Canadian Pacific Kansas City - Q3 2014
October 21, 2014
Transcript
Operator (participant)
Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific's third-quarter 2014 conference call. The slides accompanying today's call are available at www.cpr.ca. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question, simply press * then the number 1 on your telephone keypad. If you would like to address a question, press the pound key. I would now like to introduce Nadeem Velani, AVP Investor Relations, to begin the conference.
Nadeem S. Velani (Head of Investor Relations)
Thanks, Melissa. Good morning, and thanks for joining us. I am proud to have with me here today Hunter Harrison, our CEO; Keith Creel, President and Chief Operating Officer; and Bart Demosky, our EVP and Chief Financial Officer. Before we begin, I want to remind you this presentation contains forward-looking information. Actual results may differ materially. The risks, uncertainties, and other factors that could influence actual results are described on slide 2 in the press release and in the MD&A filed with Canadian and U.S. regulators. This presentation also contains non-GAAP measures outlined on slide 3. The formal remarks will be followed by Q&A. In the interest of time, we would appreciate if you limited your questions to 2, and questions are focused on our Q3 and 2014 financial results.
We'll allow opportunities for questions relating to mergers and acquisitions in two hours' time during our conference call on that topic. It is now my pleasure to introduce our CEO, Mr. Hunter Harrison.
Hunter Harrison (CEO)
Thanks, Nadeem. Good morning to everyone. Nice to be with you this morning. It's been a very quiet, uneventful couple of weeks here for the back end of the quarter. But seriously, I was extremely, extremely pleased with our results. Keith and his operating team continue to impress and produce results that are unprecedented in this organization. I think you saw, and most of you have probably seen the press release, but as reported, operating ratio was 62.8, which is outstanding in itself. But I think if you really peel back and look at the number a little deeper and you factor out stock-based comp, which is very hard for us to predict or control, I think you would actually find that the R would have been 60.8 if my numbers were correct. So that's another record in the organization.
I think the significant thing then is that it really sets the foundation for the plan, our new plan that most of you were present with us for the last analyst meeting, and so we put this in good shape there. Our earnings per share was up $2.31, up 26%. We were pretty aggressive with our share buyback, which Bart will talk a little bit about later. So overall, four records. We've been blessed, and I've been very pleased with our safety performance, which Keith has led hands-on as far as our accidents and personal injuries. And I think there's even some changes coming up there that I think will take us even further. So overall, a great quarter, starting to hit on all cylinders, and pretty excited about the future. So Keith, over to you, buddy.
Keith E. Creel (President and COO)
Hey, thanks for the comments, Hunter. I can tell you I very much appreciate your kind comments. We've accomplished a lot: record operating ratio for the company, and we still got a lot more to do. I can say, and we'll pause for this call today, and I'll let my team know how proud I am of their hard work and their efforts. Extremely proud of this town, a group of railroaders, this bench that we built, and getting stronger every day. We look at more specifically the third-quarter performance. If I look at last year, a very strong comp. So in spite of those comps, to see train length, weight, and fuel efficiency continue to improve, very encouraging.
Speaks to the strength of this franchise, speaks to the strength of our operating plan that we're executing day in and day out and delivers a superior level of service that we're able to convert in the marketplace. On the accident side, as you said, very encouraging results as well. This culture of change, this evolution continues. We've got an industry-leading year-to-date frequency severity index of 1.29, next closest in the industry is at 1.92. I say that not to boast. Certainly, again, much work left to do. One accident is too many.
But again, the direction this is moving as we evolve this culture, as we create a culture of compliance and a team of railroaders from top to bottom that understands safety as paramount in everything we do day in and day out, we're going to continue to create a foundation that allows us to succeed with this operating model. If you put the two together, metric improvements and an environment of improving safety performance, that is a recipe for success, or otherwise said, as we produce a record operating ratio. A couple of comments on the revenue side: 9% up, very encouraging as well versus third quarter of last year, 4% price, 3% volume mix, about 2% FX. I think a key takeaway here is we're moving to the strength of the franchise. It shows a diversity in the franchise.
In spite of some weaknesses in the book of business during the quarter, they were more than offset by gains we made in crude, grain, domestic, and intermodal. All very strong lines of business for us. I'll provide a couple of comments. Very encouraging on the crude side, improving the book of business. Revenue improved 9% on a dollars per RTM basis, which essentially signals a strong gain in the quality of the revenue, the pricing gains. We've got a lot of questions, and I'm sure we'll get them today, about the volatility with the WTI prices, the spreads on crude. I'd say in short term, we expect volatility. We see limited impact in the near term. Longer-term outlook, we're not going to change it. It's unchanged. Most of our growth is, as we said in the past, and we stick to this.
The reality is we're getting a lot of growth in the Canadian heavy side versus the light side. In the Canadian heavy side, the people we partner with have got low cash costs. They've made significant infrastructure investments. For the short term, we're not going to change anything. We're sticking to our guidance. We see, again, looking forward with what we know, finish in 2015 with a run rate of about 200,000 cars. On the coal side, last quarter, I'll remind you, was a very strong quarter for Teck, a record quarter for Teck, in fact, with CP last year. Pretty strong comps again. Also compound that this year with Neptune outages and some maintenance shutdowns. We had some weakness in coal. But looking forward, Q4 sales are strong for Teck.
We plan to finish the year on plan, so no changes there. A couple of very encouraging stories, although this doesn't move the needle in a huge way. It speaks to the discipline of our approach on the pricing side. Thermal side of our coal is a very small piece of the book of business. Volumes have been down, but we've recently successfully repriced 2 legacy contracts, and I'm very happy about. These were contracts that effectively didn't earn their keep. We didn't make cost of capital. We weren't making money on them. One of the contracts, it was a 10-year deal. We're actually paying for the privilege of hauling this coal, which was not a very motivating thing to deal with day in and day out. But we've got those repriced. We've got those back out in the market for providing service.
We've extended a little length of haul on one of the contracts and certainly earning a fair return to cover the cost of capital, which I know Bart is very pleased about. On the grain side, still seeing strong demand on grain. We have moved quite a bit of grain. We're doing well on the Canadian side as well as the U.S. side, exceeding the government mandate. On the Canadian side, we've seen effectively looking forward, we see a more typical crop that we're harvesting and that we're moving now. We see finishing the crop year instead of the 17-18 million metric tons of carryover. It'll be more normalized at the end of this crop year with about an 8-9, which essentially is historical levels. But again, through this year, we're going to see very strong grain movement similar to this past year. On the U.S.
side, I'm very encouraged that we've caught up, essentially caught up with our backlog. North Dakota, grain's moving well in South Dakota with the RCP&E in partnership with us. So overall, very, very positive trends on the service side and the revenue side with grain. So with that said, very ambitious plan we laid out a couple of weeks ago, but we're very bullish on it. Again, in spite of the volatility, on the crude side, we see continued growth there. We don't see anything that's going to prevent us from being able to make our guidance into 2015. And we see a lot of opportunity as we continue to drive this discipline on repricing the book of business, driving service, driving intermodal gains. Again, domestic continues to be strong. So it's all very positive trends for us as we look forward on the revenue side.
