Canadian National Railway Company - Q3 2014

Transcript

Operator (participant)

CN's Third Quarter 2014 Financial Results Conference Call will begin momentarily. I would like to remind you that today's remarks contain forward-looking statements within the meaning of applicable securities laws. Such statements are based on assumptions that may not materialize and are subject to risks described in CN's Third Quarter 2014 Financial Results press release and analyst presentation documents that can be found on CN's website. As such, actual results could differ materially. Reconciliations for any non-GAAP measures are also posted on CN's website at www.cn.ca. Please stand by. Your call will begin shortly. Welcome to the CN's third quarter 2014 financial results conference call. I would now like to turn the meeting over to Janet Drysdale, Vice President, Investor Relations. Ladies and gentlemen, Ms. Drysdale.

Janet Drysdale (VP of Investor Relations)

Thank you, Patrick. Good afternoon, everyone, and thank you for joining us. I'd like to remind you of the comments already made regarding forward-looking statements. With me today is Claude Mongeau, our President and Chief Executive Officer; Luc Jobin, our Executive Vice President and Chief Financial Officer; Jim Vena, our Executive Vice President and Chief Operating Officer; and J.J. Ruest, our Executive Vice President and Chief Marketing Officer. In order to be fair to all participants, I would ask you to please limit yourselves to one question. It's now my pleasure to turn the call over to CN's President and Chief Executive Officer, Mr. Claude Mongeau.

Claude Mongeau (President and CEO)

Thank you, Janet, and thanks to all of you for joining in on this call. I know it's been a long day for some of you, so we'll try to keep it to an hour and leave as much time as possible for your questions. You have seen the results on the wire. I think they are solid third quarter results for CN. Clearly, we are growing much faster than the economy, which is our game plan. We've achieved record revenue performance. Our revenues are up 16% over last year. We've had nearly double-digit RTM growth in every commodity that we serve. The only exception is coal, and we've had good solid discipline, same store pricing, as J.J. will explain to you when he goes over the details of our strong performance. We're also balancing operational and service excellence. There's no question our network is fluid.

We're having solid service across all the supply chains that we serve, and we're continuing to drive significant efficiency gains. As you can see, our operating ratio was 58.8%, which is an improvement over last year. Jim will give you more details on our operating metrics and service performance in a minute. In terms of financial results, I'm pleased to report our operating income is up 19%. Our diluted EPS is up 21% versus last year on an adjusted basis, and our year-to-date free cash flow is nearly $1.9 billion, and that excludes almost $200 million of asset monetization that Luc and his team delivered since the last few months. So clearly, strong financial performance, and it underpins our ability to create good financial results and create value for our shareholders. So Luc will give you the contour of those results in more detail in a minute also.

So clearly, we're delivering on our strategic agenda. We have a lot of momentum in the marketplace, and we're gearing up to deliver another strong year with strong performance in the fourth quarter. With that, I will let the team go over and come back at the end with a wrap-up and Q&A. Jim, over to you.

Jim Vena (EVP and COO)

Okay. Thank you very much, Claude. Solid third quarter with strength and fluidity shown across the board. The results show our ability to balance operating and service excellence. We handled 13.4% (sorry, Janet, I put the 0.4 in) more RTMs with fluidity and at low incremental costs. Looking at train and terminal productivity, it continues on a positive trend. Terminal dwell, car velocity, and train speed came in as expected given growth in that traffic mix. We added locomotives already this year, and we were able to put them to work efficiently, increasing the GTMs pulled per locomotive. Our fuel conservation focus continues with a third quarter betterment of 3%, which puts us in good position to deliver on our goal of 1.5% for 2014. We remain fluid into the fourth quarter with metrics pushing up against last year and with the network operating in a fluid state while handling more traffic.

We continue our strong relative position among our peers. If you could turn over to the next page. We have invested and will continue to invest in our operation for safety, operational, and service excellence. We continue onboarding new employees and have improved our onboarding quality with the opening of 2 new training centers in Chicago and Winnipeg. The centers provide our employees a campus with new facilities, curriculum, class training, as well as hands-on real-life equipment to make them the best trained and safest Railroaders we have ever brought on. We continue to add locomotives to handle growth and will be receiving 40 more before year-end. We have also placed orders in 2015 and 2016 to ensure we are well-positioned for continued growth as well as the change to Tier 4 locomotives next year. We have stress-tested our car fleet and have added cars strategically to handle the growth.

Finally, we continue to invest in our plant, first and foremost for safety as well as growth. We have invested in many areas but have concentrated on the Edmonton to Chicago corridor with investments on branch lines, double track, and yard capacity. Before year-end, we expect two double track segments between Edmonton and Winnipeg, the development of Transcona Yard in Winnipeg to help with fluidity through Winnipeg, siding extensions at Fort Frances and Superior, and the first phase of the Steelton Hill double track to come online. With that, I wanted to pass it over to J.J., and you can give a little more color of where this business is coming from that we're investing for.

J.J. Ruest (EVP and CMO)

Well, thank you, Jim. Good afternoon to all of you joining us on the phone and later on the webcast. For the next few minutes, I will walk you through the third quarter result as well as our commercial outlook and some price and yield comments. The revenue for the quarter totaled $3.1 billion, or a 16% increase over last year. Breakdowns as follow: volume and mix produced 11%, same store price was up 3.2%, and you'll recall that the second quarter same store price was just under 3%. About 70% of our revenue are same store revenue. The strong US dollar gave us 3% and also helped our Canadian manufacturer, and there was minimal impact from fuel. Now, let's do the review segment by segment as we do usually on the FX adjusted basis. Starting with Petroleum and Chemical, which posted solid growth of 18%.

We doubled our crude carloads from last year. We led the Canadian rail with a third quarter annualized run rate of 135,000 carloads, and Canadian heavy crude remain around 60% of our total. We are ramping up to unit train loading facilities operated by midstream and pipeline companies, which are backed up by long-term commitment from large oil companies. Propane, gas, and diesel were up also nicely and have ongoing potentials. On the metals and minerals revenue, which include iron ore, it grew 13%. We moved 50% more frac sand carloads than last year. Third quarter annualized run rate was 95,000 carloads. This was driven by production ramp-up on the plant that we serve in Wisconsin, as well as an uptick in unit train volume and by strong demand from most shale drilling areas.

