Core Natural Resources, Inc. 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. I would now like to turn the call over to Paul Butcher, Vice President of Investor Relations. Ladies and gentlemen, Mr. Butcher.

Good afternoon, everyone. Thank you for joining us for CN's Third Quarter 2022 Financial Results Conference Call. Before we begin, I want to highlight the forward-looking statements and additional legal information available at the start of the presentation. Please remember that today's conference call includes certain projections and other forward-looking statements according to U.S. and Canadian Securities Laws. These statements are subject to risks and uncertainties that may lead to actual results differing significantly from those expressed or implied. More details can be found in our cautionary statement regarding forward-looking statements in the presentation. After my prepared remarks, we will have a Q&A session, and I kindly ask that you limit yourself to one question. The Investor Relations team will be available after the call for any follow-up inquiries. Joining us 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 hand over the call to CN's President and Chief Executive Officer, Tracy Robinson.

Welcome to our CN call. I'm pleased to be here with everyone today. Whether you're joining us by phone or online, we appreciate your participation. I will begin with some comments about the year. When I joined the team earlier this year, we were emerging from a challenging fall and winter. At that time, we committed to focusing on scheduled operations and improving the speed at which we move our assets. We aimed to strategically build our business to leverage our network's strengths and operational plans. Our goal was to enhance the service we provide to customers and improve the consistency of our operations and interactions with our supply chain partners. We initiated this effort on April 1 and have progressively focused on this program over the past six months. I am very pleased with the dedication and results produced by this team. This is evident in our operational and service metrics, as well as our financial performance. Our objective was to show that this discipline would lead to growth from the top line to the bottom line, and we are achieving that. The team has made significant progress on this initiative. While there is more to accomplish, we are off to a strong start with positive momentum. As a result of this work, we are updating our expectations for the year. We now anticipate an increase of approximately 25% in EPS, up from our earlier forecast of 15% to 20% growth. We also expect free cash flow to be around $4.2 billion, an increase from our previous guidance of $3.7 billion to $4 billion. This progress is a result of every team member working towards a unified plan. I am proud of our collaboration and even more excited about future possibilities. Regarding our third quarter performance, we are in a position to achieve the results I mentioned earlier. Rob, Doug, and Ghislain will discuss the quarter’s details and our outlook for the rest of the year shortly. However, I want to highlight a few key points from our Q3 performance. Volumes were up 5% on an RTM basis this quarter, combined with solid pricing, fuel surcharge revenues, and a favorable exchange rate, resulting in record revenue. While we are noticing some signs of softness in certain markets, we anticipate continued activity through the fourth quarter, especially in the western part of our network. Doug will provide details on volumes and top-line performance. We have made good progress in Q3 on adhering to our plans, achieving nearly 90% on-time performance from an origin perspective, which is close to optimal. Our car velocity reached 212 miles per day, the highest for a third quarter since 2016. Rob will share additional insights on the operating side and significant safety improvements. As we increased volumes in Q3, we also improved our bottom line, achieving an EPS of $2.13, representing a 40% adjusted increase and a quarterly record, with an operating ratio of 57.2%. Ghislain will discuss the key factors driving this performance. It was a strong quarter delivered by a dedicated team. I previously mentioned that I would assess our team as we progressed with our plans. I am thrilled to announce that Doug MacDonald, who has been serving as our Chief Marketing Officer on an interim basis, is now officially appointed to the role. Congratulations, Doug. We will continue to evaluate our team as we implement our plans further. I'll now pass it to the team, starting with Rob.