With that said, I'll turn it over to Bart to comment on how he's converting it to the bottom line.
Bart Demosky (EVP and CFO)
Okay, thanks, Keith. And good morning, everyone. As Hunter mentioned, Q3 was definitely another quarter of records for CP coming on the back of the strong operating performance from the business that Keith just outlined. Record quarterly revenues up almost CAD 1.7 billion, record operating income and net income of CAD 621 million and CAD 400 million, respectively, resulting in a diluted EPS of 2.31 or a full 26% increase versus last year. And as Hunter highlighted, the bottom line of all of that was a record operating ratio of 62.8% or up a full 310 basis points. And factoring out the stock-based comp and grain revenue cap items, true performance was sub 61%. So just an outstanding result. From an operating expense standpoint, there are a couple of items I'll highlight this quarter.
With a 15% run-up in the stock price over the quarter, above $39 per share, stock-based comp drove most of the uptick on the comp and benefits line. Fuel was up CAD 23 million, which is really a reflection of higher workloads, so the volume variable expenses, and some unfavorable foreign exchange headwinds of about CAD 7 or 8 million in the quarter. But that was offset by the 3% improvement Keith's team made on the fuel efficiency front. We did see an uptick in materials expense in the quarter, which is a reflection of higher input costs and the insourcing of work previously done by third parties. Equipment rents continue to be very favorable with the savings from our fleet reductions far outweighing the impacts of higher volumes and some inflation that hit us on that front as well.
Lastly, on the expenses front, purchased services continued to see improvement driven by the lower casualty costs that Keith highlighted and the insourcing initiatives that the company's been undertaking the last 12-18 months to reduce IT and third-party maintenance costs. Now, all that said, we are coming into the fourth quarter now. As is fairly common, we're expecting to see a bit of a seasonal uptick as we finish up our locomotive overhaul and car maintenance programs. We're also going to see a one-time benefit of about CAD 18 million as a result of a settlement between CP and the BC government over timber and stone rights. And that's associated with the land that was previously owned by CP. So net-net, we're looking at a modest sequential uptick in purchased services in Q4.
As we look forward, comps will continue to get a bit harder here in the quarter, and we've got foreign exchange as a headwind on the expense front. So the team is definitely going to be digging deeper to stay focused on cost control. Now, that said, we are seeing strong RTM growth with RTMs up over 8% and costs up less than 4%. Backing out FX, we're actually up less than 2%. So we're clearly growing our revenues at a low incremental cost. As I was looking through the numbers, if you look at those RTMs up 8% and the volume variable expense that comes with it, that was more than offset by efficiency gains. So really, all of the expense increase in the quarter is due to incentive comp headwinds.
We have taken a number of steps over the last several months on the tax front to optimize our tax planning and strategies. As a result, the effective tax rate in the quarter came in at 27.2%. That's against our guidance of 28% for the year. And I expect to end the year with an annualized tax rate in the range of 27.5%-27.7%. And as we outlined at Investor Day, we're continuing to work very hard at bringing our corporate tax rate down, and we're forecasting 27.5% going forward. But rest assured, we're going to continue to work on that and see if we can optimize it further. We also are blessed, given the operational results, to be producing record amounts of free cash. And that underlying free cash flow continues to grow.
Net of dividends, we generated CAD 610 million of free cash year-to-date, which is more than double where we were this time last year. That brings me to how we're putting that free cash to work for our shareholders through repurchases. We've had an excellent start to the share repurchase program. We successfully completed the first 3% of that program in mid-September, buying back about 5.2 million shares at an average price of CAD 187. That's versus the 193 variable weighted average price during that time period or a CAD 6 per share savings. We subsequently increased the limit to 8%, which will allow us to repurchase up to an additional 7.3 million shares through March of 2015. Now, as part of that upsizing, we also filed an automatic share purchase plan with the TSX. Simply, that allows us to purchase shares during blackout periods using some preset parameters.
So I'm pleased that we've been able to take advantage of some of the recent market softness by buying back stock at depressed levels. The bottom line, we see repurchasing our shares as a strong value proposition for our shareholders. So thank you very much. With that, I'll turn it back to Hunter for closing comments.
Hunter Harrison (CEO)
Thanks, Bart and Keith. Good job producing and good presentations. Well, listen, with that, we'll be happy to take questions the group might have.
Operator (participant)
Thank you. If you would like to ask a question, simply press star and the number one on your telephone keypad. If you would like to address your question, press the pound key. As previously highlighted, please limit your questions to two. There will be a brief pause while we compile the Q&A roster. Your first question comes from Scott Group from Wolfe Research. Please go ahead.
Scott Group (Managing Director and Senior Analyst)
Hey, thanks. Good morning, guys.
Nadeem S. Velani (Head of Investor Relations)
What's up?
Scott Group (Managing Director and Senior Analyst)
So I'm sure there's going to be a bunch of questions on crude. Maybe I'll start with a few, and we can tackle them early. So can you talk about the key spreads that we should be watching and where you think these differentials need to be on a longer-term basis? Can you talk about the cash costs of production of your customers within the guidance for crude volumes to increase about 100,000 cars next year? What's the actual increase in loading capacity of the customers you're serving? And then lastly, of the growth that you've guided to, what % of that growth do you have contracts on already, and how do they take or pay? So I know a bunch of questions. If you need me to repeat anything, I will. But those are kind of the key concerns we've been hearing on crude the past couple of weeks.
Bart Demosky (EVP and CFO)
Yeah, we'll probably tag team on this, Scott. Let me take the first one, and we can take some notes here. We may have to ask for you to restate some of those questions. But let's start with the spreads. I'll speak to those, and I'll let James provide a little cover on some of the other items. So effectively, on the light sweet, the key differential, the spread we watch is Brent to WCS spread. Effectively, $10 or so covers rail costs. So in terms of the economics, most production can be economical in the $60-$65 range. So we still see a little bit of room there for some volatility before we start to see any meaningful production cuts in North Dakota. So we think we're okay short term, and we think we're okay longer term.