Semi-finished steel continues to perform, reflecting good demand from automotive and energy sector. Iron ore revenues were flat, but the fourth quarter restocking looks constructive. Forest products revenue increased 4%, but the carloads fell 3%. Lumber and panels shipments to U.S. market increased 11%, driven by steady improvement in U.S. housing starts. Short-haul lumber carloads to offshore market continued to be down, but some revenue was recaptured in our intermodal export matchback service from Prince George to the Port of Prince Rupert. Pulp and paper revenues were lackluster in the quarter. Coal revenue was down 6%. The global overproduction of met coal caused one Canadian mine to be shut this summer, and two more will be closed at the end of this year. Our bright spot remained our U.S. utilities volume coal volume, which was up 75%, driven by restocking.

Grain reported the biggest gain at CN with revenue of 37%. The Canadian grain revenue was up 50%. Yes, I said 50% more than last year as we spotted a record 5,000 hoppers per week in the prairies. Contrary to some media report, we are moving a lot of grain, and we have the fact to support it. In our U.S. grain, revenue increased about 15% on strong corn volume. CN takes pride in keeping up with U.S. demand and services both grain country very well. Fertilizer revenue was up 5%, driven by strong potash overseas export. Automotive revenue was up 13% from the Chrysler business, along with improved North American network car supply. Our intermodal franchise continued to deliver results. The revenue was increased 12%. International revenue increased close to 25%. Domestic revenue was basically flat.

We have strong vessel discharge over the West Coast, driven by new business, strong import into the US Midwest, partly related to the US ILWU diversion. The volume in Port of Montreal was also up a solid 45%, which is nice to see in our underutilized eastern network. In domestic, it was a mixed bag. We had good door-to-door retail volume offset by lower hub-to-hub wholesale volume related to market pricing. Other revenue grew 7%, most of that related to better Laker Lake vessel business. Now, turning to the outlook, we have a strong demand across many segments. We continue to seek out and aggressively develop opportunities within the energy space. We have a strategy of organic growth, a strategy of improving yield with inflation plus pricing and selective upscaling. If we start by intermodal, the import-export market, demand remained constructive, and we have several initiatives in the works.

In the Canadian market, domestic market, we are balancing volume with pricing pressure, and we leverage our service offering and our low-cost leadership. The reduction in gasoline price currently taking place in North America is equivalent to a big tax reduction on the North American consumers, leaving disposable income that should be constructive for intermodal volume in the midterm. Regarding this year's grain crop, in Canada, it is of a lower quality, and the volume is less than predicted and more in the range of 58 million tons. We expect to be running hard on grain well into early spring. In the U.S., we are bullish on corn and soybean production in the CN draw territory, which are reported to be above last year and of decent quality. On the coal side, the outlook is upbeat for U.S. domestic utilities and bleak for export.

Recall that export coal is only 3.5% of CN revenue. From the energy renaissance, we aim to achieve our target of doubling the 2013 carload ahead of schedule. Our unique access to Canadian production origin, the trend toward unit train operational network, and our strong destination franchise should make for continued growth in the fourth quarter and into 2015. We have the network capacity, the locomotive capacity, the crew, and the Chicago solution to meet the need of the crude industry. The outlook for frac sand is also very positive. We have new production facility ramping up, and we have new receiving facility as well ramping up. We had guidance to get to $300 million in 2015 for frac sand, which we now expect to achieve this year. From a housing start, the growth in lumber and panel will be in line with the U.S. housing starts progression.

The Canadian lumber and panel space will continue to be largely dominated by the CN large originating franchise and by the CN much larger rail fleet, as well as by our reserve capacity entering in 2015. Moving to price and yield management, we find the overall environment to be constructive. The North American rail capacity remains snug in specific geographic network pockets or in specific equipment type or in specific time period of the year. On price, we continue to focus on earning inflation plus pricing, which we now define as 3%+ and focusing on upscaling marginal business, a discipline that pays dividend. On yield, we find that revenue per car and cents per RTM are very weak measure of yield execution.

For yield, we like to use the more decisive tool of revenue-to-cost ratio for customers' private car contribution per car day for CN-provided rail cars investment in our round trip revenue-to-cost ratio model for intermodal. In conclusion, on volume, we aim to grow faster than the economy at mid- to high-single-digit carload, getting our fair share of the emerging market. And on yield, we are focused on getting price value for our service and for our capacity to produce industry-leading operating margin. So here, I'll leave it transferred to Luc.

Luc Jobin (EVP and CFO)

All right. Thanks very much, J.J. Starting on page 12 of the presentation, let me walk you through the key financial highlights of our third quarter's performance. As J.J. outlined, revenues were up $420 million, or 16%, slightly over $3.1 billion. We handled an all-time record volume of nearly 1.5 million carloads in the quarter. Operating income was $1,286 million, an increase of over $200 million, or 19% versus last year. Our operating ratio was 58.8%. That's an improvement of one full percentage point over last year as we grew the business at low incremental cost. Now, this represents our best quarterly operating ratio performance ever. So it's beating the 58.9% achieved back in the third quarter of 2006 after adjusting for one-time fuel hedging gains recorded back then. Other income was $2 million on the expense side versus a $5 million gain in 2013.

Net income for the quarter is CAD 853 million, up 21%. Foreign currency translation contributed to a favorable impact on net income of CAD 22 million, or CAD 0.03 of EPS in the quarter. So the reported diluted EPS reached CAD 1.04, up 24% versus last year. The adjusted diluted EPS also stands at 1.04, in this case, up 21% versus the prior year. You'll recall that 2013's adjusted results excluded a deferred income tax adjustment relating to a change in provincial corporate income tax rate. Turning to page 13, our operating expenses were CAD 1,832 million, up 14% versus last year, or 11% on a constant currency basis. At this point, I'll refer to the expense changes in constant currency. First, labor and fringe benefit costs were CAD 580 million, an increase of 9% versus last year. This was the result of three elements.

First, an increase in overall wage cost of CAD 33 million, or about 7 percentage points. This is the product of a 3% wage inflation, overtime of about 3%, and a 5% increase in average headcount versus last year in the quarter. This was partly offset by higher capital work being performed in the quarter versus last year. Second element is a higher stock-based compensation expense in this quarter versus last year, which represents a CAD 37 million variance, or 7 percentage points. The third element is a favorable variance of CAD 21 million, or 4 percentage points due to lower pension and benefit expense. This was the result mostly of the pension expense being lower, which offset the increased benefit costs in the quarter. That pension tailwind is likely to shift to a headwind for 2015, however, since as we stand today, interest rates are lower than at the end of 2013.

