Canadian National Railway Company - Q3 2016
October 25, 2016
Transcript
Operator (participant)
Welcome to CN's Third Quarter 2016 financial results conference call. I would now like to turn the meeting over to Mr. Paul Butcher, Vice President, Investor Relations. Ladies and gentlemen, Mr. Butcher.
Paul Butcher (VP of Investor Relations)
Thank you, Patrick. Good afternoon, everyone, and thank you for joining us on our third quarter 2016 earnings call. I would like to remind you of the comments already made regarding forward-looking statements. With me today is Luc Jobin, our President and Chief Executive Officer, Mike Cory, our Executive Vice President and Chief Operating Officer, JJ Ruest, our Executive Vice President and Chief Marketing Officer, and Ghislain Houle, our Executive Vice President and Chief Financial Officer. In order to be fair to all participants, I would ask you to please limit yourselves to one question. I will be available after the call for any follow-up questions. It is now my pleasure to turn the call over to CN's President and Chief Executive Officer, Mr. Luc Jobin.
Luc Jobin (President and CEO)
All right. Thank you very much, Paul, and let me in turn welcome all of you to CN's third quarter call. As Paul indicated, the whole team is here today, and we're very pleased to report another outstanding quarter, one that has seen us continuing to advance our performance in terms of safety, in terms of service, and in terms of productivity. These results demonstrate how nimble we are at adapting to today's reality, seizing opportunities to deliver bottom-line results whilst positioning ourselves to meet tomorrow's prospects. Our revenues were down 6%, while RTMs declined by 3% in the quarter. These results were reached while we were still experiencing the lingering effects of corrections in major commodity sectors, combined with a sluggish economic growth and a delayed harvest of the Canadian grain crop.
JJ will give you more color on this in a minute. In terms of operating performance, we clocked in a record-breaking operating ratio of 53.3%. It's difficult to achieve this level of results and to do so without compromising our long-term goals, so kudos to the entire team. Our steadfast focus on safety, combined with balancing operational and service excellence, came through again in this quarter. Mike will give you details on how we fared across all our key metrics. We continue to deliver superior service by leveraging our collaborative supply chain approach. This quarter, we earned an adjusted diluted EPS of CAD1.25, only 1% lower than in the third quarter of last year. We also generated free cash flow of over CAD1.7 billion year to date, which is in line with last year's results.
Ghislain will expand on our financial results. I will now turn it over to the team for their comments, starting with you, Mike.
Mike Cory (EVP and COO)
Well, thank you very much, Luc, and I'd like to thank the entire CN team for achieving outstanding results in the quarter. Our operating team of employees and leaders are top of class, and they strive each day to improve our service offering. So with that, let me turn it over to the results. As you can see, we had a solid quarter against some very tough comparables. Those comparables continue to get tougher when you look ahead, and especially considering the exceptionally mild winter we had last year. Our mandate continues to be a strong focus on executing the operating plan. We take a strong position on maximizing use of our assets in line with ensuring our service offering is what our customers need.
I'd like to touch on three key core areas that remain our team's focus moving into Q4, and these are safety, service, and productivity. Safety is fundamental to our success at CN, and our safety performance this year remains strong, but we're never comfortable to sit on that front. Year to date, we've seen major improvements in both main track and non-main track accidents. Our FRA accident ratio has improved from 2.06 year to date in 2015 to 1.32 year to date in 2016. As you can appreciate, this improvement in our FRA accident ratio has resulted in a corresponding reduction in the costs associated with train derailments. However, our FRA injuries have been flat year over year, and that leads us to engage deeper in order to realize the improvement that we must have.
Our balanced approach to investment, from infrastructure and technology to people and assets, creates the platform our team uses to leverage innovation from the ground up. Every day, we work to balance the core operating levers you see on this slide. This drives our operational and service excellence mandate. One metric I'd like to highlight is our train productivity. We were able to increase the GTMs per train mile by 6% while improving both our car velocity and our train speed. This illustrates our ability to run heavier, longer trains faster than the year before. This ensures we drive out cost, but not at the expense of speed or service to our customers. Let me share a few examples of this with you.
With the bumper grain crop coming off the field, we're able now to run 12,000 ft, 28,000 ton grain trains from country origins to port. This decreases overall labor cost while increasing fuel efficiency and reliability in moving the grain. We've also increased the number of long trains operating in the northern Ontario segment, which is a 1,200 mi segment between Winnipeg and Toronto. We've done this by utilizing strategically placed long-siding investments, adding distributed power to increase train size, and adjusting train schedules for customers' needs and precision needs. We've also increased the size of our potash trains by 25% from Saskatchewan to Nova Scotia. That's over the same segment. So with these improvements in train size, we're still able to protect premium service for our customers.
Our investment in infrastructure over the key Winnipeg to Chicago corridor, including the double track over the Hamilton Hill in Wisconsin, has allowed for double-digit productivity increases over the last two years. Car velocity, locomotive productivity, train speed, and train load have all sequentially improved. This foundational view on productivity and service has prepared us well for the future growth of the company. In our line of sight is the bumper grain crop in Canada, in both Canada and the U.S. We're handling and ready to handle more of the crop that has been produced. In order to deliver the efficient, reliable service the supply chain requires, we've recalled employees back to work, we've repaired grain cars and deployed them close to our customers, so they're ready for use after harvest.
We have available locomotives in position as needed, and we've made and continue to make strategic investments in infrastructure across our network. Over the last few weeks, we achieved a record weekly performance for grain car spotting on more than one occasion. Coupled with this, we continue to work in tandem with our partners in the supply chain to maintain fluidity through the fall peak period. Now, winter's already started in the prairies, and this has contributed not only to a delayed harvest, but to some severe storms on the West Coast, which has produced excessive rain. As I stated earlier, we know our operating comparables will get tougher going forward for both Q4 of this year and Q1 of next year, as a more normal winter is forecast on our network. But the operating team is fully focused on executing the plan.
And as I mentioned in the last quarterly results call, it's not about doing one thing well, it's about working all the levers in a balanced way. And I know we're gaining market share by following these core principles. So before closing, I want to speak about the importance of leadership and development. Our operating leaders are committed to developing our people and growing our bench strength. We've been out and will continue to be out across the property, developing our future leaders on the principles we believe in, as we know they bring us success. Ensuring we teach these lessons is something we hold each other accountable for, and it shows as our future leaders become leaders of the day. So in closing, it's about teamwork. Innovation and empowerment allows the greatest resources that we have here at CN, our people, make the difference they do.
As a result, I'm convinced we will create many innovative initiatives that will allow us to continue to excel on our operational and service excellence agenda well into the future. With that, over to you, JJ.