Thank you, Tracy, and congratulations, Doug. I appreciate the team's efforts in delivering another strong quarter of operational results. I want to recognize the exceptional work of our engineering team who worked tirelessly to restore service for our customers in Northern Alberta following a bridge fire. The branch line was brought back into service in just over a week in an area where customers heavily rely on rail to transport their products to market. The third quarter showcased the effectiveness of sticking to our plan. As we discussed last quarter, we focused on ensuring trains leave on time. Our origin train performance at key yards has continued to improve, reaching 87% this quarter, which is a 12% increase from last year. More trains are also arriving at their destinations on schedule, leading to better resource utilization, with daily average deadheads and recrews declining by 12% and 38%, respectively, compared to the same quarter last year. We are moving cars across the network with greater speed and consistency, achieving an average car velocity of 212 miles per day in the third quarter, a 5% improvement over the previous year. This is our best performance since Q3 of 2016, and we accomplished this while handling 10% more GTMs in that time. With grain season underway, we have made a strong start, recording the second-largest amount of Canadian grain moved in September, along with setting an all-time weekly record just two weeks ago. I am particularly proud that we achieved these excellent results while maintaining a safe operating railroad. Our accident ratio improved by 19% compared to Q3 of 2021, and our injury rate has nearly improved by 30% since then. It has now been 658 days since our last fatality and 469 days since the last serious injury, both of which represent the longest streaks in our company’s history. These results help us uphold our safety vision, demonstrating our unwavering commitment to the health and safety of our employees, the customers we serve, and the communities and environment in which we operate. We are poised to meet our customers' needs in the fourth quarter. We have established a strong operational foundation and aligned with Doug and his team to ensure they understand the available capacity on the network, guiding their commercial decisions. We have the necessary resources in place across the network. So far this year, approximately 400 conductors have been qualified, with another 1,000 currently in training. All 47 locomotives acquired this year are now operational and transporting freight, with an additional 10 expected early next year. We remain dedicated to expanding our railcar fleet to support growth opportunities. We have added 500 high-capacity grain hopper cars this year, with more to follow in 2023, and we plan to add 800 box cars by the end of next year. We have continued to invest in capacity this year, particularly in Western Canada, with new sidings and double track sections now in service to support operations this fall and winter. Lastly, we have released our 2022/2023 winter plan outlining the measures we are implementing to enhance our resilience and improve our capabilities during winter periods that affect our operational efficiency. While winter presents challenges, our preparations will help lessen its impact. I'll now hand it over to Doug for insights on the marketing side. Doug?

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 are confident that we have the resources to move this year's crop over the crop year, and we expect to see continued strong Canadian grain volumes well into next year. Petroleum and Chemicals continued 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 the 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, U.S. grain now looks very strong in Q4 and into Q1 2023. The U.S. crop on CN lines came in very strong. We are seeing positive demand from a number of other segments. We expect automotive demand to remain strong for the balance of the year and well into 2023 as manufacturers continue to ship into the backlog that we are being told is 9 to 12 months. With metallurgical and thermal coal prices both remaining strong, demand remains solid for Western Canadian coal and U.S. 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 thousand 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-stacked scheduled intermodal service to 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 3 years, we will invest in approximately 2,500 containers and chassis to position ourselves for the future growth. CN's expansive 3-coast network and industry-leading service provide increased flexibility and expanded reach for shippers throughout North America. In all, we believe this opportunity over time could represent an incremental 5% in volumes for our Domestic Intermodal segment. With that, I will pass it on to Ghislain.