Using the present discount rate for Canadian pension plans, which is just under 4%, and assuming it remained as such until December 31st, this would translate into approximately a $75 million increase in our pension expense for 2015. Turning to purchase services and material expenses, those were $378 million, an increase of 16%, or $52 million. The key driver here is the 15% increase in GTMs in the quarter. As such, repair and maintenance, crew, and other volume-driven expenses were up $19 million, as were material costs, up $23 million, while intermodal trucking and transloading expenses were up $10 million. On the fuel side, fuel expense stood at $446 million, up $37 million, or 9% versus last year. Higher volumes represented an increase of 14 percentage points in the quarter, while a lower price was an offset for 2 percentage points.

Our overall fuel productivity was very strong in the quarter, a 3% improvement, and a favorable variance of $12 million. Equipment rents were $83 million, $12 million higher than last year, and this is mostly attributable again to the higher equipment leasing costs and more car hire expenses. Casualty and other costs were $87 million, about $8 million, or 11% higher than last year. This was due to higher fees, taxes, and other costs, as well as accident-related costs, which were partly offset by lower costs relating to legal environmental expenses. Turning to free cash flow on page 14, we generated just over $2 billion of free cash flow in the nine months of the year and an increase of $738 million versus last year. Excluding proceeds from major asset sales, this meant over $1.8 billion of free cash flow.

This was the product of strong cash flow generated from operations, including favorable working capital. The working capital improvement is in part due to timing, so expect a lower benefit when we reach year-end. Cash used in investing activities was CAD 1.2 billion, and this was mostly the result of our capital expenditure program, where we have spent to date CAD 1,350 million, which was partly offset by major asset sales of approximately CAD 175 million. So we still have CAD 900 million of our capital program to complete in the fourth quarter. We have also completed earlier this month our 2013 and 2014 share repurchase program, returning CAD 1.4 billion of capital to shareholders after acquiring 22 million shares at an average cost just under CAD 63.

I'm pleased to report that today our board of directors has approved a new share repurchase program for 2014-2015, providing for up to 28 million shares to be repurchased, and we intend to devote approximately $1.7 billion of capital towards achieving this objective. Our record of continuous dividend growth at a compound annual growth rate of 16% over 18 years, along with the substantial share buyback over time, I think that record speaks for itself. We continue to invest significantly in the business while enhancing shareholder returns. On dividends going forward, we will be back to you in January, but our discussion with the board is very productive and should make our shareholders happy on what will be in 2015 our IPO's 20th anniversary. Finally, on page 16, our financial outlook. We're now in the home stretch, and we have very good momentum.

We continue to be optimistic with our prospects for the balance of the year. Our objective remains the same: to grow faster than the economy and to do so at low incremental cost. As we stated in our last earnings call, we believe that we have the potential in the second half of 2014 to slightly exceed the overall earnings growth achieved in the first half of the year, and that is of 17%. Given this perspective, we are maintaining our annual guidance. That is, aiming for solid double-digit EPS growth in 2014 over the $3.06 of adjusted diluted EPS in 2013. We're also affirming our guidance for free cash flow to reach the higher end of the $1.8 billion-$2 billion range, excluding major asset sales.

We're also maintaining our capital investment program at approximately $2,250 million, and if weather permits, we'll try to push the envelope even a bit more before winter sets in. So, Claude, the CN team remains as committed as always to delivering superior results, and we continue to unfold our strategic agenda for 2014 and beyond. Back to you.

Claude Mongeau (President and CEO)

Thank you, Luc, and still, the team will be there to deliver that outlook for you, and so we can report on it in January and start the 20th year of CN since our IPO on a good note. As Jim and J.J. explained, we're driving clearly end-to-end efficiency, service, and profitable growth, and we're doing it with quiet confidence, leading the way in the industry. We continue to have a very disciplined approach to our investments to increase our safety, increase capacity, boost resiliency, and do all of that with a view to stay ahead of the curve on all these key fronts. The goal is to create solid shareholder value for our customers and our shareholders, and that's what this theme of Railroader is all about. And with this, we will turn it over to you, Patrick, for the Q&A.

Operator (participant)

Thank you. We'll now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press star one on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from Fadi Chamoun from BMO Capital Markets. Please go ahead.

Fadi Chamoun (Equity Research Analyst)

Good evening, everyone, and congratulations on the good results. Maybe my question's more on the topic of the day, I guess. Claude, if you can give us your thoughts on the possibility of M&A in the rail sector, specifically among the class one railroads.

Claude Mongeau (President and CEO)

Yeah. I would have thought you had your share of an M&A discussion today, Fadi, but let me just quickly put my view. We won't comment on other railroad strategy, but we have been very consistent saying that we believe with six railroads in North America, the ability to provide service, the ability to grow organically, the ability to unfold an agenda of supply chain collaboration, and create end-to-end service that would allow the secular shift of growth ahead of inflation and solid pricing in the industry is the best going forward strategy. That's certainly our strategy at CN, and we haven't changed our view on that matter.

Fadi Chamoun (Equity Research Analyst)

Okay. Maybe one follow-up. Just sort of if there were to be hypothetically a merger in the industry, do you think that one merger is possible and that the industry can drive on with five Class I's, or is it more likely that if there were to be a merger, it would be the start of a round that will take the industry down to three or four participants?

Claude Mongeau (President and CEO)

I think the key word in your question, Fadi, is hypothetically. If there was a merger, I believe there will be network effects, and I believe it would likely start with the four railroads in the U.S. going down to two. That's just my own personal assessment, but I emphasize again, the key word is hypothetically.

Fadi Chamoun (Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Thank you. The next question is from Scott Group from Wolfe Research. Please go ahead.

Scott Group (Managing Director and Senior Analyst)

Hey, thanks. Good afternoon, guys.

Luc Jobin (EVP and CFO)

Good afternoon, Scott.

Claude Mongeau (President and CEO)

Good afternoon.

Scott Group (Managing Director and Senior Analyst)

So back to a record operating ratio, and I want to ask you if you think that is it realistic to do a full year at 60 or better than 60, or is the seasonality of one Q just make that unrealistic? And just along those lines on the topic of margins, with pricing seems like set to accelerate, but pension becoming a headwind, do you think incremental margins are better or worse in 2015 than 2014?