Heavy crude, the spread we watch there is WTI to the Western Canadian Select. Again, that spread, long-term to pay for all the investments and transportation, $20 is sort of a number. So we're under that now. But given the money that these producers have invested, we think the spread could be as narrow as $15 range short term, and we're going to see things keep shipping. You got to keep in mind these facilities they've built, they've sunk $200 million-$250 million. So they're not going to throw the baby out with the bathwater overnight because the spreads show some volatility that they expect. So hopefully, that gives you a little cover on the spread piece. James, do you want to talk about the book of business in a little bit more detail?
James Dominic Clements (VP of Strategic Planning)
Yeah. It's James Clements, Vice President of Strategic Planning. I'll put a little color in on both capacity and some of the contracts. I think those were two of your questions, Scott. In terms of capacity, we'd outlined a number of projects that were going to contribute to the growth in the originations on our network. And again, we don't see any risk around those projects. There's Bruderheim, Hardisty, which is up and running, Edmonton Rail Terminal that's under construction, and then we see some facilities in the Kerrobert area as well. So we continue, when we look to that longer-term guidance, to expect those high-quality projects to proceed. In terms of our current book of business, we're at about 40% with take-or- pay contracts at this point in time, and that spread between a couple of our facilities.
And so that will help offset any of the near-term volatility as well.
Bart Demosky (EVP and CFO)
I think a final comment, something to keep in mind. The strength of this franchise, and we talked about this a couple of weeks ago, with us sourcing the heavy crude to the West Coast, obviously, the spreads can be smaller because the transportation of the length of the haul is not as long, which serves our franchise well, as well as going to the Texas Gulf, same story. So we're positioned well to ride this volatility out and still deliver the strong growth numbers we see as an opportunity on the crude side.
Scott Group (Managing Director and Senior Analyst)
Just one follow-up for you, James. When you mentioned Bruderheim and Hardisty and I think a couple others, if you just add up all of the loading capacity that you see coming over the next year, how much is that on a carload basis or a barrel basis relative to the guidance of 100,000 car increase that you've given us for next year?
James Dominic Clements (VP of Strategic Planning)
If we add that all up and if you looked at, excuse me, the nameplate capacity, it would be a healthy margin above that. We're not banking on 100% market share of 100% of the nameplate capacity. We would be expecting something 300,000+ carloads origination capability. Remember as well, Bruderheim, for example, is competitively served. The Edmonton Rail Terminal will be jointly served. So there's some discounts there.
Scott Group (Managing Director and Senior Analyst)
Okay, great. And one just last small question, stock-based comp. When you gave the initial guidance for the year, what was the stock-based comp headwind you were modeling to? And then is there anything you're doing to smooth out or minimize the stock-based comp risk in future years?
Nadeem S. Velani (Head of Investor Relations)
Just in terms of it, it's part here. Just in terms of the first question, we had modeled in some modest stock-based comp headwinds. At present, if you're talking about hedging or smoothing, we're not contemplating hedging currently on our stock-based comp programs.
Now, the only other thing, Scott, I would add is that we are, as a result, we're taking a look at the old comp package, which needed reviewing. And there's a possibility that we would take part of this out and convert to options, which do not have the volatility associated with them that the DSUs and other comp does. So that in itself would remove some of the volatility. And I hope you can appreciate when we start budgeting, we'll have to call some of you and see what the stock price is going to be so we can set our budget. It's a little difficult task.
Scott Group (Managing Director and Senior Analyst)
Okay. All right. Thanks a lot for the time, guys. Really appreciate it.
Bart Demosky (EVP and CFO)
Thanks, Scott.
Operator (participant)
Your next question comes from Walter Spracklin from RBC. Please go ahead.
Walter Spracklin (Managing Director and Senior Equity Research Analyst)
Yeah, thanks very much. Good morning, everyone.
Nadeem S. Velani (Head of Investor Relations)
Morning, Walter.
Walter Spracklin (Managing Director and Senior Equity Research Analyst)
Just following up on the OR question. You have the 65 OR guidance, or better, for 2014. But I think with the stock-based comp that's trended where it has, it probably has a negative impact on that guidance. Or are you still kind of pointing to 65 or better even despite the stock-based comp? Because I note that in fourth quarter, you typically have a seasonally a little bit worse than third quarter operating ratio. So trying to make the numbers work in the model as it relates to your guidance.
Nadeem S. Velani (Head of Investor Relations)
Oh, the short answer is that we're comfortable with the guidance. I think that, once again, that depends to some degree on stock-based comp. But at the same time, we've had a nice start fourth quarter. All the synergies that were in here and the efficiencies of third quarter in. And I would kind of remind you, if you look at last year, the last two weeks of the fourth quarter last year were pretty rugged with weather the last two weeks. And hopefully, we don't have to encounter that. So I think we're anticipating a very nice quarter, and we're comfortable with our guidance. Or certainly, just plus or minus, very close.
Walter Spracklin (Managing Director and Senior Equity Research Analyst)
Got it. Okay. And then on grain, I know, Keith, you mentioned there's a little bit less of a significant decline in your carryover. We were of the view that you'd be carrying over a significant amount from this year's very significant crop, and that would lead to another very, very good year for grain. With the volatility and the carryover amount, should we be modeling the same type of level you've been doing in grain this year off this significant crop, or should we have a relook at those estimates for next year given less of a carryover?
Bart Demosky (EVP and CFO)
I'd say through this crop year, model the same. Walter, let me clarify my comment. I was speaking more to the carryover being more normal or historical from 2015 to 2016. So we'll finish out the 2015 crop year end of next summer effectively with that normalized carryover for the 2016. So for this current crop year, model the same as you did for last year.
Walter Spracklin (Managing Director and Senior Equity Research Analyst)
Got it. Okay. That's my two questions. Appreciate it.
Nadeem S. Velani (Head of Investor Relations)
Thanks, Walter.
Operator (participant)
Your next question comes from Brandon Oglenski from Barclays. Please go ahead.
Brandon Oglenski (Director and Senior Equity Analyst)
Yeah. Good morning, everyone. Congrats on the quarter. Bart, Keith, I just want to ask about the comp and benefit line. So it looks like you had about $30 million year-over-year of additional stock comp. So what I want to ask is, where do you see the run rate of your compensation and benefits right now? And just given a pretty robust growth outlook, should we be thinking you've hit and maybe this is more for Keith, but have you hit the labor efficiency targets that you'd like to see in the network, or how should we be modeling headcount heading into 2015?