I will discuss Page 14 of the presentation, which will give more insight into our performance in the third quarter. These results showcase the strength of our company as we achieved a 5% increase in volume in terms of RTMs and a 26% rise in revenues, despite some challenges from Canadian grain at the start of the quarter. The strong top line performance, along with solid operational results, led to record earnings this quarter. Let me share more details about the quarter, focusing on the adjusted figures, which exclude a merger termination fee from the third quarter of 2021. Labor expenses rose by over $40 million compared to last year, primarily due to a $47 million increase in wage accrual for the tentative agreement with our unions in the U.S. Moving forward, we will adjust our labor expenses based on this tentative agreement. Fuel expenses surged 80% on a foreign exchange-adjusted basis, as fuel prices remained elevated compared to Q3 of 2021. We have an effective fuel surcharge program to manage fuel price fluctuations we've experienced this year, although it does create some variability in the short term. In this quarter, we benefited from a favorable fuel surcharge lag compared to last year. We achieved over $1.9 billion in operating income in Q3, a 31% increase on an adjusted basis, marking a quarterly record. Our Q3 operating ratio was 57.2%, which is 180 basis points lower than the adjusted operating ratio for the same period last year. Diluted EPS was $2.13 for the quarter, a 40% increase over last year on an adjusted basis, also setting a new record. We generated free cash flow of over $1.3 billion in Q3, nearly $600 million higher than last year, mainly due to increased earnings. This raises our year-to-date free cash flow to over $2.9 billion, an increase of nearly $900 million through the end of September. Under our current share repurchase program, active 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 strong performance over three quarters and solid volume expectations in Q4, we are raising our 2022 financial outlook, now anticipating adjusted EPS growth of about 25% and free cash flow around $4.2 billion. We also expect an operating ratio starting with a 5 and an ROIC of approximately 15% for the year. From a volume standpoint, we still expect RTMs to grow in the low single-digit range for the year, assuming strong growth in Q4 driven by a top five all-time Canadian grain crop that began moving in September. We are now estimating that in 2022, the average WTI price will be around USD 95 per barrel, and the Canadian dollar will average approximately $0.77 against the U.S. dollar for the year. We are not anticipating any major service disruptions for the remainder of the year. In conclusion, I want to emphasize a few key points. Volume expectations for Q4 remain strong, mainly driven by Canadian grain, and we are maintaining discipline in pricing. Our strong bulk franchise, including grain, potash, and coal, is less affected by economic fluctuations, and we have a current backlog of lumber and automotive traffic. The network is fluid and operating effectively as we continue to run a scheduled railroad with an emphasis on car velocity. We are closely watching the effects of inflation on our costs and are committed to managing our expenses. We have a robust balance sheet that offers us financial flexibility, and we will allocate our capital in ways that create long-term value for our shareholders. Let me turn it back to you, Tracy, for concluding 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, and 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. I'm comfortable that we will deliver on our upgraded guidance of 25% EPS growth in 2022, and we remain committed to deliver value to our customers, to our employees and to our shareholders. And with that, we look forward to your questions.

The first question comes from Ken Hoexter from Bank of America.

Congratulations on the excellent work, Tracy and team. It's great to see everything coming together. Tracy, throughout the conversation, you, Doug, and Rob discussed capacity and how we use spare capacity to manage some oil. Additionally, the grain crop is returning. Could you elaborate on the balance you foresee in meeting expectations, especially considering the government's focus on available capacity and the necessity to catch up on capital expenditures? Is there a requirement to catch up on some capital expenditures, or do you anticipate congestion in certain areas being stronger than expected?

Thank you, Ken. That’s a significant question. As we have focused on our scheduled railroads, one of the advantages of this operation is that it provides a clear view of our capacity. We ensure that Doug and his team effectively manage our sales in relation to available capacity in the network. This strategy enables us to consistently meet our customers' needs. Selling capacity that we do not possess is detrimental. As we operate the railroad efficiently and our speed improves, we can unlock additional existing capacity. Looking ahead, for the supply chain to function effectively, we require several elements. We need advance visibility on upcoming volumes from all parties involved in the supply chain. We must anticipate volume changes, whether they arise from economic fluctuations or immediate demands. Effective communication and a coordinated response to disruptions within the supply chain—whether they occur in rail, trucking, terminals, or at our shippers' facilities—are crucial. A supply chain only operates smoothly when all its components are functioning well, which necessitates collaboration. We are actively participating in all supply chains related to our customers, and we are generally open to making investments as we observe growth opportunities. We engage in discussions with all our customers about these opportunities, and where sustainable growth is achievable, we are eager to invest in long-term capacity alongside them.

Your next question comes from the line of David Vernon from Bernstein.