Claude Mongeau (President and CEO)

Clearly, the pension headwind is one headwind that's out there. As Luc said, the discount rate for Canadian pension plans at the moment is 3.9, 3.95, and we're two months away from December 31st. So it's looking like next year, most likely, this will be a headwind. But we have headwinds, we have tailwinds, we focus on what we can control, and we have guidance that we believe we can continue to improve our margin and achieve sustainable low 60 operating ratio, and that's what we're trying to deliver. If you look at our third quarter result, we had, again, a sub-60 operating ratio. It's not the first time in our history. We typically have sub-60 operating ratio in the third quarter. That's the best quarter to have that in the summer when things are rolling and all of our capital programs are happening.

In the fourth quarter, when the programs wind down, when winter comes in, the fourth quarter and the first quarter typically have much higher Operating Ratio just because of the accounting for capital work and also the weather and network effect that comes with operating conditions that are more difficult. So we're going to finish the year with a record Operating Ratio, it looks like, and we're going to continue to improve like we have the last few years. In the third quarter, with a onepoint improvement in EOR, we delivered 19% of operating income growth. We're pretty pleased about that. It's our strategy, it's working, and we will continue with it.

Luc Jobin (EVP and CFO)

Hey, Scott, it's Luc. Just, I mean, year to date, we're 62.2% in terms of OR. And if you recall, I mean, the first quarter was extremely, extremely difficult. So clearly, in my mind, I mean, there will be puts and takes, like pension as an example, but clearly, we think that the low 60s is imminently doable, and that's what we're striving for.

Scott Group (Managing Director and Senior Analyst)

Okay. Thank you, guys.

Luc Jobin (EVP and CFO)

Welcome.

Operator (participant)

Thank you. The next question is from Cherilyn Radbourne from TD Securities. Please go ahead.

Cherilyn Radbourne (Managing Director and Equity Research Analyst)

Thanks very much and good afternoon. I wanted to ask you a question on grain. Clearly, we've had a historic year in grain in Canada, so I was just wondering if you could update us on the state of the grain supply chain and address the reasons for some of the recent well-publicized instances where CN was unable to move the weekly volumes mandated by the government.

Claude Mongeau (President and CEO)

Yeah. Well, thank you for that question. Cherilyn, you're right. We did a record movement last year. It's about 15% more than our prior record for grain movement in Canada and 20% more than an average. The good news is the Canadian grain system is back in balance. If you look at it with a late harvest, the carryout for grain was less than 10 million metric tons when the orders started to pick up a couple of weeks ago. Our orders in August and early September were temporarily down a little bit to around 4,500 cars just because we were kind of waiting for the new harvest, and we had caught up with the supply chain. Grain companies took advantage of that short-term lull to do their annual maintenance. Rupert, for instance, for us, was down for 10 days for their annual maintenance.

Vancouver terminals were down also the same. And so you have all the signs of a supply chain that is back in sync, and it's actually quite good news for all. At the same time, while we're not quite moving the minimum order in council for a few weeks because it was increased on August 1st by 7% exactly when we hit balance back, we're actually moving record volumes. J.J. said it. We're up 50% on a year-over-year basis in the third quarter. And it's also important we have maintained our market share, which is slightly above 50% of all the grain that moves in Western Canada, and that's true of the last two months as well coming into the new crop.

We're doing our best to move all the grain that's coming our way and do so for Canadian farmers so that we can stay in balance and move the crop that's coming. If J.J. is right at 58 million tons or so, we should be able to move hard through the fall and winter, and we should probably be done in early spring, at the latest early summer, be back into a position where we're storing cars waiting for the next harvest.

Cherilyn Radbourne (Managing Director and Equity Research Analyst)

That's great. Thank you. That's my one.

Claude Mongeau (President and CEO)

Thank you. You're very disciplined about your one question, Cherilyn.

Operator (participant)

Thank you. The next question is from Chris Weatherby from Citi. Please go ahead.

Chris Wetherbee (Senior Research Analyst)

Thanks. Good afternoon. Maybe a question on the energy markets is just thinking about the recent volatility. I'm just kind of curious how to think about sort of the sensitivity of the crude business and the sand business in respect to that, and if you see the potential for any slowdown in either one of those commodities. It sounds like on the sand side, you're ahead of your expectations. Just want to get a rough sense of maybe how we think about moving into 2015.

J.J. Ruest (EVP and CMO)

Yeah. Thank you, Chris. I think roughly we're looking at you have the shale oil, shale gas, you have oil sand, and you have SAG-D. And the question really right now is more about the shale oil. I think the oil sand and the SAG-D, those production are much more difficult to curtail or change course. So shale oil, which is really Bakken or Eagle Ford or Permian, the last two have been in Texas, is where the question is more about at what price do you slow down. So some expert would say at $80, you might start slowing down these drilling activities in these shale oil areas, these three areas. At $70, you'd have major cutback. But broadly, and that would affect both the whatever you move out of there by crude, by rail, or by pipeline, and that would also potentially affect the frac sand.

So it's really when you look at shale oil in the area where people are drilling for shale oil, and we have the different list of all areas. What you're drilling for is where the question really comes in. So at this point, we just look at our frac sand as an indicator of what's happening in the shale oil area. Two of the three are up, one is slightly down, and right now we're not seeing, as we speak, in the third week of this quarter, we're not seeing things that really indicate something of a fundamental trend, either up or down, even in these three areas.

Chris Wetherbee (Senior Research Analyst)

Okay. That's very helpful. Thank you.

J.J. Ruest (EVP and CMO)

Thank you.

Operator (participant)

Thank you. The next question is from Walter Spracklin from RBC. Please go ahead.

Walter Spracklin (Canadian Research Management and Co-Head of Global Industrials Research)

Thanks very much. Good afternoon, everyone. I guess my question is on cost, and I know, Claude, you had indicated some of the seasonality impacts that exist when you move to fourth quarter. But given that, as I think it was J.J. or might have been as J.J. mentioned with the snug capacity, how might you be increasing your employee base or preparing for a winter where you've had somewhat full capacity utilization as you go into that what can be a troublesome period?

Claude Mongeau (President and CEO)

You know what? Whether it's investment in capacity, and Jim gave you a good rundown on this, or whether it's our crew base, we want to be ahead of the curve. We have a lot of attrition. We're hiring this year more than 3,000 people. The large majority of that is attrition of our employees who are coming to retirement. So really, being ahead of the curve, the worst that can happen is we're going to have to wait for a quarter before we can correct the situation. So we want to be hiring a little bit ahead of the curve so that we can handle the business appropriately. It's no secret that last winter was very difficult. We don't control weather, but we do want to do a better job this year, subject to the elements.