JJ Ruest (EVP and CMO)
Well, thank you, Mike, and great job from the operations team on that 53.3. The third quarter revenue was down 6.5% or CAD 208 million from last year, mostly due to four commodities and from the application of the cheaper fuel surcharge. Carload was down 3.4%, and revenue ton mile was down 4.4%. US coal, crude by rail, frac sand for drilling, and sulfur from energy represented about CAD 150 million of the revenue decline. The fuel surcharge application lowered our revenue by another CAD 74 million.
On the positive side, we had volume benefit from U.S. housing start, from some U.S. economy growth, from some organic market share gain, U.S. grain volume, and it feels like volume has come off the second quarter bottom in most segments. The all-in same-store price on same-store sales was up 2.2%. Same-store price on same-store sales was up 2.8% when excluding regulated grain and excluding index-based legacy contracts. The Canadian dollar impact was neutral this quarter. I will now go to the result and outlook on some selected segments. Housing start drove our lumber and panel revenue by up almost 10% versus last year. Our lumber, lumber shipment to the U.S. increased 11%, while export car load to Asia were flat. The softwood lumber agreement expired October 12, and our car orders for lumber have remained solid during the last four weeks.
Moving to customers' purchase of motor vehicle, our automotive revenue was up about 3% in Q3, following a slow start to the quarter. We now handle a bit more than 60% of all motor vehicle purchased by Canadian consumers. Our supply chain services continued to earn on volume. We're expecting some further cargo growth in automotive, despite the overall flattish demand for the vehicle in North America. On crude by rail business, it dropped 50% versus last year, and our frac sand for drilling was down 30%, but both have sequentially stabilized from last quarter, and we could experience some improvement. Intermodal revenue was down 4%. Domestic volume was weak, mostly in wholesale full load, especially in cross-border trade. International volume was challenging as well.
Rupert had resumed its trend for sequential growth in July, but Hanjin filed for bankruptcy in the end of August and stopped its weekly service. Since then, other shipping lines are positioning to take a bigger role in the Rupert gateway. In Vancouver, we recently picked up a shipping line contract, which will come into effect the first of 2017. On the East Coast, Halifax position in the intermodal market is stronger. The volume growth was about 30% in Q3. We've handled the first small rail volume out of Port of Mobile, and in the coming months, we have planned to add another intermodal ramp in the U.S. Midwest. Our grain operation was running very - is running very smoothly, and, my operation partners have described that, described that earlier. US grain revenue was up 20% in the third quarter, driven by corn and soybean export.
Canadian grain revenue was down 5% due to the quite small inventory left from last year and a later harvest than usual of this year's crop. The long-awaited Canadian crop is now available since the end of September, and we are now running at record weekly carload for Canadian grain. The near future look bright for our grain business, given the bumper crop on both sides of the border. We anticipate upside in grain to the third quarter of 2017.... Staying with bulk commodities, potash produced an incremental 10% and sulfur from oil and gas declined 40%. The fourth quarter outlook for potash car loading is positive, including export via New Brunswick on the East Coast. Overall, coal revenue was down 32% in the quarter, mostly from decline in domestic terminal coal. Our U.S. coal revenue was down 40%.
Canadian met coking coal, which is a coal for making steel, was up 13%, but the market is at a cyclical crossroad. One of the idle Canadian met coal in CN will restart this quarter. Petcoke export from the oil sands from Fort McMurray resumed in the third quarter, producing some positive for the upcoming fourth quarter. The Minnesota iron ore mine, United Taconite, has reopened in mid-August, and the Cliffs and Empire Mine, also producing iron ore, closed permanently in October. Last quarter, our combined iron ore, rail, dock, and vessel business produced flat revenue versus last year, which is a better omen for the coming quarters. In closing, the sequential quality revenue trend has hit bottom last summer and is starting to inflect mildly upward.
The fuel surcharge application will remain somewhat of a revenue headwind, as the on-highway diesel index will likely be below CAD2.54 per gallon that we had last year at the same time. The pricing environment remain influenced by the excess capacity in all transportation mode, but we expect to continue to produce pricing above rail inflation. On that point, it is useful to remember that the AAR all-inclusive less fuel index was below 2% in both 2015 and 2016. Finally, it is useful to reflect also on CN some key business strength of our model. We have a very diversified book of business. We are connecting North America to the world market by our three coasts, easily pivoting around Chicago with the easy uni-ring railroad advantage.
We are providing services conceived with the customers in mind, and we do have the industry lowest operating ratio, and we've had that for quite a number of years. Gis, I'm gonna pass it on to you to do the CFO review.
Ghislain Houle (EVP and CFO)
Thank you, JJ. Let me review the financial highlights of our solid third quarter performance. Revenues were down 6% at slightly over CAD3 billion. Fuel lag on a year-over-year basis represented a revenue headwind of CAD 36 million or CAD0.03 EPS, all driven by a favorable lag experience in the third quarter of 2015. Operating income was down 5% versus last year at just over CAD 1.4 billion. Our operating ratio came in at 53.3%, an all-time record for CN, representing an improvement of 50 basis points over last year. Net income stood at CAD 972 million, or 3% lower than last year, with diluted earnings per share of CAD 1.25 versus CAD 1.26 in 2015, down by 1%.
The impact of foreign currency on net income and earnings per share was negligible in the quarter. In the third quarter, we recalibrated our effective tax rate from 28% guidance, or let me be a little bit more precise, 27.5%-26.5% full year 2016, driven by more earnings in Canada versus the U.S, which caused the third quarter effective tax rate to be around 24.5% due to the six-month catch-up. Turning to expenses, we definitely made progress in the quarter in terms of safety, productivity, and cost management, while continuing to provide superior service. Operating expenses were down 7% versus last year at just over CAD 1.6 billion, driven by lower headcount in light of a weak volume environment.
As the average exchange rate in Q3 2016 was essentially the same as last year, both actual and constant currency variances are the same. Labor and fringe benefit expenses were CAD 495 million, 16% lower than last year. This was mostly the result of lower wages and pension expense. Wage costs decreased by 6%, as wage inflation was more than offset by a reduction of about 8% in average headcount for the quarter versus 2015. Pension expense was CAD 49 million favorable, and we still expect a pension tailwind of approximately CAD 180 million this year, mostly driven by the adoption of the Spot Rate Approach to estimate current service costs and interest costs. Purchased services and material expense were CAD 379 million, 5% lower than last year.
Lower volumes and our continued cost management initiatives helped reduce our trucking and transload expenses by CAD 10 million, and material repairs and maintenance by another CAD 10 million. Also, our solid safety performance contributed to lower accident costs by CAD 7 million of the overall favorable variance. These elements were partly offset by lower capital credits for CAD8 million and increased outsourced services by also CAD8 million. Fuel expense came in at CAD 269 million, or 11% lower than last year. Price was favorable by CAD 13 million, and lower volumes accounted for an additional CAD10 million reduction. Fuel productivity came in at 1%, but when you exclude an inventory adjustment in 2015, it was up 2.9%. Depreciation stood at CAD 312 million or 9% higher than last year. This was mostly a function of net asset additions.