Ghislain, can you talk a little bit about what's in the labor number for the accrual associated with some of the collective bargaining in the U.S.? And as you think about the resources that the team is going to be adding next year in terms of locomotives, in terms of cars, in terms of the training pipeline, how comfortable are you on the incremental margin outlook? Are we still resourcing sort of a little bit ahead of demand right now? Or are we a little bit more balanced in that in terms of how we should be thinking about the incrementals developing into 2023?

Yes. Thanks, David. I can start, and then Rob, you can jump in a little bit on resources. But in terms of the accrual, as I said in my opening remarks, we did have an accrual for the U.S. wage tentative agreement of $47 million. That was taken in the third quarter. When you look and you look forward in terms of labor costs, I think what you need to do to have a sense of what it looks like, is you need to remove that $47 million, and that run rate will be good for the fourth quarter and the first half of next year. And then in the U.S., as you know, you will add another 4% for the second half of next year. In terms of resources, I think as Rob mentioned, we are getting some locomotives. We are getting some cars. I think we need to continue and we will continue to improve on our margins. I mean that's the key. And I think we've said it before. I think that we need to continue. But to do this, we need to have a tight operation. We need to improve on our margin, have a tight operation, sweat our assets, improve velocity. That will create capacity and that will allow us to bring top line at low incremental costs. I don't know, Rob, if you want to add on resources.

Yes, David, just on the resource side, regarding manpower, we'll still have needs from an attrition standpoint in 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.

Your next question comes from the line of Konark Gupta from Scotiabank.

Tracy, I wanted to ask you, this is your first time leading a Class 1 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 that. It's a pertinent question that's on many people's minds. I'll start and then turn it over to Doug. Navigating through various economic fluctuations is something that this railroad, like others, has done over time. We understand how these situations typically unfold and have the capability to adapt. It's worth noting that our business is quite diverse, and not all segments are affected by a recession. Doug will elaborate on that shortly. We are closely monitoring the areas more sensitive to a recession and what’s occurring there. Looking ahead, we are strategically positioning our resources to respond effectively. As Rob mentioned, we have a history of taking steps to minimize inefficiencies by parking less effective locomotives when necessary and we can quickly adjust our freight cars. We have already started making adjustments on the international front. It's crucial to maintain our operational efficiency, and we will take necessary actions regarding contracts. However, a significant part of our business isn't expected to be impacted by a recession. Our organization has the experience to handle these challenges, and we're vigilant about the situation. Doug, do you want to share your insights on the recession outlook?

Yes. Great question. And some of the major commodities that normally you would think would be hit by a recession, that's changed. Strictly mostly because of the Ukrainian war. As an example, we're going to see strong grain in the U.S. and Canada no matter what moving forward. We don't see any impact from an economic standpoint from any recession. Same thing with coal. Coal is also very strong, mainly due to the war going on over there. With that comes some other commodities like potash and fertilizer, all very strong. We expect to see it going over the next 3, 6, 9 months. It's not going to be your typical one. Lumber, we expect to see very strong as well, so strictly because our fleet is sold out even anything above 1.3 million housing starts. And lastly, automotive is going to be strong for at least the next 9 to 12 months of the backlog. Anyone out there trying to buy a car, I think you'll find that's about the wait period still. Thanks for the question.

Your next question comes from the line of Chris Wetherbee from Citi.

It seems like the fuel surcharge may slow down sequentially as we move into 2023, but I'd like to get a clearer understanding of how to approach yields. If you could discuss pricing and foreign exchange as well, that would be very helpful.

Let me start that off, Chris, and then I'll hand it over to Doug. As we've focused on scheduled operations and improved our velocity, we've found opportunities to enhance customer service. We experienced strong demand and favorable pricing conditions, and Doug and his team have effectively addressed some of the initial issues we faced. Looking ahead, you can expect us to maintain this level of discipline. Doug will share more about his mandate of inflation plus pricing. Doug, feel free to provide additional details on our outlook.

Thanks, Tracy. Listen, we've been very successful in getting inflation plus pricing right throughout all of 2022, and we're seeing that continue into 2023. We're renewing contracts on a regular basis. We're still able to get inflation plus pricing. And honestly, with the service that we're providing, we think it's a very fair settlement with our customers. Thanks for the question.