And so we have the locomotives, we have the crews, we will continue to invest ahead of the curve in terms of capacity, and we will do this to be able to serve our customers and keep our supply chains in sync.

Walter Spracklin (Canadian Research Management and Co-Head of Global Industrials Research)

Your employee base is where it should be right now, or do we see a big tick up in fourth quarter?

Claude Mongeau (President and CEO)

We continue to increase it, but Luc, maybe you want to give it a little bit?

Luc Jobin (EVP and CFO)

Yeah. I mean, if you look at the run rate through the third quarter, it's actually about 3% up. In the third quarter, we've been stepping it up. So I mentioned 5% is the average workforce that we were carrying through the third, and probably will be higher at that level, somewhere at that level in the fourth quarter. Remember, it takes about six months to get a conductor fully trained and on the premises, working productively. So we want to make sure that we fill the pipeline so we can get through the winter with as many crews as we can. So there's a little bit of a seasonal push that we're doing right now. If you look longer term, I'd say it's probably back down to the 3%, give or take 3% as a run rate is probably a good place to be.

But we also have handled a hell of a lot of traffic. I mean, labor productivity is up 10% in the third quarter, and it's been running about 8% year to date. So we have visibility on the business that's coming our way, and that's why, combined with the downside protection of attrition that Claude talked about, that's why we're taking this opportunity for renewal and beefing up a little bit for the winter challenge.

Walter Spracklin (Canadian Research Management and Co-Head of Global Industrials Research)

Perfect. Okay. Thanks.

J.J. Ruest (EVP and CMO)

We have a little buffer that we always keep, is we have transportation officers and officers ready to fill in when they have to from Chicago North. So we're building the right number of people, making sure we're just ahead of the curve. We know we have to hire for the first quarter and second quarter next year, so we're a little ahead. On top of that, we've got a buffer with the managers if we need to use them.

Walter Spracklin (Canadian Research Management and Co-Head of Global Industrials Research)

Perfect. Makes sense. Thank you very much.

Claude Mongeau (President and CEO)

Thank you, Walter.

Luc Jobin (EVP and CFO)

Thank you, Walter.

Operator (participant)

Thank you. The next question is from Brandon Oglenski from Barclays. Please go ahead.

Brandon Oglenski (Director and Senior Equity Analyst)

Hey, Claude, I hate to do it, but I want to ask one more in M&A because I heard there's a hockey team in Florida looking for a home, so I don't know if you guys have any insight into maybe a future in Quebec. But nonetheless, J.J., you talked about domestic intermodal, and I think you threw in some commentary about pricing competition in Canada. Can you elaborate a little bit more on that, and what does that mean for the outlook? Is it going to be more difficult to take share there just given what your competitors are focused on right now?

J.J. Ruest (EVP and CMO)

Well, our revenue on the domestic intermodal, which is a combination of Canadian domestic and cross-border, east and west, as I said, was flat in a quarter. We're not necessarily very satisfied with being flat, but it starts with the basic principle that yield is a critical component. So yield for the enterprise, yield for intermodal, and yield for Canadian domestic market. So we are pacing our effort in volume with what we believe is the price that is the right price to marketplace, and that's why right now in the third quarter we were flat, and it is what it is. It's a choice that we've made, and we'll see in the next few quarters how we manage that.

Brandon Oglenski (Director and Senior Equity Analyst)

Okay. Appreciate the color on that. Thanks.

Luc Jobin (EVP and CFO)

Thank you, Brandon.

Operator (participant)

Thank you. The next question is from Benoit Poirier from Desjardins Capital Markets. Please go ahead.

Benoit Poirier (VP and Industrial Products Analyst)

Yeah. When we look at your RTM, they were up 13% in the quarter. I was just wondering if you could provide more color on the expectation for Q4 and also more color about more specifically what we should expect on the grain and intermodal side given they are facing a tougher comp?

J.J. Ruest (EVP and CMO)

On grain last year, we were running very hard. We had a bit of a setback last year, as you recall, in October, when we had a mishap on the main line. So this year, if everything is okay and the network runs well and the winter starts a little late, we might actually be able to do better than last year on Canadian grain. That would be more of a kind of operation condition from a weather point of view, especially in December. U.S. grain last year was also very strong, but it could actually be as strong, if not stronger, this year because we've got a good crop in front of us. And our network in the U.S. is very fluid, and I want to emphasize we serve the U.S. farmer just as well and as fairly as the Canadian farmer. We serve both.

I think your other question was on the intermodal, Benoit?

Benoit Poirier (VP and Industrial Products Analyst)

Yeah. Whether you see the flow moving back to the western ports in the US, I was just wondering whether there was an impact as well?

J.J. Ruest (EVP and CMO)

So on the intermodal at the national side or the overseas, the business came in earlier this year. Customers wanted to bring their product earlier because of fear of issues on the US West Coast. We are over that surge, if you wish. As we speak right now, the whole network and the Canadian ports are very much in balance and very current. At the same time, we hear more and more, we read more and more that L.A. Long Beach has congestion issues at this point as we speak, which means that maybe in three weeks from now, we start to see some more diversion of traffic again if customers decide to load for Canadian port in Asia as opposed to keep loading for L.A. Long Beach.

We'll see if there is a bit of a pickup in November, which pickup would be related to congestion in L.A. Long Beach. To be seen.

Benoit Poirier (VP and Industrial Products Analyst)

Okay. Thanks, J.J., for the time.

Claude Mongeau (President and CEO)

Thank you, Benoit.

Operator (participant)

Thank you. The next question is from Allison Landry from Credit Suisse. Please go ahead.

Allison Landry (Senior Equity Research Analyst)

Thanks. Good afternoon. Thinking ahead a little bit, just given a couple of large contract wins this year in conjunction with some difficult grain comps, what are your initial thoughts for carload and RTM growth in 2015?

Claude Mongeau (President and CEO)

Well, we're not going to give you a better color for that, Allison, in January when we talk about the guidance for next year. But broadly speaking, as you would know, following the markets, there's no question that global trends are worth watching at the moment. China seems to be slowing. Europe, with Germany appearing to stall a little bit, it's certainly not a bright spot. And so global trends are not the best. There's been a bit of a deterioration over the last couple of months. The US economy is a bright spot, and we see that continuing. There's quite a bit of momentum, both durable goods, housing starts, the whole gamut of what needs to get moved in the U.S. So it's a mixed bag, but we're constructive.

