a growth plan that factors in economic support, and specific customer initiatives are already showing potential.

Our next question comes from David Vernon from Bernstein. Please go ahead. Your line is open.

Thanks, everyone. Tracy, I want to focus on the growth guidance over the three-year timeline. As we approach potential vulnerabilities in 2023, should we expect to see potential growth achievable perhaps better than the lower end of your target? Furthermore, how do you assess the contours of your target over this timeframe—do you anticipate it being back-end loaded?

It's likely that timing will shift for various factors affecting our growth plan. We are confident in our specific customer initiatives, but the pace of the wider economic recovery remains uncertain. We will provide additional commentary in January as we evaluate our outlook.

Our next question comes from Konark Gupta from Scotiabank. Please go ahead. Your line is open.

Thanks for taking my question, and congratulations to Ed, Patrick, and Derek. On the international intermodal side, how much visibility do you have on when container traffic will fully return to Canada from the U.S.? Additionally, regarding domestic intermodal, what kind of RFPs are you anticipating for the Falcon premium service?

On the international side, our customers expect a gradual ramp-up over the next year, and that’s reflected in our forecasts. On the domestic front, we’re seeing strong year-over-year increases, which is promising. As for Falcon, we’re pursuing RFPs regularly and are working to earn our customers’ trust through trials and tests. We’re aware the U.S. truck rates have been depressed recently, and we are gearing up to compete effectively.

Our next question comes from Fadi Chamoun from BMO. Please go ahead. Your line is open.

Thank you, Ed, Pat, and Derek, for your roles. Ed, best wishes on your retirement. Doug, regarding Q4, could you provide guidance on expected volume growth, both year-on-year and sequentially? Also, how should we interpret cost per head in Q4, considering upcoming labor negotiations?

Currently, weekly and monthly volumes are showing strength, and we expect sequential growth across the board, excluding the international segment. We have closely aligned our plans with our customers to forecast our outcomes accurately. Thus, we’re confident in our guidance. Doug, want to add anything on CapEx?

We approach capital expenditures dynamically. We will adjust our spending based on anticipated volumes, customer initiatives, and market conditions. Our capital envelope is flexible, and it is continuously evaluated based on our real-time opportunities.

Our next question comes from Ken Hoexter from Bank of America. Please go ahead. Your line is open.

Good afternoon. I want to join everyone in congratulating Ed, Patrick, and Derek. Tracy, I have a couple of questions. First, regarding casualty costs that increased during the quarter—are these increases expected to be persistent, or were they temporary concerning a few accidents?

The casualty costs have been mostly flat year-over-year this quarter. The sequential increase largely stems from variances in lower high-horsepower income and will be true to our quarterly adjustments on horsepower.

Understood, thank you. My second long-term question is about your EPS growth target of 10% to 15%. Given the indications that you're nearing the bottom, could you discuss the upside and downside factors for achieving this growth goal?

The EPS growth we've projected will depend on the actualization of customer initiatives as well as broader economic strength. As you indicated, if we can realize growth beyond our estimates, we have ample opportunities to capitalize on. However, the economic environment does present risk factors that could impact our growth trajectory.

I concur with Doug. The growth rates projected are heavily influenced by economic health and maintaining our competitive edge, but we’re currently optimistic about achieving our targets.

Our next question comes from Benoit Poirier from Desjardins. Please go ahead. Your line is open.

Bonjour à tous! Congratulations, Ed, and best wishes to Pat and Derek for their roles. Regarding Eastern ports, with labor agreements up for renewal at the Port of Montreal and a potential strike concerning the St. Lawrence Seaway, have you observed any notable cargo diversions and what measures are in place to mitigate the impact of these labor discussions?

Concerning the St. Lawrence, shortages at Thunder Bay for grain aren’t expected to impact operations significantly. We're prepared with a plan to offer alternative routes for freight moving through Western Canada to the eastern ports in advance of any strikes. Similarly, we are proactively engaging the Port of Montreal to create plans for rerouting freight to Port Halifax to prepare for any contingencies.

Thank you for your insights.

Our next question comes from Chris Wetherbee from Citigroup. Please go ahead. Your line is open.

Hi, thanks. Good afternoon. I wanted to discuss headcount and resources. Given your growth trajectory, are your current resource levels sufficient to absorb anticipated volume growth, or do you foresee needing to add additional resources moving forward?

Currently, we have sufficient resources to manage existing volumes, while planning for future growth. As we anticipate growth, we are preparing to ensure that additional resources will align with the uptick in volumes. Our operations remain resilient, even with fluctuations in volume, thus maintaining the consistency of service is our priority.

Our next question comes from Steve Hansen from Raymond James. Please go ahead. Your line is open.

Thank you for the time. I’m curious about your comments on grain's momentum, given last year’s strong harvest. With this year’s harvest being subpar, I find your cautious outlook surprising. Could you clarify your reasoning behind a more positive outlook amid the current agricultural backdrop?

The grain crop this year was not bad, but it was less than last year's. However, we’re still moving significant quantities of grain. Our North lines experienced a less severe drought this year. Although we may see a dip in available grain to move next year, we have customer initiatives helping to offset that impact.

We're achieving strong volumes in the U.S. market due to limited water levels on the Mississippi; however, broader demand from China and other global buyers can impact future yields.

We appreciate your questions, but we are nearing the end of our time.

Our last question comes from Justin Long from Stephens. Please go ahead. Your line is open.

Thanks, and good afternoon. Could you share your expectations for the sequential progression of yields on a cents per RTM basis as we move into the fourth quarter? Additionally, can you elaborate on core pricing trends?

Pricing visibility may be challenging due to various factors, including fuel surcharges and storage fees. Our commitment allows for pricing dynamics in contracts exceeding inflation rates. Thus, we expect strong margins and will continue to monitor pricing trends as they develop.

When evaluating cents per RTM or revenue per RTM, keep in mind the fluctuations due to multiple factors affecting yields. Regardless, we remain confident our pricing strategies will keep pace with inflation levels.

We’re nearing the close of our Q&A session. Thank you for the insightful questions today. I want to extend gratitude to Ed for leading the team during such a remarkable period. It’s been a pleasure working alongside you and seeing our strategy unfold successfully. While Pat and Derek are not mic'd up, I very much look forward to collaborating with them as this plan takes shape. We’re optimistic about executing our growth strategy. Thank you all for your participation today, and we'll talk soon.

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