Your next question comes from the line of Cherilyn Radbourne from TD Securities.

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 LA Long 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. Great question. 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 a great news to hear. And Vancouver is a little bit slow right now. The majority of our business is actually coming into Montreal and Toronto and the U.S. business has softened somewhat for us. Having all those containers 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 there by the end of the month.

Your next question comes from the line of Fadi Chamoun from BMO.

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're always kind of learning from how to deal with winter better. I'm just kind of wondering, coming out of the last 9 months of kind of operational focus, again, are you approaching winter any differently than you have in the last 5 years? What are some of the things you are doing perhaps differently to kind of ensure you don't lose that operating momentum you're coming out of right now going into the winter?

Maybe I'll start with that, Fadi, thanks. What does cost inflation look like next year? That is the key question about inflation. We know what we've experienced this year and that there can be a delay in some of our material inflation. We have a clear understanding of wage inflation in the U.S. and have begun some collective bargaining in Canada. It is too early for us to predict what we think cost inflation will be this year. However, whatever that turns out to be, Doug and his team will aim to price above it. Doug, any comments? And then, Rob, over to you for the winter plan.

I would just say a good proxy to use is the ARR index, the all-inclusive index less fuel. It's as good a proxy to use as any as for all the railways. Rob, do 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 adding those lessons learned. Our winter prep started some time ago in the yards and locomotives, winterizing those. Our aircar fleet, which we have 100 of, is now up and ready to go. We've replaced more air gaskets and air valves in 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 -30, -35, -40, it will present challenges and our efforts are really to try to mitigate that. Thanks for the question, Fadi.

Your next question comes from the line of Brian Ossenbeck from JPMorgan.

Maybe one more on end markets for Doug. Can you just talk about the impact of the strong recovery that's starting to show up in any specific commodity types and whether or not you think that would be a net positive for volume outlook for next year? And then Ghislain, maybe if you can just clarify the $47 million accrual, if that is all prior period adjustment. Just wanted to be sure about that.

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, but I was asking about the stronger U.S. dollar and what that impact was on your end markets good, bad, indifferent across the commodity lines. And if Ghislain can clarify the $47 million accrual on the labor side, if that is all prior period.

Yes. No, we got it all, we just missed the stronger U.S. dollar part. The stronger U.S. 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. Ghislain?

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

Your next question comes from the line of Benoit Poirier from Desjardins Capital Market.

Congrats for the strong results and the strong operating metrics. With the back-to-basic approach that yields great results with an OR of 57.2% in Q3, what kind of initiatives or actions are still to be implemented that could yield to further OR improvement going to 2023 and beyond?

Bonjour, Benoit. I'm going to start that, and then I'll hand it over to Rob. I'm really happy with the way this team has leaned into this 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 a whole bunch of our team working hard together across the organization to make this happen. We all know that we have traction, but we also know that there's more opportunity here 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. There's always room for improvement. Very happy with the progress that the team has made. We'll continue to focus in 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's 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. 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.

Your next question comes from the line of Amit Mehrotra from Deutsche Bank.

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

Yes, we can hear you.

I wanted to ask about the sequential implied decline in earnings based on the guidance, especially since winter occurs around the same time each year. Additionally, Canadian National holds a AAA credit rating, which is impressive and may be significant for the company. Is there a possibility to maintain a strong investment grade rating, even if it’s not AAA, and utilize some of that balance sheet capacity to further reduce the company's share capital?

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’m trying to convey is that the 25% growth in earnings suggests that earnings in the fourth quarter will be lower compared to the third quarter, simply based on the numbers. Additionally, there have been improvements in grain, mix, and volume. I recognize that winter might present some risks, but I’m looking to understand the factors influencing the expected decrease in earnings from the third to the fourth quarter.