Casualty and other costs were CAD 68 million, which was CAD 5 million lower than last year, mainly attributable to a favorable settlement of a claim with CP for CAD 25 million, essentially offset by an increase in provision for bad debt related to the Hanjin bankruptcy for CAD 20 million. Turning to cash, we generated free cash flow of CAD 1,743 million through the end of September, which is essentially flat versus 2015. Capital expenditures were slightly above CAD 2 billion, or CAD 35 million lower than the same period last year. Finally, our 2016 financial outlook. Given our solid performance in the third quarter, we are raising our earnings outlook for 2016, now expecting adjusted diluted EPS to be up approximately 1% versus last year's adjusted diluted EPS of CAD 4.44.
The economic environment continues to be uncertain and volatile, and we believe that energy market-related volumes, namely crude and frac sand, hit the trough in the second quarter. Although sequentially positive in the third quarter, we still expect them to remain below last year. On a positive note, we continue to see relative strength in lumber and panels and automotive, while grain in both Canada and the U.S. looks to be strong. We still expect carloads to be lower than last year in the mid-single digit range, while pricing will stay ahead of inflation. We assume that the Canadian to U.S. dollar exchange rate will continue to be in the range of CAD 0.70-CAD 0.80 cents, while fuel prices using WTI will now be between CAD 40-CAD 50 per barrel.
These factors still make it a challenging environment for us, including tougher cost management comparables for the fourth quarter on a year-over-year basis and more normalized winter operating conditions versus unseasonably warm weather last year. With respect to capital investments, we continue to reinvest in our business to support the safety, superior service, and efficiency of our network. We are keeping our capital investment program at CAD 2.75 billion for the year, and we have been deploying this capital very productively, generating mid-teen unit cost savings. Furthermore, we continue to deliver sustainable value for our shareholders and reward them with consistent dividend and share buyback returns. CN's annual dividend was increased by 20% earlier this year, and we are moving towards a 35% dividend payout ratio.
In addition, we are completing our current CAD 2 billion share buyback program on October 29, and I am pleased to announce that our board of directors have just approved a new Normal Course Issuer Bid program for the repurchase of up to CAD 33 million shares and approximately CAD 2 billion to be completed over the next 12 months. Over the past 5 years, CN has repurchased CAD 135 million shares, returning approximately CAD 8 billion to its shareholders. So despite a continued challenging environment in 2016, we remain focused and committed to managing the business by protecting earnings, while strongly positioning ourselves for the future and long-term competitiveness. On this note, back to you, Luc.
Luc Jobin (President and CEO)
Thanks, Ghislain. So to recap, as we look ahead, you heard JJ describe how our volume environment is shaping up. Still sluggish, but improving sequentially in a number of markets. Mike, I think, illustrated very well how the operating team continues to drive our agenda of operational and service excellence, leveraging innovation and staying true to our objective of providing quality service to our customers. Ghislain shared with you our updated annual outlook and the new share buyback program. So on that note, we'll be happy to take your calls.
Operator (participant)
Thank you. 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 Scott Group from Wolfe Research. Please go ahead.
Scott Group (Managing Director and Senior Analyst)
Hey, thanks. Afternoon, guys.
Luc Jobin (President and CEO)
Afternoon.
Ghislain Houle (EVP and CFO)
Afternoon.
Scott Group (Managing Director and Senior Analyst)
So I think I heard you say a couple of times talk about inflation plus pricing. Wanted to ask you, though, if we see an uptick in inflation next year, are you still confident that you can see an uptick in your own pricing and see inflation plus pricing next year, too?
JJ Ruest (EVP and CMO)
Maybe I'll pick up that one. It's JJ speaking. I think there might be a lag, depending on how inflation evolves. I'm not sure inflation will really pick up that fast. But when inflation pick up, there might be some lag in time between the pace of inflation and the pricing following behind. But if you take it more than just one quarter at a time, inflation plus pricing is still the model. I think that in the rail industry is the model.
Luc Jobin (President and CEO)
Yeah, and I think just to add to JJ's point, I mean, at this juncture, we're not seeing, you know, inflation running away. So, you know, we'll have to see how things evolve. And then over time, we still feel that we have the ability to adapt. And, you know, historically, you know, inflation has not necessarily been a bad thing in terms of ability to price. So we're, you know, we're optimistic, that we can sustain our position of inflation plus. Thanks, Scott.
Scott Group (Managing Director and Senior Analyst)
Okay. Thank you, guys.
JJ 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)
Yeah, thanks very much. Good afternoon, everyone. Looking at your operating ratio, obviously a very successful operating ratio again, this quarter, congratulations on that. As we look out to next year, looking at anything that might not be sustainable or, or we should look at, particular those headwinds that you, that you're aware of and know about today, what would you point us to? And understand you're not giving guidance on OR, but if you- if we're looking out to 2017 as we are, are there any known headwinds that you would really flag when we look at our OR assumptions for next year?
Luc Jobin (President and CEO)
Yeah. Thanks, Walter, it's Luc. I would probably say that, the rising price of oil, will play a role, as you know, I mean, just the pure mechanics of it, plus you add to, to that, the, the lag that comes with it. So that's, that's an area that's gonna put a little bit of pressure, I, I believe. Also, I think, you know, Ghislain may want to talk a little bit about, you know, how we see pension, but this year it's been a, a significant tailwind. I think next year, just you're looking more at a little bit of a headwind, right?
Ghislain Houle (EVP and CFO)
Yeah, Walter, as I mentioned in my remarks, this year, pension has been a tailwind of about CAD 180 million. If you assume that discount rates at the end of December remain to where they are today, and interest rates are around 3.25%, then we could be looking at a headwind on pension next year of around, give or take, CAD 50 million.
Walter Spracklin (Canadian Research Management and Co-Head of Global Industrials Research)
Fifty.
Ghislain Houle (EVP and CFO)
So again, this is determined on the interest rates at the end of December, but if they remain that way, then that's what we're looking at.
Mike Cory (EVP and COO)
Yeah, Walter, it's Mike here. We, we're predicting a, you know, more normal winter than we had last year. And, you know, the spread of it is unsure yet. I mean, I don't know if it's gonna start in the, in the prairies of Alberta or the prairies of Manitoba, Saskatchewan, but we know, we know there's gonna be more snow, more cold, and that'll start up in December and carry right through for a normal winter. So that'll have an effect also, so-
Walter Spracklin (Canadian Research Management and Co-Head of Global Industrials Research)
Casualty and other, Mike, was this a particularly good year on casualty and other? Should we model that as well?
Ghislain Houle (EVP and CFO)
I think we've all—Walter, this is Ghislain. We've, we've always guided around CAD 90 million per quarter. I think, I think that's the right run rate, and I would continue to assume that.