There's going to be not as much as last or as 2014, but there's going to be a lot of grain to move. There's going to be good growth with everything that touches our U.S., North American types of flows, and perhaps uncertainty and sluggish in global offshore markets. We're monitoring everything, and we're broadly constructive, and we'll give you a better, more precise update in January.

Allison Landry (Senior Equity Research Analyst)

Okay. Thank you. That was a great answer. Thanks.

Operator (participant)

Thank you. The next question is from Steve Hansen from Raymond James. Please go ahead.

Steve Hansen (Managing Director)

Oh yeah. Hi guys. Good afternoon. Just circling back on the frac sand question just a little more specifically, given that you've gotten into your target here already, what kind of visibility do you have on new mines coming online in addition to some of the recent announcements around growth going forward? And I suppose as a follow-up to that, what kind of constraints do you still see in the system on the receiving terminal side? I know that's been a constraint up in Canada of late. Trying to get a frame reference for growth into 2015.

Luc Jobin (EVP and CFO)

Yeah. Steve, the growth will come from the plant, which are already on our line to fully ramp up to full capacity. Also, we need more destination terminal, either a bigger one or unit train one, which are being built as we speak. And there might be some other mine being built on the CN network in 2015. Time will tell. And then you have the fundamental demand for what's the price of natural gas? What's the price of WTI for shale oil? And what's the price of the liquid? Natural gas and liquid right now look promising. Shale oil, people have different views and different questions. But frac sand has still a long way to go. I mean, that's still very much an emerging market, and CN is in good position to you can have different views how big that is. The same thing with crude oil by rail.

You could have different views how big that is. But when you decide how big it is in your model, you could assure that CN will get its fair share of both these markets.

Claude Mongeau (President and CEO)

No question that we have a very strong origination franchise, but we match it in both frac sand and energy markets in general with an equally, if not stronger, destination franchise. So we see those markets as constructive.

J.J. Ruest (EVP and CMO)

Yeah. People like our destination franchise. They also very much like our Chicago solution. Now, obviously, frac sand is a big interline business, and the interline with CN is by and large in Chicago, and we can get in and out of Chicago very fluidly.

Steve Hansen (Managing Director)

Very helpful. Thanks.

Claude Mongeau (President and CEO)

Thank you.

Operator (participant)

Thank you. The next question is from Bill Greene from Morgan Stanley. Please go ahead.

Bill Greene (Managing Director)

Hi. Good afternoon. I just want to return to the revenue question, and that is when we look at the long term here, at least in 2014, CN and CP, for that matter, the Canadian rail market's grown quite a bit faster than the U.S. rail market. And maybe some of these things, Claude, that you just referred to in terms of structural opportunities. But I'm curious if you can sort of talk about how you think about that long-term market, if you thought about the total addressable market. Is it fair that it could continue to grow in the double digits, or do you feel like this is a unique year and we're really more of a mid to high single-digit kind of sustainable growth rate for the revenue? Thanks.

Claude Mongeau (President and CEO)

Well, I think Bill, you just have to look outside the window at the global economy, which is slowing, and you have to look at all the key markets. Grain, we're coming off of a 100-year crop. So I mean, over the next two years, there's $170 million or so of grain movement in Canada to go back to an average crop. Now, an average crop is just that. It's an assumption, but there's no question you're starting off with a very high base in grain. Some of the export markets that are tied to global activity, whether it's coal or potash, are in a slower growth to flat mode. Energy markets are constructive and will continue to do so unless prices continue to decline as they have recently. And we have a good North American economy supporting the other commodities, whether it's automotive, forest products, industrial products, intermodal.

A lot depends on innovation, supply chain thinking, our ability to grow against market share, to grow market share against trucks to help our customers win in the market. Our revenue model has not changed. You can decide on the economy and then add a little bit more volume as we outpace the economy on a volume basis and add pricing a little bit ahead of inflation. You certainly get good growth, but in my model, you don't get to double-digit growth unless you have a much stronger economy or something that turns around.

Bill Greene (Managing Director)

Okay. Very helpful. Thank you.

Operator (participant)

Thank you. The next question is from Thomas Wadewitz from UBS. Please go ahead.

Thomas Wadewitz (Senior Equity Research Analyst)

Yeah. Good afternoon. I have a question for you, J.J. I know you've had some on the crude by rail topic, but wanted to see if you could give us a sense of what crude by rail carloads might be in 2014, just a kind of a framework, and then how you might think about that number for 2015 as kind of a framework. And then on sensitivity, is there a level? You said the oil sands production is pretty robust. You have to fall pretty far to see that reduced, but how far would it fall to maybe put risk at your 2015 expectation?

Luc Jobin (EVP and CFO)

Well, we're not providing at this point 2015 specific target carload for crude by rail. We think our business will ramp up significantly. That's because of customers' investment either in loading facilities, unit train, or loading facilities, many of them being unit train also as well. Also on the belief that the cars that will come out of the shop, we're talking the new cars and customers that we're dealing with, we'll have them early enough in the year for everything to pan out. Regarding the price of WTI and Brent and the Western Canada Silicon and all these spreads, many of these capital investments at origin destination fleet are quite significant.

And so once you start the momentum going, whether the price is up $5 or down $5, I don't think the big oil company will start to change their strategy the same way as they don't when they invest into pipelines. So I think the issue is more of a midterm than short-term, unless, as I said earlier, when it maybe relates to shale oil where will you drill a new when you start drilling again for a new hole at $70, maybe not. But once you get going on oil sand, you keep on going. But we're not providing specific numbers, but we're in position to capitalize on whatever that is out there. Whether it's big, it'd be big for us too.

Claude Mongeau (President and CEO)

And we're clearly ahead of our own guidance on the energy markets, Tom, and continue to see good momentum.

As I said, we have an extremely strong franchise both at origin and destination. As J.J. said, shale plays in the U.S., the fast replenishment drilling may be more susceptible to short-term pricing. Long-term oil plays in Western Canada, not in the short term. It would be more long-term, the pace of investment and how that pans out 3, 5 years from now as opposed to next year. They got the commitments, the capital is in the ground. They will move what they produce.

Thomas Wadewitz (Senior Equity Research Analyst)

I mean, how far out is that timeline? That's more than a year. That's actually a couple of years back.

Claude Mongeau (President and CEO)

Oh yeah. For heavy oil sands, you're talking multi-year time frames for these capital deployments. So 3, 5, 7, 10 years?