Yes, we haven't included any significant impact from weather or other events in our operations model. We are analyzing volumes and various outcomes for the fourth quarter, and we have settled on a 25% growth rate. We feel confident in our ability to achieve this. Regarding our balance sheet and available capacity, it’s advantageous to have this cushion, especially with the potential for an economic slowdown or recession. As part of our strategic planning, we are considering how to best utilize that capacity and determine the optimal levels for us, and we look forward to discussing our plans at Investor Day in May.

Your next question comes from the line of Scott Group from Wolfe Research.

I wanted to ask about the timeline for the EMP volume win you mentioned. Regarding labor, you recently announced a small deal in Canada with a 3% annual wage increase. The wage increases in the U.S. were significantly larger. Do you believe this difference is sustainable, or will Canadian labor agreements need to align more closely with the U.S. trends?

Thanks, Scott. It's Doug. I'll start off with the EMP. We started the conversion a couple of weeks ago. It's going to take a while to work them all through our system. But every day, we're adding more and more in, so it's going extremely well. And I think we'll be fully up to speed by the end of the quarter, so 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 IBW 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, and hopefully, we get to a quick resolution. Thanks, Scott.

Your next question comes from the line of Walter Spracklin from RBC Capital Markets.

Just checking it, can everyone hear me?

We can, yes.

Okay. Tracy, when you first took on the role, you identified four key areas to focus on: improving operations, curating the book of business, better aligning sales and operations, and investing for growth. I want to focus on the first two areas, specifically improving operations and curating the book of business. What stage do you believe you’re at with these two initiatives? In terms of curating the book, how much of your business do you think still has the potential for significant repricing to enhance returns, or to be shed if the returns are not satisfactory?

Thank you, Walter. I don't know if this is a 4 or 12-inning game or what this is, but this is a long-term focus for us as to how we're going to run our railroad. It's the way we believe in providing the service to our customers. We will continue to tweak and refine as we go forward. I'm really happy with the launch of this scheduled operating plan and what the team has done with it, both from an operations perspective as well as from a commercial perspective. Because you can only deliver what you have the capacity and the operating model to provide. There were some things we needed to look at pretty early on as far as the book goes. I'm comfortable that we've taken care of those that are most urgent. We've got right now a book that fits our network, but this is something that we'll be intentional about as we go forward. And as we look at growth, we're going to be doing it through the same lens. We are prepared to invest in our network and invest our growth, but we'll do it very intentionally to make sure that as Doug and team sells, we have both the capacity and the operating model to deliver to our customers as we go forward. It's going to be an ongoing tweak. We are a long-term game here.

Your next question comes from the line of Tom Wadewitz.

I guess this is a little bit of a variation on that last question. But your services improved, you've executed very well on how you're running the network. I think that's helpful on price. But also, as you take a look back, I think Tracy, you said there's not really urgency to kind of changing the book of business. But what about opportunity for business that may have been repriced over the last, I don't know, 5, 8 years? Do you look at parts of the book and say maybe there's an opportunity that something was mispriced, a certain part of the business, over the last 5, 6, 7 years? Or do you think most of the book is kind of priced the way it should be?

I believe we have our operations running quite efficiently right now, but we recognize that there is still more work to be done. We will continue to focus on this. Looking ahead, our primary concern is identifying avenues for growth. Our starting point is always our customers and examining the potential business opportunities and volumes available, along with how we can effectively offer solutions. We need to invest in our infrastructure and capabilities, including rolling stock, tracks, and personnel, to facilitate these solutions. We aim to collaborate with our customers and take sustainable steps together. This also allows us to evaluate our existing business. Doug will mention that about one-third of our portfolio is up for renewal every year from expiring contracts, providing us a regular opportunity to reassess that segment of our operations. When we engage with our customers, we also explore business opportunities that we do not currently handle to see if they may naturally align with our network.

Your next question comes from the line of Steve Hansen from Raymond James.