Luc Jobin (President and CEO)
Yeah, Walter, I mean, you know, this is something very difficult to predict, of course. I think what we've done is we've made a number of very significant improvements in terms of our safety record, and I would expect that a lot of that is gonna stick. But if you have a very cold winter, then obviously we'll be facing a little bit more of a headwind, as Mike described. I think the key point here is, you know, no matter what the conditions are, you can expect us to perform at an industry-leading level. And I'll remind everybody that, you know, we don't necessarily manage the business for the operating ratio.
We manage the business to do what's right for our customers, and we do it safely, efficiently, and that's really the formula that we keep, you know, working against. So, it'll follow where it falls. You just should rest assured that, you know, we'll give it our best shot, and usually that's, you know, industry leading.
Walter Spracklin (Canadian Research Management and Co-Head of Global Industrials Research)
Okay. That's great. Thank you very much.
Luc Jobin (President and CEO)
Thank you.
Operator (participant)
Thank you. The next question is from Tom Wadewitz from UBS. Please go ahead.
Tom Wadewitz (Senior Equity Research Analyst)
Good afternoon. I don't know if you can clarify on the CAD 50 million headwind. Is that a year-over-year number? Is that what you're saying?
Ghislain Houle (EVP and CFO)
Yes. Yes, Tom, that's a year-over-year number.
Tom Wadewitz (Senior Equity Research Analyst)
That's year over year. Okay. Okay, great. On the intermodal, I mean, you talked about a couple markets that seem to be bottoming. I think the tone of overall volume outlook seems constructive. What are your thoughts on intermodal volume outlook? And then I don't know if you could offer a thought on pricing and competition in intermodal. It seems like that's been a market which has been pretty weak and, you know, it seems like it's tough to have visibility to what the freight outlook is, you know, in that market. So any thoughts on those two would be helpful. Thank you.
JJ Ruest (EVP and CMO)
Yes, Tom, it's JJ. The, I think, looking short term, the intermodal volume, I think North America and for CN is a little weak, both domestically, where we compete very hard with the trucking industry, who has, lots of capacity and better cost than they did, when the drivers were short, in short supply and fuel was expensive. And on the product coming from overseas, I mean, those trades are not as buoyant as they were two years ago. So things are a little, on the weak side right now in intermodal. So I think we have to, you know, recognize that and look for 2017 to hope to see some better environment on the, on the volume side. And on the price side, I mean, we all compete for the business.
As I said, competition on the over the highway is fairly tough, especially in the case of CN and where we do cross-border, because that's a shorter length of haul. And when a product come from the coast, we compete with many railroads and many ports, and this is where our operating ratio come in handy, and we use it responsibly, where it makes sense, and where it doesn't make sense, we don't. So it's, it's a competitive environment. That's, that's all it is.
Tom Wadewitz (Senior Equity Research Analyst)
Okay, great. Thank you.
JJ Ruest (EVP and CMO)
Thank you.
Ghislain Houle (EVP and CFO)
Thanks, Tom.
Operator (participant)
Thank you. The next question is from Fadi Chamoun from BMO Capital Markets. Please go ahead.
Fadi Chamoun (Research Analyst)
Yes, good afternoon. Thank you for taking the question. Just one clarification first, and then I have a question on pricing. So, for your fourth quarter, your guidance implies, if my math is right, of about 5% lower earnings on a year-over-year basis, although you have a bit of a more tailwind on the volume side. I was wondering if this is just a function of what you've just indicated, which is-
... normal winter and maybe some tough comps on the cost, or are there any other factors going in there? And secondly, on the pricing side, just big picture question for JJ. So, I think over the last 12, 14 years, you've really have had pricing of 3% or more in every single year, even though we've have gone through episodes where the transportation industry had excess supply. And I was wondering whether there's something different about this freight recession we're in. Are we seeing sort of a business mix that is probably more cyclical, and therefore, we're seeing sort of the pricing being a little bit more vulnerable this freight downturn? Is there something changing in terms of this pricing story? Are we maybe at a more mature stage in this pricing story?
If you can add any color on that would be great.
Ghislain Houle (EVP and CFO)
Maybe I can start, Fadi. This is Ghislain. On the fuel surcharge, just to make sure that you remember, last year, we had a positive lag in the fourth quarter of about two pennies. And obviously this year, as Luc mentioned, if fuel prices stay to where they are, we assume a slight headwind on fuel lag in the fourth quarter. So that has to be taken into consideration. And as you mentioned as well, and Mike mentioned it, obviously, we are assuming a normal winter operating condition in December. And if you remember last year, December was unseasonably warm. I mean, I remember in Montreal, on the twenty-third of December, was around 20 degrees Celsius.
I mean, when you take that into consideration, that's what supports our guidance of what we put forward.
Also, just maybe to add a little color, Fadi, you know, I mean, it remains to be seen, given the lack of visibility, you know, where generally, our customers are gonna, you know, how they're gonna, taper down as we get to the last few weeks of December. The inventory levels may see some adjustments, or we may see as well, a little bit of early shutdowns for maintenance and so on and so forth. So I think we're, you know, we put the guidance out there because we wanted to give you our best view. It does reflect some of these factors that we don't control. And obviously, we'll have to see how those things eventually pan out.
But we feel comfortable with the guidance that we've put out there. It calls for, you know, generally more normal conditions, and we'll see where we are.
JJ Ruest (EVP and CMO)
Yeah, on, on that, it's JJ, Fadi, you just may ask me that question earlier, today, is what's, what's gonna happen in the last two weeks of the quarter? And, and we don't know. If we, if we understood the last two weeks of the quarter, whether customers will overstock, destock, and what kind of weather we will have, it will be easier for us to call the fourth quarter. Going back to your question on pricing, I think it's important to reflect on, as you said, on the last many years. And the rail industry in the last many years has always been inflation plus pricing. So if you do the compounding effect of all these years, where we get the inflation plus something, it, it's quite, it's quite a powerful model.
And that's how, as an industry, we get to these operating ratios that we all have, and we all improve. It's more than just the fact that fuel is cheaper. It's also the fact that the industry is getting healthier, and the industry is getting good compounding, same-store price above inflation. I think another factor is, you know, historically, you know, we've, we may have all made some mistake, you know, five, 10 years ago. And as contracts get repriced, we reprice them closer to market. So you get some of these one-time effect. I think all railroad had some of that, some of the railroad more than others, but we all benefited from that up to a point.
What maybe is a little more specific at this point, where we're at, the economy has been weak now for, for a bit, and many of us, including at CN, we all have invested a lot of capital. So all the railroad have lots of capacity. The river system is at capacity. Trucking industry is at capacity, and we all have equipment parked. We parked locomotive, the trucking industry is parking rig, and that has an effect over, obviously, on the, the industry impact. So eventually, when the whole North American transportation industry has sort of digest a little more of its capacity, I think the pricing power will get stronger. But, you know, inflation plus pricing in the current economic environment, after what? About 10 years of inflation plus pricing, pretty good.