Bart Demosky (EVP and CFO)
Yeah, thanks. It's Bart. I'll take the first part of that question and then turn it over to Keith. We're running currently, for every CAD 1 change in the stock price, about CAD 800,000-CAD 850,000 of headwind or tailwind, depending on which direction the share price goes. That would, without any changes to the stock-based comp, and Hunter alluded to the fact that we are reviewing that, if we kept our current program, that would bump up a little bit next year, closer to something like CAD 1 million per CAD 1 stock price change. Hopefully, that helps you with the run rate numbers, Keith.
Keith E. Creel (President and COO)
Yeah, I'd say on the headcount, there's still some room for improvement. We've got it. We talked about another 1,000 through attrition, through efficiency. So there's definitely an opportunity. We've got knock on wood. We've got a collective agreement that's out for ratification on the U.S. side that would give us some synergy. That's not all of it, certainly, but it would be helpful. But again, even if we don't get that ratified now, I'm optimistic that's going to happen later. But we'll still stick to the number. And the 4,900 is pretty strong, and we expect some additional improvement on that side.
Brandon Oglenski (Director and Senior Equity Analyst)
Okay. Appreciate that. And for my second one, a lot of investors and analysts look at carloads, right, because we see the visibility every week. But you guys have been running very favorable mix on the RTM side. Is that also something that you expect is going to carry over into next year, Keith, or should we start to see some acceleration in units as well?
Keith E. Creel (President and COO)
I think RTM, we're going to be pretty similar. You're going to see strong single-digit, low double-digit growth for next year. You'll see similar. I pay attention to the RTMs a lot more than I would on the carload side.
Brandon Oglenski (Director and Senior Equity Analyst)
All right. Appreciate it.
Operator (participant)
Your next question comes from Tom Wadewitz from UBS. Please go ahead.
Tom Wadewitz (Managing Director and Senior Equity Research Analyst)
Yeah. Good morning. Wanted to ask you about grain and just, in specific, the Canadian grain yields. I know there's a bit of noise in that line, so just wanted to see if you could help us understand the dynamic with the 7% decline in the quarter and then how we might think about that in fourth quarter and the next couple of quarters, just in terms of modeling the change in year-over-year revenue per car for Canadian grain.
Bart Demosky (EVP and CFO)
Well, you're going to see a continued headwind through the fourth quarter. So similar to what you saw third quarter is what we're going to do in the fourth quarter. You'll start to see that become a tailwind for us first quarter of 2015 and a strong tailwind second quarter of 2015.
Tom Wadewitz (Managing Director and Senior Equity Research Analyst)
In terms of year-over-year change, similar in fourth quarter, and then it becomes year-over-year growth in revenue per car in first half of 2015?
Bart Demosky (EVP and CFO)
Yeah. A little bit in first, a whole lot in second.
Tom Wadewitz (Managing Director and Senior Equity Research Analyst)
Okay. Great. I appreciate that. That's helpful. And in terms of the operating ratio, how would you think about the pace of improvement in 2015? I mean, you guys have obviously a lot of productivity opportunities the next several years, and you've got a pretty robust revenue outlook for 2015. Is it possible that you approach a 60 OR in 2015, or is that too aggressive in terms of potentially what you could do next year?
Bart Demosky (EVP and CFO)
Keith may have some comments. He normally does. Let me speak before he does, though. I'm going to have a disappointed leader if we don't see a low 60s number in 2015.
Nadeem S. Velani (Head of Investor Relations)
I agree.
Tom Wadewitz (Managing Director and Senior Equity Research Analyst)
I mean, is 60 unrealistic to think you might touch that, or is that in the realm of possibilities?
Nadeem S. Velani (Head of Investor Relations)
Well, certainly not unrealistic. And I want to be careful about how my remarks are interpreted. But if you look at the run rate, Tom, that we're going to have third and fourth quarter, you take the seasonality out of first or factor that in, what impact that will have. I think you will see second, third, fourth quarters that will be knocking on 60 and might break through. And then whatever impact the first quarter has from a seasonality standpoint, you can factor that in. It will have some potential negative impact.
Bart Demosky (EVP and CFO)
Yeah. To Hunter's point, you'll know a lot after the fourth quarter. Get a little bit more color on that because first quarter of last year was one of the worst first quarters I've ever dealt with in my railroad life. And I pray that I don't have another one. And I'm optimistic we want it to be a more normalized winter. At least that's what I pray about every night. And if that happens, you're going to see our comparables to last year be favorable for us overall for the year.
Tom, it's Bart. Just one thing to add and to keep in mind as we're going throughout the year is our pension expense as well. Obviously, interest rates have been falling, and that does have an impact on the liability calculations. So that's something you should factor into the mix as well.
Tom Wadewitz (Managing Director and Senior Equity Research Analyst)
Right. Okay. Great. I appreciate it. Thank you for the time.
Nadeem S. Velani (Head of Investor Relations)
Thanks, Tom.
Operator (participant)
Your next question comes from Bill Green from Morgan Stanley. Please go ahead.
Bill Greene (Equity Analyst)
Yeah. Hi. Good morning. Thanks for taking the question. Bart, I wanted to start with you. I know we're going to do an M&A call later today, so we don't have to speak to that. But can you speak about the balance sheet within that context? In other words, when we think about levering it up to buy back shares, do you pull back a little bit from that given that perhaps M&A would happen? Can you talk a little bit about that? And of course, Hunter, if you have views, we'd love to hear them as well.
Bart Demosky (EVP and CFO)
Well, the only thing I'd say, Bill, is that our balance sheet is in fantastic shape. We do have a fairly significant amount of dry powder to put to work for shareholders. You're probably as well aware of the numbers as anybody is. And our view on it is simply this: whatever is going to garner the absolute highest return for shareholders is where we're going to put our dollars. Right now, we see that in our share price. I can't speak for the M&A space. Hunter's going to talk a lot more about that in a short while here. But obviously, if something ever did come up, we would direct the dollars there if it's more beneficial. But it's absolute highest return for shareholders.
Hunter Harrison (CEO)
Bill, I don't think there's much to add to that. I think I agree with Bart totally. We're going to proceed like we're going to proceed, and then we'll react as the market potentially changes.
Bill Greene (Equity Analyst)
Okay. Hunter, can you also speak to the potential for a labor deal? Any updates there, anything that's new on that front?
Hunter Harrison (CEO)
Well, to Keith's remarks earlier, it's certainly encouraging, number one, that we got an initial agreement. That just indicates that the labor leadership and management agree. Now, we've got some issues that we got voters we got to deal with, and there's some issues about change and trust and so forth that we're going to have to deal with. If I had to put some odds on it, I think it's probably 50/50 at this time. But to Keith's point, I think it indicates a major breakthrough attitudinally. And if it doesn't happen this time, it's close. So I'm very hopeful, but if we don't quite make it, then we've got another alternative to look at. And I would imagine we would come back with another that same type agreement, maybe fine-tuned to the voter a little bit and hear their responses. And it's bottom line solved good.