I just wanted to follow up on the pricing and yield discussion of earlier. I can appreciate you've been successful thus far at passing on inflation plus pricing both through 4Q and into early next half. I'm just kind of curious though just on some of the comments around looking backwards a little bit. We had really outstanding pricing start to show in fourth quarter last year and into the first half. I'm just thinking we're starting to lap some of those comps. I just trying to make sure we're level setting expectations around pricing going forward given some of those tough comps that are ahead.

Thanks, Steve. Listen, we still expect pricing in that area, inflation plus. I mean, some of the things that happened last year is we also saw a lot more storage fees for containers and things like that. But with that came also congestion issues because we had to store them. What we're expecting in 2023 as the economy evolves and as the supply chains get back into a regular flex, we'll probably see some of those storages come down, but we'll see the increase in business to offset it.

Operator, are you there?

It's Jon Chappell. Can you hear me?

Yes.

The question I was asking before was, if we go back a year ago, the casualty and other line was a big part of the OR initiative. And if we look at the first 3 quarters of this year relative to the last 3 quarters of last year, it's a run rate that's much higher. Was that a series of unfortunate events given weather, some derailments, etc.? Or is that being planned to be higher as you're preparing for a stronger volume and a more efficient network going forward? And I guess the last part is, how do we think of that run rate going forward?

Yes. Jon, when we analyze the casualty and other line each quarter, the typical run rate is around $100 million to $120 million. This figure includes costs associated with unfortunate derailments, which can significantly impact expenses. Some of these incidents are one-time occurrences, but they do happen. Additionally, we account for updates on legal claims and workers' compensation provisions, among other factors. Overall, the run rate of approximately $100 million to $120 million for casualty and other may experience fluctuations in specific quarters due to unexpected events, but that is the general trend.

And we did have a hurricane hit Nova Scotia in Q3, so I'm sure that's part of it.

Exactly. When you have some of these events, hurricanes, you have a derailment, then you'll see some noise in that category.

Your next question comes from the line of Ari Rosa from Credit Suisse.

I was hoping you could elaborate on the EMP program. Maybe you could just give a little bit of color around how you see it operating differently from what was current or what was in place before. And then to what extent you've been marketing that to customers and what the reception has been. And then how we should think about the incremental volume that could come from that?

We were a minor participant in the EMP program prior to this. But what this does is it makes us the major, the big Canadian player now. We're the sole person in Canada on the EMP program. What that does is we bring up a lot of cross-border business from both the UP and the NS. It comes into both Eastern and Western Canada. It allows us to refill those boxes with other customers' freight to go back down to the U.S. We can also use those boxes for some transcontinental freight as well as long as it conforms to the program requirements. What this allows us to do is really grow our customers. We have a lot of customers that currently already use it that are now calling on CN to continue to use the EMP program. It increases our cross-border traffic in Intermodal which is something we've been trying to grow for quite a few years. And really, it really partners us well with the great UP service and NS service that we're able to give now on this freight.

Your next question is from the line of Brandon Oglenski from Barclays.

I guess following up on that question, Doug, can you talk more or less about the competitive landscape in Intermodal? I know you called out international being a little bit softer. Is that a macro comment? Or is that also in relation to share shifts in the marketplace?

We haven't observed significant changes on the international front, apart from the earlier share shift this year, which has been quite stable. Instead of the usual U.S. volume passing through Canadian ports, we are now seeing increased domestic freight coming from Toronto and Montreal. This situation is largely due to overordering, as people were concerned about potential shipment delays tied to COVID. As a result, there is a substantial amount of retail volume currently sitting in warehouses in Toronto, Montreal, and other areas, which has led to a bottleneck in the supply chain extending back to Asia. We anticipate some blank sailings in November from overseas. Domestically, we remain fully booked in all our slots, so business is thriving. While we're not enjoying the premium rates we experienced at the economic peak, we are maintaining steady operations and continuing to grow. Additionally, the EMP business is a strong complement to our efforts, further supporting our growth.

Your next question comes from the line of Justin Long from Stephens.