Ghislain Houle (EVP and CFO)
Yeah.
JJ Ruest (EVP and CMO)
Okay.
Ghislain Houle (EVP and CFO)
Thank you very much, Fadi.
Fadi Chamoun (Research Analyst)
Thank you.
Operator (participant)
Thank you. The next question is from Ravi Shanker, from Morgan Stanley. Please go ahead.
Ravi Shanker (Equity Research Analyst)
Thanks. Good afternoon, everyone. Just to follow up a little bit on the pricing commentary, is it safe to assume that you will see stable pricing at the current levels of, say, a high 2% range, ex regulated grain, unless you see a big spike in inflation? And also, when does the grain pricing show up in the overall pricing?
JJ Ruest (EVP and CMO)
Okay, what we, we don't provide guidance or outlook on pricing per quarter. We haven't. We're not providing guidance for next year either. So that's why we stay with the general term of inflation plus pricing. If anybody can give us exactly what inflation will be next year, maybe we could be more precise on how much pricing we hope to get. Regarding the, the grain side, the regular grain is, somewhat under, beyond our control. It's a formula that federal government run. The formula produces a 4.8% price increase available August first.... We at CN did not take it August first. We will take it at the beginning of the fourth quarter.
That's why I've used, you know, I took out the regular grain because it was a bit of a headwind for us in the third quarter. It will become a tailwind in the fourth quarter. And as you know, we do have some legacy contract life of mine, where the pricing includes the fuel. That's why those are obviously still negative in that point of view.
Ravi Shanker (Equity Research Analyst)
Sorry, go ahead.
JJ Ruest (EVP and CMO)
Go ahead.
Ravi Shanker (Equity Research Analyst)
I was gonna ask, will all the grain reprice right away, or will that take time to work through the volumes?
JJ Ruest (EVP and CMO)
The grain price we took, effective first of October. You know, the grain cap gives you a formula. You can take the price over the twelve months, 10 months, nine months. It's up to each company to decide whether we do that. In our case, we decided to wait for the crop to come in before we took the price increase.
Luc Jobin (President and CEO)
So Ravi, we'll effectively work through the balance of the season, as JJ's pointing out. Thank you.
Ravi Shanker (Equity Research Analyst)
Great. Thank you.
JJ Ruest (EVP and CMO)
Thank you.
Operator (participant)
Thank you. The next question is from Cherilyn Radbourne from TD Securities. Please go ahead.
Cherilyn Radbourne (Managing Director of Equity Research)
Thanks very much, and good afternoon. Question for Mike. You provided some good detail on productivity in your bulk network, but I was actually pleasantly surprised by the year-over-year improvement in your yard productivity, particularly given some puts and takes on the merchandise volumes. Maybe you can just elaborate there a little bit more.
Mike Cory (EVP and COO)
Sure, Cherilyn. We, you know, I spoke about significant siding investments, but we've also, over the last few years, taken a close look at our yards, and to accommodate the size of those trains, we've done things like lengthened tracks in yards so that we eliminated the amount of handlings we had on the cars. We've done that in our hump yards with pullbacks. We've reconfigured tracks in our yards in order to gain both speed and safety. So we never, we never take our eyes off the yards. We do the same type of investment approach as we do on the main line, because, again, it's about safety, productivity, and service.
Cherilyn Radbourne (Managing Director of Equity Research)
Great. Thank you. That's all for me.
Luc Jobin (President and CEO)
Thank you, Cherilyn.
Mike Cory (EVP and COO)
Thank you.
Operator (participant)
Thank you. The next question is from Jason Seidl from Cowen and Company. Please go ahead.
Jason Seidl (Managing Director)
Hey, guys. How's everyone?
Luc Jobin (President and CEO)
Very good. Thanks, Jason.
Mike Cory (EVP and COO)
Very good.
Jason Seidl (Managing Director)
So my one here is gonna be on the productivity. Now, I think you mentioned, obviously, it's gonna get a little bit tougher with the winter weather, especially on a year-over-year basis. But how should we start thinking about 2017 and productivity? I mean, there's, there's nothing, nothing really preventing you from continuing to post gains on this front, is there?
Mike Cory (EVP and COO)
No, 'cause Jason, you know, it's our approach, and I'm just gonna kind of keep repeating the same things. You know, we start with making every effort that we can to have a safe and reliable network. That's job number one. And then, really our key driver after that, when it comes to productivity, is the train length size. And we're in position over the majority of our network to run at the size that we run and more. So there is some incremental opportunity with volumes that start to come back, depending on mix, of course. And then, you know, third, we still will target specific investments where that ROI feeds back into that productivity cycle. So with that longer train, we also are able to, you know, get productivities in fewer locomotive use.
But it's, it's gonna be the same story, same approach, as we go forward. So we expect good results, no different than they are today, and that's, that's where we're going.
Luc Jobin (President and CEO)
And Jason, just to add to Mike's comments, I mean, I think, again, we have to see what the level of volume will be. And obviously, you know, we've worked very hard to bring a significant level of improvement in terms of our service. It is important to our customers, and needless to say, you know, it's a balancing act here. So, the improvements we're making on productivity are not coming at the expense of service. And there are times where we're also willing to invest in service for some of our great customers, because, you know, that's how we build long-term relationships, and those things matter.
So, you know, obviously, the guys never cease to amaze all of us in terms of their innovation and the way they look at the business, and the way we interact with the supply chain also gives us a big edge. Otherwise, we wouldn't be able to identify and pursue a lot of these initiatives. So, you know, it gets tougher because I think the level of performance is just impeccable. I mean, it's stellar. So it always gets tougher, but, you know, we've never shied away from looking at our business and continuing to improve. So, maybe the quantum, you know, you can't bank on the same quantum of improvement. But clearly, the game plan of the team is clear, as Mike laid it out.
I mean, everybody, that's, that's our agenda, so should be no surprise.
Jason Seidl (Managing Director)
I guess the game plan is for you guys to keep making your year-over-year comps difficult for yourselves?
Luc Jobin (President and CEO)
Absolutely. Absolutely.
Jason Seidl (Managing Director)
Thank you. Appreciate the time, guys.
Luc Jobin (President and CEO)
All right.
Operator (participant)
Thank you. The next question is from Turan Quettawala from Scotiabank. Please go ahead.
Speaker 20
Oh, hi there. This is Milan Basaragon for Turan. Just wanna talk a little bit about the coal market and met coal mines in northern BC. Now that coal prices have risen dramatically, if that sort of sticks, how long do you think it would take for some of the mines to really start break ramping back up, and what kind of opportunity could this be for you? And I know you mentioned there's one that's coming online in Q4, but are there any others, or what's the opportunity there? Thanks.
Mike Cory (EVP and COO)
... It's Mike here. We actually have already started to move some of the coal from the first mine that had available stockpile. The second mine, and JJ will talk to you here in a second, is actually starting up, and we're in preparation of making that happen. So go ahead, JJ.