Bill Greene (Equity Analyst)
Great. Thank you for the time.
Operator (participant)
Your next question comes from Ken Hoexter from Bank of America Merrill Lynch. Please go ahead.
Ken Hoexter (Managing Director and Senior Equity Research Analyst)
Great. Good morning. If we could just take a little bit more on the yields. You talked about Canadian grain turning down negative growth rate in the quarter. Can you kind of dig into the why it was down? And similarly, potash slowed sequentially and also turned down negative sequentially and chemicals on a yield basis. I'm talking just strictly on yields. Was there an impact on congestion that decreased yields? Was there something else that kind of overhung on the yield growth potential there?
Bart Demosky (EVP and CFO)
Now, the yield on the grain, it's all about the MRE in Canada. So last year, to simplify it, we overcharged effectively the third and fourth quarter, and you've got to adjust it. If you don't give it back in rate concessions, then you're going to pay a penalty. So that's effectively what it is. We'll get to a comparable, again, first quarter and second quarter where we're not giving back, and it's a more consistent approach. We've changed our approach. We're not overcharging. We're trying to stay right with the MRE on an annual basis. You're not going to see this happen again to the best of our ability as it's occurred in the past. That's what's driving the yield difference, the deterioration on the grain side.
Ken Hoexter (Managing Director and Senior Equity Research Analyst)
Any comment on the others? On the other two that were down, I guess in terms of bulk, potash, chemicals also seem to come in in terms of growth rates. Was there anything kind of on the yield basis? As I mentioned, was congestion an issue in terms of yields or huge mix changes on those?
Bart Demosky (EVP and CFO)
We wouldn't say there was any congestion impact on the yields. In potash, there certainly is a little bit of a mix play between how much you have on moving in domestic versus export lanes. The characteristics of the moves are quite different. We saw the export side quite strong in Q3, and that's what drove a little bit of the mix in there. If you look, you had ARC up 6% or average revenue per car while your cents per RTM on potash were down a little bit. That's because of the longer haul on the export moves. That's what we were seeing there. On chemicals, maybe I'm not following what you're looking at because we saw the revenue per car up 7% on our chemicals and plastics business and our dollars per RTM up 6%.
We think we had some good pricing practices in how we dealt with the contracts and the mix of business in that area. It was.
Hunter Harrison (CEO)
I guess there I'm looking sequentially just to throw it out there. It was almost 3,185 and below 3,100 this quarter, so from second quarter to third quarter. And then the growth rate got cut in half from over 13%-6.5%. And that's similar to each of the commodities that I mentioned. It was same thing in potash and obviously Canadian grain, we saw it. But that's what I was referring to on the chemical side.
Bart Demosky (EVP and CFO)
Chemicals has moved along nicely. I don't have the sequential number right in front of me, but we're doing the right thing, and we're happy with how that book's performing and the mix of business we have there.
Ken Hoexter (Managing Director and Senior Equity Research Analyst)
All right. Thanks for the time. I'll follow up later. Thanks.
Operator (participant)
Your next question comes from Turan Quettawala from Scotiabank. Please go ahead.
Turan Quettawala (Director of Transportation & Aerospace)
Yes. Good morning. I guess my question is just to go back to our guidance for a second here. Obviously, it looks like you guys are pretty much on track to deliver your EPS and your OR guidance, and you probably would have beaten here quite nicely had it not been for the headwind, I guess, from the winter as well as stock comp expense, which has been talked about. I guess my question is, are those really the two major headwinds that you had maybe in the year, or is there something else that maybe either went better than your plan or maybe went against your plan? Just trying to understand about some opportunities and challenges maybe with regard to your guidance for next year. Thank you.
Bart Demosky (EVP and CFO)
Turan, it's Bart. I think you captured the two big areas. As we're sitting here today, we're not seeing much in the way of material items that we'd say are going to be big tailwinds or headwinds. Foreign exchange is obviously working a bit for us right now. I mentioned pension expense being something that could be a headwind for us next year just depending on how interest rates perform over the last few months of the year. Those are two things I'd see. The rest of it is.
Keith E. Creel (President and COO)
Yeah. Let me add one thing that I am encouraged about. I think that could come a tailwind for us. We've talked about it a lot. Our domestic intermodal product continues to be well-received in the marketplace. Strong demand actually exceeding some of our capacity at times on that domestic intermodal train. So we've got an opportunity to improve the quality of the book, the freight that's moving on that train. And we're starting to see recognition in the marketplace for the service as well on the international side. So more to come on that later, but very optimistic on some opportunities international as well as domestic that could give us some tailwind that I'm pretty happy about.
Turan Quettawala (Director of Transportation & Aerospace)
That's great. Keith, I think you did just say that there were some contracts coming up for renewal? I believe there's a few at least that are coming up over the next year. Is that right on the international side?
Keith E. Creel (President and COO)
Yeah. We're in the process of negotiating with our current contracts. I can tell you that one of our three, we've just recently successfully renegotiated. Again, favorable to the book of business and certainly one that reflects the discipline on our pricing side that recognizes the service we're putting in the marketplace. But more to come on some additional opportunities as well in the near future, some other contracts that we're negotiating. So pretty encouraged.
Nadeem S. Velani (Head of Investor Relations)
Thank you very much. That's helpful.
Operator (participant)
Your next question comes from Benoit Poirier from Desjardins Capital Markets. Please go ahead.
Benoit Poirier (Managing Director and Senior Equity Research Analyst)
Yes. Thanks. Good morning. Just to come back on the crude by-rail question, you mentioned about the potential for 300,000 carloads for the origination. I was wondering if you could provide the number once you include all the new terminals that have been announced. I would assume that you are not including the potential with Encana, Dakota Gold, Port Arthur, and also Kinder Morgan.
Bart Demosky (EVP and CFO)
Kinder would be in that. Bruderheim, Canada, Kinder as well as USD. Those are the three. And then no Kerrobert. That's going to be in 2016, right? So yeah, those are the primary three that are driving it at Benoit.
Nadeem S. Velani (Head of Investor Relations)
Okay. Just with respect to Hardisty, revenue per carload on the crude by-rail side was close to 4,400. Should we expect this number to come down a little bit as Hardisty is ramping up given its more focus on a short haul?
Bart Demosky (EVP and CFO)
No. No. I would not model that.