Luc Jobin (EVP and CFO)

Yeah. What's constructive is more and more you hear executive or CEO of a larger oil producer or oil buyer who talks about crude by rail being a permanent part of their portfolio, how they get product to market, and how they're willing to continue to support major capital investment or to do take or pay for product with people who make these capital investments to keep that going. Because obviously, there is a challenge when it comes to building pipeline or getting the permitting, and there's also a challenge where the pipeline gets you in terms of what kind of net back you get there. And I think the asset test of crude by rail for an oil producer or an oil buyer has been passed. We've made that test more than one time this year and last year. So the market sees the value of that transportation mode.

Claude Mongeau (President and CEO)

Especially at the margin because I mean, the toll for the pipelines that are not yet built is obviously much higher than people thought when they started the approval price process six years ago. So as you move, as the price of pipeline goes up, as we move more and more into under-diluted mix or neat bitumen, we have a chance to be price competitive, and we certainly provide max market access. And as long as we can do it safely, we see a long-term trend for CN to be able to help market access to energy markets across North America.

Thomas Wadewitz (Senior Equity Research Analyst)

Okay. Just to be clear, you see very little sensitivity of production in the next year or two, three years, the current oil prices? You just think there's a big long-time lag, and so very little sensitivity to decline in oil prices?

J.J. Ruest (EVP and CMO)

Canadian heavy crude has different sensitivities than shale oil. It's a different model.

Luc Jobin (EVP and CFO)

Yeah. Talking about Western Canada.

Claude Mongeau (President and CEO)

Yeah.

Luc Jobin (EVP and CFO)

Thanks for the time. I appreciate it.

Claude Mongeau (President and CEO)

Thank you, Tom.

Operator (participant)

Thank you. The next question is from Turan Quettawala from Scotiabank. Please go ahead.

Turan Quettawala (Director of Equity Research)

Yes. Good afternoon. J.J., could you give us a sense of what % of your contracts on crude by rail are take or pay?

J.J. Ruest (EVP and CMO)

I will not do that. I think the question maybe you guys should ask is who has a take or pay with who? There is take or pay, but maybe it's more along the line of those who actually invest major capital. It's an industry that works along the line with the pipeline industry. People commit to it. They commit to investment. I think that there may be different ways to maybe understand what this is all about.

Turan Quettawala (Director of Equity Research)

Okay.

Claude Mongeau (President and CEO)

The underwriting tends to be with the loading facility, Turan, and we furnish linehaul and locomotive and resources to commit to market. So all of these supply chains are backed by very significant investments on the part of those who are setting them up: cars, loading facility, unloading facility, and the railroads are linking the two.

Turan Quettawala (Director of Equity Research)

Okay. Fair enough. And I guess maybe one more quickly on intermodal volumes. So over the last three years, I mean, CN has done extremely well here on the intermodal side. I think your average RTM growth is about 9% or so. Now, looking into next year, you're obviously going to have some tough lap periods on the international side, and the domestic business maybe gets a little bit more competitive. So I guess my question is, J.J. or Claude, maybe in terms of your growth in intermodal over the next one to two years, can you still do sort of significantly above GDP as you've been doing over the last few years, or do you think it'll sort of start going closer to GDP?

Claude Mongeau (President and CEO)

Well, lapping tough years is our usual challenge, Turan.

Turan Quettawala (Director of Equity Research)

I know. I know.

Claude Mongeau (President and CEO)

We've been at it for 15 years, and we feel good about our prospects, and we'll provide you with more detailed guidance in January. There's no question. Just the sheer size of the initiatives we have in place and the carryover effect into next year, we're broadly constructive that we will continue to grow, and clearly, we will grow faster in the economy. It's just a question of putting that in context, assessing what the economy will be, and lining up all the initiatives, and we'll do that in January.

Turan Quettawala (Director of Equity Research)

Okay. Thank you very much.

Operator (participant)

Thank you. The next question is from Ken Hoexter from Merrill Lynch. Please go ahead.

Ken Hoexter (Managing Director and Senior Equity Research)

Wonderful. Good afternoon. And Jim, great job on the operational performance. But when you think about heading into winter and next year and given the growth that you and Claude and J.J. are talking about, can you talk a little bit more about access to locomotives? And I know you threw out some numbers on the prepared comments, but talk about, given that we've got one manufacturer kind of disappearing at the beginning of next year, the ability to get access to those locomotives and what size and amount are you planning on bringing on board?

Luc Jobin (EVP and CFO)

Okay. Ken, thank you very much. So it's always fantastic to take a look at what was happening. We've got one manufacturer, and it looks like late 2016, early 2017 before the second one comes in, and we're planning for 2017. So when we built in our model and growth and how the efficiency of the locomotives, we've got securement for 120 as we labeled, but we also have options to bring in more so that we can make a decision over the next 12 months to decide exactly what the final number will be. But I think we're set up in the right position. We've brought in locomotives for this winter. We got some more coming in January and through the rest of the year next year. Committed, and we have an option to build on that 120, Ken.

Claude Mongeau (President and CEO)

It's important, Ken, because some of these new unit train service in energy markets in particular, they tend to be very locomotive intensive. So you get a lot of good growth, but you have to have the ability to match it up with the right locomotive power. And that's exactly what Jim and Luc have been working on. And I feel very good that we have our base commitments lined up, and we have options to get us through well into 2017, 2018 when we will hopefully have two manufacturers back in the market serving Class 1 railroads.

Ken Hoexter (Managing Director and Senior Equity Research)

Claude, do you think that's going to be an issue into next year in terms of access to the locomotives, or is the industry prepared?

Claude Mongeau (President and CEO)

Well, you know what? Last year, locomotive power was very, very tight across the entire North American industry. That's a function of velocity with the congestion that we face with winter. You assume a more normal winter. You assume continued preparation like we have discussed and all the investments we're making to make sure that we're fluid. We feel good about where we stand. We certainly are resourcing to be able to handle the growth that we see in front of us.

Ken Hoexter (Managing Director and Senior Equity Research)

Great. Appreciate the insight. Thanks, guys.

Claude Mongeau (President and CEO)

Thank you, Ken.

Operator (participant)

Thank you. The next question is from Steven Paget from FirstEnergy Capital. Please go ahead.