JJ Ruest (EVP and CMO)
Yes, so these were the mine that, we're talking met coal, right? We're not talking thermal coal?
Speaker 20
Yes, yes.
JJ Ruest (EVP and CMO)
Yes, and on the met coal side, we had some mine in Canada that, you know, that were used to be under the ownership of Walter Energy, went bankrupt. They come back of bankruptcy with a new owner, and one mine is restarting. They will restart this quarter. I, I would take, I would take that as a positive sign, right? Rather than having a decline in tonnage and decline in revenue, we have a, you know, revival of some volume. Take that for what it is. The real issue, though, is that the met coal market in the world is not improving because the Chinese are buying more coal. It's because the Chinese are producing less coal, because the government has decided that they will produce less coal.
The price is up right now, it's not because the demand is strong, it's because they've cut back supply. Hoping that this will stay in place, the price stay high, and the Chinese decide to stay with their model of cutting back, forcing their own local mine to restrict production, then we should see more coal mine coming out from the D.C. Obviously, starting a mine takes quite a while, but if you restart a mine that was in operation, that takes less time.
Luc Jobin (President and CEO)
Yeah, and we have the capacity to move whatever comes our way, so it's a good story.
JJ Ruest (EVP and CMO)
So great.
Speaker 20
Great.
JJ Ruest (EVP and CMO)
It's positive to be negative.
Speaker 20
Okay, thank you. Somebody, and this is moving through Ridley, is that correct?
Luc Jobin (President and CEO)
That's correct, yes.
JJ Ruest (EVP and CMO)
Yeah, Ridley Rupert.
Speaker 20
Okay. Thank you.
Luc Jobin (President and CEO)
Thank you very much.
JJ Ruest (EVP and CMO)
Thank you.
Operator (participant)
Thank you. The next question is from Brandon Oglenski from Barclays. Please go ahead.
Brandon Oglenski (Director of Senior Equity Analyst)
Yep. Good afternoon, everyone, and thanks for taking my question in. Luc, you've had about a quarter now with your new executive leadership team, so just wondering, you got some pretty big shoes to fill here after the prior two CEOs, you know, first with CN Precision Railroading and then Claude Mongeau, you know, really focusing on supply chain enablement and a lot of top-line expansion, a lot of energy expansion in Canada. What, what's gonna be your legacy at CN with this management team? You guys already have the industry best leading OR, buying back CAD 2 billion of stock. I mean, what's your vision going forward? What do you do from here?
Luc Jobin (President and CEO)
Yeah, well, thanks, Brandon. That's an easy one to talk about, right? Well, first and foremost, let me say a few words about the first 100 days and the leadership team. You know, I'm really enthused. I think, you know, the team is gelling together very well. We enjoy working with each other, we challenge each other, and I think that's a very, very good environment to work in. I've been out on the property, certainly with Mike, meeting all of our employees, getting them energized, talking about, you know, the way forward, and I'll come back to that in terms of the vision. JJ and I have been meeting with customers, so, you know, a lot of good engagement there.
And what I'm hearing from the customers is they like our product, they appreciate the efforts that we're doing in terms of pushing forward in supply chain. So, you know, that bodes well, and I think we continue to impress them in terms of our ability to move their precious cargo to market. Paul and I, and JJ and Ghislain as well, I mean, we've been out meeting with investors, and they're also telling us that, you know, they like the way CN has been performing. Our strategy as it continues to resonate with customers. So, from that standpoint, I wouldn't expect any major change.
Sean and I have also been out there, meeting with the regulators, engaging with them, and I think that's also has been a very positive, positive series of meetings. So all in all, the first 100 days confirm what I kind of knew already, but it's good to see. You know, the property's in good shape. We've got a great strategy, which continues to resonate with our customers. It's all about, you know, going out there and with our supply chain mindset, continuing to innovate, continuing to operate in a way that balances the productivity and the service improvements. And so, you know, to a large extent, I would say the journey continues.
And, you know, this is a strategy which many of us, certainly JJ, Ghislain, and I have been part of, you know, working through with, with Claude, and so, we're continuing on that, that same, same momentum. We don't make up the economy, so to a certain extent, we've seen a significant correction in, in some of the commodities, where we had a lot of growth in the last couple of years. But, you know, we're a pretty resilient bunch. You can see our numbers. We're continuing to, you know, grind it out there, and, and, we've got a very innovative, commercial team as well as operating team. So, you know, I feel very good.
I think in terms of looking at the future, if there is anything, I think what we wanna do is we wanna leverage a little bit more and deploy a little bit more technology to continue to make advancements in terms of safety, productivity, and service. So that's one area that we will be focusing a little bit more on in the next few years. But otherwise, I would say, you know, this is not a revolution. This is gonna be an evolution. And you've got a, you know, a tremendous franchise. JJ pointed to the diversification....
In terms of geography and customers and commodities, and you've got a very energized team of railroaders all the way from the front lines, all the way up to the headquarters and the leadership team around this table. So, you know, I feel pretty good, and I think, you know, if I can continue the momentum that was built by my predecessors, that's pretty good. I mean, I would take that gladly. And I think I'm not at the point where I feel there's a, you know, breakthrough strategy that's just waiting around the corner. So this is a continued progress in a competitive environment with a great franchise and probably the best management team in the whole business, bar none.
You know, I feel pretty good.
I hope that-
Brandon Oglenski (Director of Senior Equity Analyst)
Decent answer, Luc. Thank you.
Luc Jobin (President and CEO)
Give you some insights, Brandon.
JJ Ruest (EVP and CMO)
Just watch us.
Operator (participant)
Thank you. The next question is from Chris Wetherbee, from Citi. Please go ahead.
Chris Wetherbee (Senior Research Analyst)
Great. Thanks, thanks for the time this afternoon. Wanted to ask about, drill down a little bit on the volume outlook. When you think about the fourth quarter, I think some of the sequential improvements in some of the end markets, JJ, that you highlighted, do you think we can get to positive carloads for the fourth quarter? And then sort of looking at comps and, you know, all the puts and takes as we start to think out 2017, any sort of early outlook for sort of what you like, what markets you like, what you don't, how that might play out in terms of carload growth? That'd be helpful. Thank you.
JJ Ruest (EVP and CMO)
It's JJ, Chris. So I think I'll maybe leave 17 for the next conference call. In terms of the fourth quarter, so far this quarter, when you look at the CN carload, we are positive. The reason for that, you know, we have a lot of noise in our short-haul business of iron ore. We have a minor shutdown, one that we opened. Maybe much more relevant is our revenue ton mile, which is right now slightly positive. I'm hoping, I would hope that we can have some slightly positive revenue ton mile by the end of the quarter. As we said earlier, it's the last 20 days of December.