Benoit Poirier (Managing Director and Senior Equity Research Analyst)
Okay. Just for the second question, when we look at your RTM quarter to date, obviously, it's only a few weeks. We are up 3.5%. What should we expect in Q4 and especially on the coal and grain side?
Nadeem S. Velani (Head of Investor Relations)
Yeah. Benoit, Nadeem, I would just point out we had the RTMs we've reported. There is a bit of noise with Thanksgiving and year-over-year kind of changes. So we're right now actually closer to 6%-6.5%. You should see a similar kind of quarter both on RTMs and on cents per RTM.
Bart Demosky (EVP and CFO)
Yeah. 6-6.5 with demand growing. Our 7-day numbers, our recent trends are even stronger than that. Hunter mentioned this a moment ago. I'll just tell you, October could be a record revenue month for CP Rail. That's what we're seeing right now. So we're very confident in our outlook on the fourth quarter, Benoit.
Benoit Poirier (Managing Director and Senior Equity Research Analyst)
Okay. Thanks very much for the time.
Operator (participant)
Your next question comes from Chris Wetherbee from Citi. Your line is open.
Chris Wetherbee (Senior Research Analyst)
Hey. Thanks. Good morning. Keith, maybe a question on the U.S. operations side. Just kind of curious how things were trending towards the end of the quarter. And as you head into the fourth quarter, how much more progress do you need to make there, particularly as you think about the interchange with the RCP&E? I think you mentioned things were getting a bit better.
Bart Demosky (EVP and CFO)
Yeah. The RCP&E, they've gotten their legs under them. They've got locomotives. They've got cars. I think they're doing a pretty solid job of moving the product they've got out there. And we're working well with them, taking trains over Tracy in interchange. So I'm very encouraged with the progress there. Minneapolis, St. Paul, we continue to work closely with our partners there. The investments that we made last year, we're seeing some improvements. We've taken those westbound trains out of that grid, so to speak, over our own route, starting to see year-over-year increases in train speed, reduction in dwell. Chicago is and will remain a focus area for us. It's very fragile. I guess I'm being optimistic with my comments.
I can't predict what's going to happen in Chicago, but I do know enough about this business that if we have a winter like we had last year or close to it, I'm concerned. But with that said, again, we're being very proactive. Some might say aggressive. I would say we're engaged. We're trying to do all that we can do to ensure that the bridge carriers, the Belt, the Harbor, those that benefit the entire industry are performing to their utmost best, which will benefit CP, which will benefit every other carrier that utilizes their services. So we're doing all the things that we know how to do. But again, I don't have a crystal ball for winter. And I do remain concerned about the fragile state of that overall terminal in Chicago.
Chris Wetherbee (Senior Research Analyst)
That's probably the biggest area of concern as you're heading into this winter just from an operational perspective. It's got to still be Chicago. It's always going to be that at this point.
Bart Demosky (EVP and CFO)
As long as it's steady state and current state of operations in Chicago, it's going to remain my number one concern today. I'm sure first quarter, second, third, fourth of next year, it's not getting any better in Chicago, that's for sure. As this business grows for all the railroads, it just puts additional pressure on a place that's already very fragile.
Chris Wetherbee (Senior Research Analyst)
Okay. That's helpful. And then just a follow-up on the coal side, just trying to get a rough sense of how you guys are thinking about maybe the Teck business, the export business off the West Coast as you think about 2015. Obviously, that market continues to be a soft one, but Teck appears to have the ability to produce at a relatively low cost. Just want to get a rough sense maybe how you're thinking framing up the volume outlook for 2015.
Bart Demosky (EVP and CFO)
I'd say model the same thing, pretty flat, 2014 versus 2015. Teck, they've sort of taken up lessened their dependence upon China. It's only 25% of the business. They're a strong low-cost provider, and we effectively are the ones that are helping them play in that game. So as long as Teck is competitive in the marketplace, they're going to be strong. We're going to be strong as a result. It's a great partnership. And again, long answer to your short question, assume the same for 2015 that you see in 2014.
Chris Wetherbee (Senior Research Analyst)
All right. Great. That's helpful. Thanks for the time. Appreciate it.
Operator (participant)
Your next question comes from David Newman from Cormark Securities. Please go ahead.
David Newman (Managing Director of Institutional Equity)
Good morning. Just back on the crude for a second. Obviously, in this kind of commodity price environment, the likelihood of more pipelines getting built is probably tenuous at best. Do you think there's a chance that the rails could pick up a greater share or conversely maybe take the take-or-pay percentages up over time?
Bart Demosky (EVP and CFO)
Well, I definitely think the take-or-pay percentages, the strength of our franchise, can go up over time. I do think there's an opportunity to take more share. I mean, again, I don't have a crystal ball, but in this environment for a pipeline to be built, if they pull the trigger, you're still talking 7-8 years out. So what I call long-term in our four-year plan, again, I'm very bullish on it.
David Newman (Managing Director of Institutional Equity)
As you shift over to more crude, I mean, wouldn't that naturally flow that you could probably take that take-or-pay percentage up, Keith?
Keith E. Creel (President and COO)
Yes.
David Newman (Managing Director of Institutional Equity)
Okay. Very good. And just maybe Bart. You're at CAD 610 million on free cash flow year to date. And I think the soft sort of guidance was CAD 1 billion-CAD 1.2 billion. Are we assuming that Q4 is going to come in very strong on the free cash flow basis? And maybe what are the sort of puts and takes around that?
Nadeem S. Velani (Head of Investor Relations)
Well, maybe we don't actually guide on cash, but the $610 million is net of dividends, of course. We're looking, as Hunter and Keith have outlined, at what we believe is going to be a very strong fourth quarter. My views have not changed on where our free cash is going to end for the year.
David Newman (Managing Director of Institutional Equity)
I know it was just a couple of weeks ago, but any further developments on the monetization of the assets? So is it reliant on the balance sheet to do the buybacks?
Nadeem S. Velani (Head of Investor Relations)
No. Nothing new there. We talked about the D&H at our investor day. And we're in great shape, though, from a balance sheet point of view and with some cash on the balance sheet currently that we can put to work for buybacks. And so you're going to continue to see us in the market.
David Newman (Managing Director of Institutional Equity)
When do you anticipate the D&H might close or when you finally get an agreement in hand?
Bart Demosky (EVP and CFO)
Well, it's James. We think that we'll have an agreement this quarter. And then it needs regulatory approval through the STB. So that would put closing sometime in 2015, probably second half 2015.
David Newman (Managing Director of Institutional Equity)
Very good. Excellent. Thanks, guys.
Nadeem S. Velani (Head of Investor Relations)
And David, the only other thing I'd add is that any asset sales, whether it be on the real estate side or any part of the network, cash flow coming from that is entirely incremental to our business plan. So it's all upside.