Steven Paget (Director of Institutional Research)

Good afternoon, and thank you. Jim, I recall in Chicago that you asked rhetorically, "What is it about CN?" and gave a good answer. In light of your operating ratio and other results today, I think people might want to hear that. Would you mind repeating that today?

Luc Jobin (EVP and CFO)

Geez, I said so many words. I'm not absolutely sure, but I think it's basically the people. I've got one heck of a strong team out there. So you've got to have the right leadership from the very top of the house. And I think we've got a CEO who understands how to balance what we're trying to deliver, not having a short-term view. He's got a long-term view of building this company and keep on growing. But people out in the field that we've got, I've got a lot of bench strength, whether it's Mike Cory, L. West, whether it's Jeff Liepelt, John Orr. I could go through them. It's about we've got a lot of experience from the ground up. These guys have all started switching cars, cleaning locomotives, and they know their business.

We've got a strong team, and we're driven with one thing, and that is to be able to move a boxcar as fast as possible. So the agenda is clear. We want to get ahead of the game, and it's the team that does it.

Claude Mongeau (President and CEO)

I would say, Steve, just to add my own little sprinkle on Jim's rhetorical question, how do people come together? The chemistry, the cross-functional approach, the ability to be nimble but connect the dots, the vision, the right agenda, all those things come into place. It's a people business. It's all about execution. We think we have good momentum, and we'll carry through and continue to deliver solid results for both our customers and shareholders.

Steven Paget (Director of Institutional Research)

Well, thank you both. That was my question.

Claude Mongeau (President and CEO)

Thank you so much.

Luc Jobin (EVP and CFO)

Thank you.

Operator (participant)

Thank you. The final question will be from David Newman from Cormark Securities. Please go ahead.

David Newman (Senior Partner and Director of Equity Research)

I'll wrap it up here, guys. So God forbid, but we've got another potential tough winter according to the Farmers' Almanac. Not sure about the crystal ball, but obviously your network in Chicago advantage loomed large in the congested North American framework. And certainly, some of the earlier calls today, they talked about gridlock. And I have to think that given our trip down there recently, that you can leverage this for market share gains and pricing volumes, etc., especially in crude and intermodal. I mean, how can you actually quantify the advantage in terms of the top line, your ability to leverage that asset down there? Because obviously, it's quite fluid around that Chicago, and it's showing up in all the operating metrics as well.

Claude Mongeau (President and CEO)

Let me, Jim, can add a little bit, and J.J. might want to pitch in, but I think you put it right. It's all about connecting the dots, and it's a multifaceted advantage that we have. From a resiliency standpoint, we saw it last year. The ability to connect our own network from east to west around Chicago is just huge. It's a great, great asset. We worked hard. It took us many years to negotiate, many years to get the approval, all the work to get it done in terms of integration. And we're reaping the benefit of all this hard work in terms of resiliency and service. It's also a huge opportunity from an asset standpoint and efficiency standpoint. We don't have locomotives waiting on either side. We don't have recrews.

We are able to deploy our assets and address issues elsewhere in our network because it's not like we don't have issues elsewhere. And so it's cost, it's revenue, it's service, and it's who we are. And we think it's a great advantage. How to quantify that separately from the guidance and the success we've been having over the years is a bit difficult. This is why we're growing faster. This is why we're growing at low incremental cost. This is why we bounce back quicker when we face adversity. This is why we're back in sync across all our supply chain at the moment. This is why we're in business. It's a big asset.

Luc Jobin (EVP and CFO)

Yeah. No, for sure.

David Newman (Senior Partner and Director of Equity Research)

Just the segments, maybe, J.J., where do you see it the most? Does it show up in crude by rail for the interchange down to the Gulf Coast? Does it show up in intermodal? Where does this actually show up the best for you guys in terms of vantaging that asset?

J.J. Ruest (EVP and CMO)

I mentioned some of that earlier. So the frac sand, there's a lot of interline business, crude, which is also a lot of interline, intermodal, obviously, because you want to go south, maybe Memphis or east to Detroit, lumber long haul. If any kind of these different industries are trying to go to Chicago, I think the EJ&E Ring Road is a lot more attractive to you than a mega merger root canal.

David Newman (Senior Partner and Director of Equity Research)

Right.

Claude Mongeau (President and CEO)

Maybe, Jim, you want to talk about we're just finishing cutting over, I think, this weekend, Kirk Yard, in our basically upgraded plan, how we're going to use that to build resiliency.

Jim Vena (EVP and COO)

Absolutely, Claude. So when we started on the EJ&E, we looked at Kirk Yard. And to tell you the truth, it's been sort of our secret little advantage within Chicago. We've got a hump yard now that can handle the traffic. We have 25% of our business touches Chicago. So that's the first piece is we got to be able to get through Chicago. And we spent hundreds of millions dollars to make sure that we've got infrastructure to be able to handle it. So now we've got Syminton, and we got this triangle of hump yards: Syminton, Mac Yard, and Toronto, and Kirk Yard. And what we've been able to leverage, and we will continue to leverage, is Kirk Yard can build blocks to bypass Syminton. We have our length of haul then further, and the same thing with Winnipeg coming south.

We help with the frac sand business that's growing. So when you put in the mix that you got 25% of our business touches Chicago, you've got a new hump yard that is able to handle more than what we normally have to handle. We've got a little bit of buffer there. Helps Symington and helps Winnipeg. I think it's a win-win for us. It'll help us through the ebb and flow that you normally get with traffic coming into interchange.

David Newman (Senior Partner and Director of Equity Research)

Well, that's terrific. Thanks, guys. And let's hope we don't get that winter. Appreciate it.

Claude Mongeau (President and CEO)

Yeah. We're excited. You got our vote.

Luc Jobin (EVP and CFO)

Absolutely.

Claude Mongeau (President and CEO)

Okay.

Luc Jobin (EVP and CFO)

Thank you.

Claude Mongeau (President and CEO)

Well, thank you. That was a good closing question for this call. We're very, very pleased. We have a lot of momentum. If the economy continues to be constructive, we should have very solid guidance when we meet you again in January. And Luc gave you a little heads-up or a little hint about our focus following this share buyback that we just announced today about our intention to look at the dividend payout ratio and continue to reward our shareholders. So that's the strategy. The game plan is working. The team is firing on all cylinders. And we look forward to have you on the call again at the end of the year.

Luc Jobin (EVP and CFO)

Thank you very much.

Claude Mongeau (President and CEO)

Thank you.

Luc Jobin (EVP and CFO)

Thank you.

Operator (participant)

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.