If the last 20 days of December, we have, you know, challenges in the weather, which would impact volumes, or if we have customers who decide that they want to end the year with very low inventory, whether it's manufacturing or retail, then obviously, you know, I, I think the game will be played in the last 20 days of the quarter. And that's... We're hoping for, we're hoping for something slightly positive, but definitely, sequentially, the things just get better and better, slowly but surely. I don't know if that can help. Regarding 2017, well, you ask me the question again in next quarter.
Chris Wetherbee (Senior Research Analyst)
Fair enough. Thanks very much. Appreciate it.
JJ Ruest (EVP and CMO)
Thanks, Chris.
Operator (participant)
Thank you. The next question is from Bascom Majors from Susquehanna. Please go ahead.
Bascome Majors (Senior Research Analyst)
Yeah, thanks. So you talked a little bit earlier about having the best management team in the industry. You know, that's historically led competitors to hire some of your key people away, and you've recently gone through a pretty significant reshuffling at the senior management level. You know, can you let us know how you make sure the competition doesn't poach your top talent, be it existing or recently departed, and use them to compete against you, either in Canada or the U.S.?
Luc Jobin (President and CEO)
Yeah, Bascom, it's Luc. Listen, you know, I think first and foremost, it's about, you know, getting our team to be really engaged in what we do. You know, I mean, in this industry, everybody has pretty decent compensation. What's actually more important is how people are involved in leading the company and making a difference. And so, you know, I would tell you that the level of engagement that we have at CN is very, very high, and with this leadership team, even higher than ever before. And that's not a criticism on the past, that's more, you know, how excited I am about the future. So that's in terms of retaining our folks.
We also have, needless to say, compensation plans, which focus on long-term compensation, and that long-term compensation comes with caveats in terms of people leaving the organization. So, you know, that's never any guarantee because somebody can actually buy you out. So the first job is to get everybody engaged and making a difference in terms of the team. Then, also, as Gisèle pointed out, we did come to an agreement with CP with respect to some outstanding litigation. As part of that, we have agreed with them, and they have agreed to extend for another two-year the non-hire agreement that we had, which was due to end at the end of December 2016. So now this will extend to 2018.
So, you know, those things are mechanisms to prevent, you know, poaching or to minimize the risk of poaching. But I would say job number one is get everybody engaged, get everybody contributing, energized, and, and that's really what makes the difference. And, you know, beyond that, these are the mechanisms that are out there to to help us cope with, you know, aggressive behaviors to get to our, you know, great talent. Thank you for the question.
Bascome Majors (Senior Research Analyst)
Thank you.
Operator (participant)
Thank you. The next question is from Allison Landry from Credit Suisse. Please go ahead.
Danny Schuster (Private Fund Group)
Hi, this is Danny Schuster on for Allison. Thank you for getting my question in. So you had another very strong quarter in automotive from a volume perspective, and I think last quarter, you actually cautioned that auto sales might be looking a little bit peak-ish. But just wondering whether the new business you started in September and October should be enough to drive absolute volume growth over the next few quarters here. Then also in that context-
... It looks like your automotive RPU declined sequentially by a couple%. Was that due to the new customer starts, or is there something else driving that? And should we expect to see that going forward?
Ghislain Houle (EVP and CFO)
Hi, Danny. Yes, I think it's probably a fairly wide consensus within those who follow the automotive industry, that automotive sales in North America, with Canada and U.S., have sort of reached plateau and may start to, I mean, I wouldn't say decline, but, you know, they may not be the growth that we had year-over-year for the last few years. That's one. That's the environment that we all have. So in the case of CN, we focus on the cities where we do have a rail network, and how much of a market share do we have of the vehicle purchased by consumers in those cities. And along those lines, along those lines, we've been able and are able to slowly grow our participation in what's purchased in those city, even though the market might be slightly flat or slightly down.
That's the reason why we have revenue growth, and we expect to have some continued revenue growth here for a period of time. Regarding the revenue per carload, or I think you were talking, these are the mix, the length of haul, and, you know, the mix of business we have now, versus the mix of business we had three months ago and six months ago. I've never been really big on revenue per carload. You have exchange, you have fuel, you have length of haul. This is; these numbers are hard to draw any conclusion out of.
Luc Jobin (President and CEO)
A lot of noise on those-
Ghislain Houle (EVP and CFO)
A lot of noise.
Luc Jobin (President and CEO)
numbers. Thank you for the question.
Bascome Majors (Senior Research Analyst)
Thank you.
Brian Ossenbeck (Managing Director)
Okay, thank you.
Operator (participant)
Thank you. The next question is from Benoit Poiré, from Desjardins Capital Markets. Please go ahead.
Speaker 19
Yes, thank you very much, and good afternoon, guys. Just in terms of financial position, obviously, you came in with, again, strong numbers, with the EBITDA of 1.7. Obviously, 2016 has been a big year in terms of locomotive purchases. There are still some upside in terms of raising the dividend. But I was just wondering, looking ahead, whether you still see some opportunities for some tuck-ins, or you could become a little bit heavier in terms of a share buyback going forward? Thanks.
Ghislain Houle (EVP and CFO)
Yeah. Hi, Benoit. Well, as I said in my remarks, our board has just approved a share buyback. I'm pleased about that, of CAD 33 million shares or CAD 2 billion. You know, in terms of dividend, this will be decided in January, as we usually do. So we are in our planning process as we speak, so we will look at it. So, you know, stay tuned. In terms of CapEx, as you alluded to on the locomotives, yes, we have all received our 90 new locomotives this year. Again, we will look at CapEx hard, and as we've said in the second quarter call, obviously, it gives us an opportunity to reduce our CapEx. We're talking about CAD 300 million related to these locomotives.
But one area that I wanna make sure that you understand is, we will not compromise on our basic investments. We have not compromised this year, and we will not compromise because we believe in the long-term value of our franchise. And when you decide to reduce basic, actually, you don't, you don't avoid CapEx, you just defer CapEx. So we have been deploying CapEx this year, and our rail and ties that have been installed this year, we've actually produced somewhere between 15%-20% savings in unit costs. So it's been very good deployment, and this is an area where we'll not compromise.
Luc Jobin (President and CEO)
Yeah, and Benoit, this is Luc. Just to supplement a little bit what Ghislain is saying, I mean, we continue to look at, I mean, you know, we wanna be opportunistic in terms of, you know, bolt-ons. So if we see some tuck-ins out there, that makes sense. Historically, you know, I think, the pricing environment was way too rich, and so, you know, we're pretty disciplined in terms of deploying capital. So, you know, we haven't necessarily made any significant acquisition. So, you know, we'll be looking. Things are a little bit tougher for, for a lot of the smaller railways. And, you know, I think that, there could be some opportunities out there that could come to fruition.
These would not be, you know, of a multi-billion-dollar scale. But we're clearly keeping an eye out there. And on top of that, I think just to add to the comments from Ghislain, you know, if we see some good piece of business, some good customers, and there are opportunities to co-invest with them in terms of growing the franchise, you know, we are a longer-term player. So we're not shy about putting the money, you know, forward, and if that is to potentially take us to raise our capital budget, well, so be it. I mean, we're here to grow the business.