David Newman (Managing Director of Institutional Equity)
Very good. Thank you.
Operator (participant)
Your next question comes from Jason Seidl from Cowen. Your line is open.
Jason Seidl (Managing Director)
Hey, guys. Getting back a little bit to some of the comments made regarding some repricing of some legacy contracts on the coal side. Were they reflected in the 3Q results, or is this something that we should see start in 4Q when we're looking at your yields?
Bart Demosky (EVP and CFO)
You'll see a little bit of it in fourth quarter. You'll see all of it in first quarter. Nothing in third quarter.
Jason Seidl (Managing Director)
Nothing in the third quarter. Okay. Fantastic. Also, when I'm looking at the yields, a little bit surprised that the domestic intermodal side didn't start creeping up, especially when we're looking at some of the pricing on the truck side. Is that something that was impacted by mix with some sort of the whole business? Is this something we should expect to trend up sequentially?
Bart Demosky (EVP and CFO)
Yeah. It's a mix issue. You've got to look at what we're trying to do is balance the network. So we picked up a lot of eastbound backhaul freight, which obviously is not as profitable as the headhaul. Overall, though, the book of business in our intermodal is improved. So I'm bottom-line focused. It's moving the right direction. So as we continue to evolve this thing, we pick up a little bit of increased profitability on international, we're going to do that same thing on domestic. And you'll start to see it change a little bit next year.
Jason Seidl (Managing Director)
All right. Appreciate the time as always, guys. Thank you.
Operator (participant)
Your next question comes from Allison Landry from Credit Suisse. Please go ahead.
Allison Landry (Research Analyst)
Good morning. Thanks for taking my questions. So I wanted to ask another question on crude, but sort of from a different perspective. You've clearly laid out that you're comfortable with the near and long-term guidance. But in the event that the opportunity does end up being significantly smaller than your initial expectations, what are some of the key or different other levers that you might be able to pull to hit the targets that you laid out a couple of weeks ago?
Bart Demosky (EVP and CFO)
Well, I think we've got number one, you've got to understand that we were conservative for the opportunity on the crude side. So it would have to take a meaningful drop for it to really be material to the point that I'd be talking about guidance. So I think that's important to understand. I think it's important to understand that we remain very strong in our additional merchandise from our service. Our boxcar business is picking up. The chemical business is doing well. The frac sand, even if crude production goes down, just the changes they've made as far as the way they're effectively mining for this crude is increasing demand for frac sand. It's 2-3 times out oversold, so overprescribed. So there's a lot of pent-up demand that we can see some softness in, again, from a material standpoint.
I'm not going to lose a lot of sleep at night, certainly not with what I see today.
Allison Landry (Research Analyst)
Okay. Perfect. And then in terms of pricing, so you mentioned it was around 4% during the quarter. A couple of your peers have talked about the rail pricing environment strengthening. And in light of your comments that the quality of the book is improving on the intermodal side as well as what you've done sort of on the coal side, though that may not be hugely incremental, what do you think about the potential for the 4% to accelerate in 2015?
Bart Demosky (EVP and CFO)
I would say model about the same. The 4%, it's a pretty conservative number. We think it's a number we're comfortable with. We think we can grow with our customers. And there's puts and takes every day, but that 4% is a solid number.
Allison Landry (Research Analyst)
Okay. Great. Thank you very much.
Operator (participant)
Your next question comes from Cameron Doerksen from National Bank Financial. Please go ahead.
Cameron Doerksen (Managing Director and Senior Equity Research Analyst)
Good morning. I just wanted to circle back on the domestic intermodal business. You continue to see a nice growth rate in that business. I know that that's one of your key growth areas. You're making some gains as a result of your service-level improvements on some of your key routes. Just wondering if you could break down the growth as it relates to some of the key underlying economic trends. Just wanted to kind of get an understanding how much of that growth is related to the service-level improvements you've made.
Bart Demosky (EVP and CFO)
I would say the preponderance of it's all about service level. It's taking trucks off the highway. We've taken some share from our competitor, but the main driver is trucks off the highways. There's such a compelling difference in price and cost of moving it rail versus truck that gives us a lot of strength there. As long as we've got a consistent service, which is what we've had to put in the marketplace and effectively establish some street credibility, doors are opening and opportunities are presenting themselves from decision-makers that effectively put their job on the line when they put this time-sensitive freight on the rail. So again, outside of economic drivers, just existing opportunity that's there, there's still a lot of meat left on the bone.
An opportunity for us, even with our existing customers, is we shift away from contract business to tariff business to continually improve the quality of the book of business on that train. Then, of course, once you do that, the whole next level of growth is when you get to a point that maybe you want to add another train. We're not there yet, but certainly some opportunity still left to be mined with that service.
Cameron Doerksen (Managing Director and Senior Equity Research Analyst)
Okay. And just thinking about 2015, when you were doing your guidance or you outlined your targets, how much of the domestic intermodal growth did you attribute just to the service-level improvement and how much to improving economic climate?
Nadeem S. Velani (Head of Investor Relations)
Cam, we'll get into our 2015 guidance in January. Typically, that's when we'll do our guidance. So we've outlined the 2018 kind of targets and the key drivers for the long-term plan. We'll get into some more kind of near-term 2015 in January.
Cameron Doerksen (Managing Director and Senior Equity Research Analyst)
Okay. Great. Just one last question on hiring trends in some of your key regions like the Bakken. In the past, you've mentioned that sometimes attracting labor in those regions has been a little bit difficult just given what's been going on with oil and gas. How is that trending for you as of right now, and how do you see that going in Q4?
Bart Demosky (EVP and CFO)
Well, number one, we've been successful with our initiatives trying to attract employees. We've been able to hire. The long-term game, of course, is to be able to make it stick and sustain employment. So far, so good. Although we have had some headwinds there, we've done some pretty creative things with incentives to get people to relocate there. We've actually created some lodging facilities for our crews to stay in. So we're trying to provide some creature comforts that allow an employee the motivation to pick us as an employer of choice. The real gain, though, this collective agreement, if we can get that nut cracked, you're talking about an opportunity for the employees to make a whole lot more money, for the company to be more productive, to have a whole lot better quality of life.
All those things are powerful, powerful motivational levers for attracting and retaining employees. More to follow on that, but we're encouraged with it.
Cameron Doerksen (Managing Director and Senior Equity Research Analyst)
Okay. Great. Thank you for taking my questions.
Bart Demosky (EVP and CFO)
Thank you.
Operator (participant)
Your next question comes from Jeff Kauffman from Buckingham Research. Please go ahead.