I wanted to ask if you had any directional thoughts on volumes in 2023, assuming we're in a mild recession. And Ghislain, you made a comment earlier about the need to continue improving margins. How dependent is that on volume growth? Or is there enough self-help opportunity to expand margins in an environment where volumes are down?

Maybe I'll start us off on that one. We're not guiding at this point on volumes for next year. I think Doug gave a pretty good overview of where we see the potential for some recessionary kind of impact on volumes and where we see strength, and we're organizing our resources around that. We're staying pretty close to our customers as that unfolds. We will be able to I think in January, when we next talk, give you a better sense on where we see volumes going. And Doug can add whatever he needs to that as well as a comment perhaps on the pricing piece. Doug?

For the margin side, we expect that honestly to keep going at inflation plus as inflation will eventually decline back to more normalized levels. We still expect to be able to retain that inflation plus pricing on all of our renewals.

Your next question comes from the line of Ravi Shanker from Morgan Stanley.

Tracy, this may be a little bit of an unfair sell-side question, but I think you're now at a point where you have a high-quality problem of having to deal with a very high bar, just given the traction you guys have demonstrated on the earnings growth and the guidance you put out for this year. I think, again, you find yourself in a place where like CN was maybe 6 or 7 years ago where the kind of bear case on the stock was that you cannot really sustain this level of earnings growth, this level of OR improvement. Again, maybe this again is a little bit of a preview to what happens at the Analyst Day, but what is that long-term algorithm going to be like? Are you confident that over the next 3, 5 years, you guys have enough kind of top line growth opportunities to keep that EPS growth engine coming kind of even beyond '23?

Well, that sounds like a fantastic discussion for Investor Day in May, which is what we intend to do. That was the first mission as I came into the railroad was to get the scheduled operation going. We've got a lot of muscle memory in this organization, and wow, I'm very impressed with the traction that we have. And so that was mission number 1. Not declaring any kind of finish on that. We've got a ways more to go on that, but that is driving the customer service that we've got and it's driving some of the margins. You combine that with the efforts that Doug and team are making to make sure that we've got the right book of business, and we're pricing profitably. That presents and kind of crystallizes a baseline for that. From there, we spent a couple of days with our Board this week talking about the growth opportunities we see ahead of us. We know that running that tight, efficient operation is a necessary condition in order to kind of lift our head and grow, but we're pretty excited about some of the growth opportunities that we see as we go forward and around capitalizing them both in existing capacity in our network as well as in some areas that we look forward to investing to expand our capacity. As I said, great conversation for us in May for Investor Day. We're looking forward to it.

Your next question comes from the line of Jeff Kauffman from Vertical Research Partners.

Congratulations, Tracy and team. I wanted to come back to your comment about the river levels. There hasn't been a ton of discussion about this and your railroad runs in competition with the Mississippi River probably better than just about anybody else's. Can you talk about what magnitude of opportunities there are? I know it's a lot of grain and coal down river, steel up river. And maybe address how much excess capacity do you have in your network to handle any potential business? Like could there be a limit to how much you could do if it was, we need rails and boats just aren't an option?

Thanks, Jeff. There's always a limit. Let's be clear. It's a great opportunity. We do parallel the river the entire way south. We did move a lot of grain last year in Q4, Q1. And I think we can expect similar volumes moving this year. We're working directly with the customers. Now listen, we have 3 really nice terminals on our line in Louisiana, and they will be capped out probably at similar levels to last year. What it does do provide us though is now we can look at some of that northbound business. This deal, the fertilizer, some of the other products that are down there that we'll have the opportunity to bring back up north. It's a good problem to have. I think we'll be able to actually do well. But eventually, it will rain and the river levels will come up. We're looking at it as a good Q4 potential, maybe into Q1, and then we think things will be back to normal by then.

Okay, thank you. I think that's the end of the call today. We very much appreciate your interest and your time today. We're happy with the railroad we're running right now, and we're really excited about what's to come as we look into the future. Look forward to seeing you all in January. Thank you.

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