It's just that, you know, we are disciplined, and the opportunities for investment have been a little bit scarce, if you look outside of our own network, at this juncture.
Speaker 19
Okay, perfect. Very good call. Thank you very much.
Luc Jobin (President and CEO)
Thank you. Thank you, Benoit.
Ghislain Houle (EVP and CFO)
Thank you.
Operator (participant)
Thank you. The next question is from Brian Ossenbeck, from JP Morgan. Please go ahead.
Brian Ossenbeck (Managing Director)
Hey, good afternoon. Thanks for getting me on the call here. I just had a quick one for JJ. You mentioned that crude and frac sand kind of hit their trough in the second quarter this year. So what do you seem to conclude that? And it's probably not a big bounce, but, you know, the, the my, the busiest spread has actually fallen throughout all of their quarter. And I was also curious, the comments being made in the, in the slide deck about, being opportunistic in, in the approach to new volumes in this business.
... If you could elaborate on both those. Appreciate it. Thanks.
JJ Ruest (EVP and CMO)
So the case of frac sand, we, you know, we have seen some improvement in the volume, cargo volume coming to us. I think it may be the case for many railroads, too. The drilling activities is slightly better. I mean, first, we have to find the bottom. I think the bottom has been found sometime in the summer, depending on which commodity. Surely, we did, I see that bottom in the case of frac sand. If you look at, I think one of the company was talking today, Precision Drilling, their CEO was saying that they have seen some more work coming at them in Western Canada regarding drilling activities. Not necessarily a whole lot more work sequentially, but sequentially positive, as opposed to sequentially negative. So a little more optimistic on frac sand because it was very negative for quite a while.
We might still be below last year in the fourth quarter, but something better than, you know, sequential basis. On the crude, crude, we had a decent third quarter on crude cargo, with everything relative from where we came from. And I don't know whether the spreads here matter or not, because the movement of crude right now is limited to a handful of buyers and sellers, and they're still moving crude as we speak. So crude is right now, seems to be kind of following a run rate. And unfortunately, take as in, as in meaning that we don't sign any long-term contract when it comes to crude. We go by month by month, quarter by quarter. As long as it makes sense for all parties involved, we do it.
If it doesn't make sense for one of the party, either the railroad, the buyer, or the seller of the crude, then, then we just slow down. I don't know if that helps, but these are, these are, you know... You go from negative to slightly positive with a, a better future than what we had in the past.
Luc Jobin (President and CEO)
Thanks for your question, Brian.
Operator (participant)
Thank you. The next question is from Ken Hoexter from Merrill Lynch. Please go ahead.
Ken Hoexter (Managing Director)
Hey, great. Good afternoon. I know it's getting a little late here, but I'm surprised not too much on the grain crop. And earlier, you mentioned, kind of just talked a little bit about the grain in the winter, that crops running about above five-year averages. Can you maybe give a little thoughts, JJ, on your thoughts for the uptick here, the scale of that uptick? And then you mentioned earlier that storage was virtually empty, yet the bumper crop, so you've already brought back employees. So, with respect to the employees, any thoughts on kind of margin pressure as you move forward with the growth of that crop?
JJ Ruest (EVP and CMO)
Regarding the storage, when we were getting geared up in August, September to move grain, there was not much grain left from last year. So that's what I meant. We had to wait for the new crop to come in. It did come in, but it came in a little, little later than we thought. It's coming in large quantities, so will that be an upside for the fourth quarter and the first quarter of next year? Potentially, it will be more about us because it will depend on how hard we can run the railroad, and that will be partly in the hand, in the hand of Mike, and also the weather. What we can more, more likely see is, you know, we, we think there'll be more grain left by the time you get to the spring.
That's what a big crop does it, you know, the season extend longer, and that's where the, the benefit will come in. The benefit will mostly come in, in 2017, not so much in the next six months. I don't know, Mike, if you want to-
Luc Jobin (President and CEO)
Yeah, no, Ken, I, I'm not quite sure what you were asking about with people in the market.
Ken Hoexter (Managing Director)
So you mentioned that you were bringing employees back on from furlough already, right? To, to help move the crop. Did I, did I catch that comment right?
Luc Jobin (President and CEO)
No, absolutely, you did. Yeah, and we, we did that in line with, as the crop, even though it was delayed, we, we were very close with the grain shippers to make sure we brought them back at the appropriate time. So they're all out there working right now, and we're moving, as JJ said, record amounts, so.
Ken Hoexter (Managing Director)
So timing with the crop growth, not ahead of time, where you have to retrain or anything, so it's, it should be kind of concurrent with the volume growth.
Luc Jobin (President and CEO)
Absolutely.
Ken Hoexter (Managing Director)
JJ, JJ, I'm sorry, just did you give a scale, your thought on kind of what kind of percentage growth you should see move versus going back to filling up storage?
JJ Ruest (EVP and CMO)
I'm not sure I understand the question. Could you-
Ken Hoexter (Managing Director)
Kind of the size of the crop. You know, what kind of grain growth should we expect or is built into your, your numbers in, in terms of your volume estimates?
JJ Ruest (EVP and CMO)
I mean, the crop is not all in yet. We're assuming a crop maybe in the range of 75 million tons, which would be a million ton or two below the record. What you're asking is basically getting us into 2017, and how much we, you know, we're going to do grain next year. At this point, all I would say is we will do more next year than we did this year.
Ken Hoexter (Managing Director)
All right. Thank you.
Luc Jobin (President and CEO)
Thanks for your questions.
JJ Ruest (EVP and CMO)
Thank you.
Ken Hoexter (Managing Director)
Thanks.
Luc Jobin (President and CEO)
All right, so, maybe in closing, I'll make a couple of remarks. You know, first of all, I have to say that I'm very proud of what the team has accomplished this year. I mean, we've demonstrated our ability to deliver solid results in what is, you know, unquestionably a challenging environment. Our industry-leading team of railroaders delivered once again through solid execution, and at the same time, we continued our focus on leveraging our superior service to our customers, which, as JJ pointed out, I mean, helps us gain traction in the marketplace. You know, we also continue to reinvest in our infrastructure, and you've heard the comments from both Ghislain and Mike on that topic. It clearly is there to support safety, service, and productivity improvements.
So as the economy evolves and commodity sectors gradually recover, I think we're very well positioned to compete and deliver continued shareholder value. So on that note, we certainly look forward to talking to you again in January to review our results for the fourth quarter and for the full year, 2016. At that time, we will also provide you with our annual 2017 annual outlook or guidance, if you want to call it that. So on that note, thank you very much, everybody, for joining the call, and be safe. So it's Luc thanking everybody for, you know, your participation. Patrick?
Operator (participant)
Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.