Jeff Kauffman (Research Analyst)
Thank you very much, and congratulations, everyone. I just wanted to follow up, Bart. A lot of my questions have been answered at this point, but just to quantify, you mentioned that if you don't do anything to stock comp, it'll be about CAD 1 million for every CAD 1 change in stock price. I assume if the stock price drops, you're clawing back some of that accrual, correct?
Nadeem S. Velani (Head of Investor Relations)
Absolutely. It's $1 million either way, depending on which way the share price moves.
Jeff Kauffman (Research Analyst)
Okay. And you mentioned about pension with the interest rates. Do you have kind of a ballpark idea if we just took today's interest rates, kind of how meaningful that impact could be?
Nadeem S. Velani (Head of Investor Relations)
Just for back pocket for you, I think the way to think about it is every 10 basis points moved in the underlying interest rates is about $13 million on the expense. At investor day, we'd outline a view that next year we'd have a modest expense. I think we were around $10 million, and I was assuming 4.55% on the interest rate. Rates have come down a bit since then, so I don't have those numbers sitting here right in front of me, but that number would be higher going into next year if rates held the same. That's the most sensitive part of the calculations, and it's purely just the math.
Jeff Kauffman (Research Analyst)
Okay. And the final clarification, currency. I don't think any of us expected the Canadian dollar to drop the way it has this year. Who knows what happens next year, but your average price on the dollar so far is around $0.9192. Generally, we think for every penny, I think it's CAD 35 million annualized revenue benefit, CAD 20 million higher expenses. Is there anything you're doing to change those relationships, or is there any reason to believe the relationship would be different in 2015?
Nadeem S. Velani (Head of Investor Relations)
No. In fact, we understand our currency exposure very well. There's some big components that are in it, fuel being one of them in particular. But we've got a very strong natural hedge within our book of business. And one of the things to keep in mind, as you've seen the Canadian dollar weakening here, is it's highly correlated with crude. So if you think about our book of business and how revenues will move up and down in relation to the currency as well, we've got a strong hedge there on the revenue side. So we're very comfortable and probably would look to give you the same guidance going forward.
Jeff Kauffman (Research Analyst)
Okay. I just wanted some clarifications on those items. Thank you.
Nadeem S. Velani (Head of Investor Relations)
Yeah. Jeff, I would just add that below the line, as you lever up and if you take on U.S. dollar debt, that also helps support that natural hedge as well. So one thing that's not to overlook as well.
Jeff Kauffman (Research Analyst)
Okay. Thank you.
Operator (participant)
Your next question comes from Steven Paget from FirstEnergy Capital. Please go ahead.
Steven Paget (Director of Institutional Research)
Thank you, and good morning. On business development, one of your biggest recent successes was your new haulage route via CSX on the south side of Lake Erie. Could you maybe fill us in on how that came about, and are you working on other high-impact partnerships?
Keith E. Creel (President and COO)
Well, I'd just say that that sort of came from a beast of necessity. For us to be competitive in that lane, which there's an opportunity between Montreal and Chicago, we needed to have double-stack economics. We currently don't enjoy that through the previous route to Detroit. It sort of knocked us out of the market, so to speak, now that we've done this deal with CSX. As long as we do our part and they do their part and we can provide consistent service to our customers, we get the benefit of the economics on the double-stack and improved service level. So it's a very encouraging development for us on international cross-border intermodal service.
Steven Paget (Director of Institutional Research)
Are you working on other similar partnerships?
Keith E. Creel (President and COO)
You know what? We're always keeping an open mind. I don't know any right now that are front of mind that are going to knock the ball out of the park, so to speak. But we're always keeping our eyes open and looking for opportunities to partner with our competing or partnering railroads to provide a service that converts in the marketplace. So we haven't come up with any, and we'll be highlighting those in future calls.
Steven Paget (Director of Institutional Research)
Thank you, Keith. Length of haul on US grain is way up. What's behind that?
Keith E. Creel (President and COO)
Growth in the Pacific Northwest. So you've got grain that's coming out of North Dakota that's coming up to Canada, going across to the UP at Kingsgate, going to the West Coast.
Steven Paget (Director of Institutional Research)
Thank you. Those are my two questions.
Keith E. Creel (President and COO)
Okay. Thank you. Take care.
Operator (participant)
Your next question comes from Keith Schoonmaker from Morningstar. Please go ahead.
Keith Schoonmaker (Director of Industrials Equity Research)
Thanks. Within domestic intermodal, up 20% in RTMs in the period, pretty strong. How impactful do you consider the limitations to truck driver availability as a key driver?
Keith E. Creel (President and COO)
You know what? I think that that's going to broaden our strength and our opportunity, I think, as we go forward. And you see some of their constraints and their hours of service changes affect that industry. You're going to see additional demand for our domestic intermodal products. So I think long-term, it's very favorable for the rails.
Ken Hoexter (Managing Director and Senior Equity Research Analyst)
Is that pretty impactful on both sides of the border, Keith?
Keith E. Creel (President and COO)
Yes. Similar story both sides of the border.
Keith Schoonmaker (Director of Industrials Equity Research)
Let me ask a quick one on a sector that maybe wasn't so favorable in the period, and that's autos, where RTMs declined 21%. Is this idiosyncratic, unique to this period, or is this more of a secular trend?
Bart Demosky (EVP and CFO)
Chrysler. We lost the Chrysler contract, generally long-haul business. So you're seeing full impact of that in the third quarter, which is the first quarter of loss of that business. You'll see similar impact from a variable standpoint fourth quarter.
Keith Schoonmaker (Director of Industrials Equity Research)
Yeah. Thanks. Do you expect additional declines with Mexico production coming online, or does this present some opportunities as well?
Bart Demosky (EVP and CFO)
I think it presents an opportunity. One other point I'll lead everybody to, in spite of the loss of revenue for the contract that we walked away from, our quality of revenue on the automotive side is increasing. Again, very encouraging as we drive a disciplined approach to the book of business.
Keith Schoonmaker (Director of Industrials Equity Research)
Great. Thank you.
Operator (participant)
Your next question comes from David Tyerman from Canaccord Genuity. Please go ahead.
David Tyerman (Managing Director)
My questions have been answered. Thank you.
Bart Demosky (EVP and CFO)
Thank you.
Operator (participant)
Mr. Harrison, there are no further questions at this time. Please continue.
Hunter Harrison (CEO)
Okay. Thanks very much for joining us, and we'll be talking to some of you in about 50 minutes. So thanks a lot again.
Operator (participant)
This concludes today's conference call. You may now disconnect.