[Abrupt Start]CN Third Quarter 2019 Financial Results Conference Call will begin momentarily. I would like to remind you that today’s remarks contain forward-looking statements within the meaning of applicable security laws. Such statements are based on assumptions that may not materialize and are subject to risks described in the CN third quarter 2019 financial results, press release, and analyst presentation documents that can be found on CN’s website.As such, actual results could differ materially. Reconciliations for any non-GAAP measures are also posted on CN’s website at www.cn.ca. Please stand by. Your call will begin shortly.Welcome to the CN Third Quarter 2019 Financial Results Conference Call.I would now like to turn the meeting over to Paul Butcher, Vice President, Investor Relations. Ladies and gentlemen, Mr. Butcher.

Well, thank you, Patrick. Good afternoon, everyone, and thank you for joining us for CN’s third quarter 2019 earnings call. I would like to remind you about the comment already made regarding forward-looking statements.With me today is JJ Ruest, our President and Chief Executive Officer; Ghislain Houle, our Executive Vice President and Chief Financial Officer; Rob Reilly, our Executive Vice President and Chief Operating Officer; Keith Reardon, our Senior Vice President, Consumer Product Supply Chain; and James Cairns, our Senior Vice President, Rail Centric Supply Chain.Once again, I do want to remind you to please limit yourself to one question so that everyone has the opportunity to participate in the Q&A session. The IR team 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. JJ Ruest.

Thank you, Paul, and good afternoon, everyone, and welcome to our third quarter earning call. I'm very proud with the CN team. They delivered very good result with solid cost management in a softer and uncertain economic environment for the North American rail industry. We produced adjusted EPS growth of 11%; revenue growth of CAD140 million or 4% growth, and an operating ratio of 57.9% and improvement of 160 basis points.In the next few minutes, Rob will cover our operation, James and Keith will cover their respective marketplace, and Ghislain will peel-off the financial. CN pricing was above rail inflation. Our carload growth was flat, which is well above the industry negative average of 4.5% for the quarter and our costs and asset utilization KPI are improving.While the North American rail industry is dealing with slower growth in manufacturing, natural resource, energy, and trade, we stay very focused on building our sustainable long-term business, namely increasing our exposure to the consumer economy in Intermodal and Automotive, deploying productivity-enabling technology to our rail operation, creating new model of rail growth in partnership with others, and building a bench of human talent as one of our long-term competitive edge.Since we last spoke, we reached a purchase agreement for a CSX rail property and we are starting with a new joint service that will connect the U.S. East Coast port some of them with the consumer distribution center located in Greater Toronto and Greater Montréal. We are also initiating whiteboard supply chain planning with PSA executive to leverage their purchase of an ocean terminal in Halifax. The same whiteboard discussion will also take place with a team of DP World, who is acquiring the Vancouver, Fraser Surrey bulk container terminal and with AMCI, who is acquiring the Rupert bulk terminal.The CN franchises has…

All right. Thank you JJ. First and foremost, thanks goes out to the men and women within the CN team to help deliver this quarter's outstanding results. Some of the operational highlights this quarter include: The team handled an all-time record in GTMs for a third quarter, 1% more than last year's Q3 and 5% higher than 2017.Train speed improved 4% over the same quarter last year, car velocity improved 7% and train productivity increased 2% versus the same quarter in 2018. As JJ mentioned, this quarter's financial results were in large part assisted by our strong cost control efforts.In the quarter, we delivered an all-time best fuel efficiency performance improving 4% year-over-year. That means, we moved 4% more tonnage the same distance with the same amount of fuel. CN continues to be the North American Class I railroad leader in fuel efficiency, using a little more than 8/10 of a gallon of fuel per thousand gross 10 miles.These results were not an accident, but the result of an intense day-to-day commitment by the operations team, disciplined by our locomotive engineers and utilizing onboard tools, minimizing the idling locomotives and a strong execution of the number of locomotives used on trains to achieve these savings.From a railcar perspective, we’re in process of returning nearly 3,000 railcars that were on lease, scrapping another 2,000 railcars and have parked over 6,000 cars to saving car hire expense. All of these actions help to right size our fleet to the rail volumes we are experiencing and decrease our expenditures associated with them. As a result of these efforts, our active online inventory has dropped 6% year-over-year leading to a more fluid railroad.On the locomotive front, we continue to return leased locomotives and will return the last of these locomotives in Q4, as we…

Thank you, Rob. Overall revenue for the quarter was up 4%. Keith and I will walk you through the top line performance for our respective markets in Q3 and provide some insight of what lies ahead.The North American rail industry is facing a challenging economic environment. And as you've heard from Rob, we are managing our cost very closely. Looking at year-over-year results, it is clear that our unique three course market reach and footprint in North America, our structural advantages that allow us to diversify our traffic mix and adaptive changing market conditions.A great example of this structural advantage and action was our performance in North America coal segment in the third quarter.Coal was a tale of two markets in Q3. Strong growth in Canadian exports, up 80%, driven by the ramp-up of Coalspur’s new mine that opened earlier this year, was partially offset by a sluggish U.S. thermal coal exports down 38% as a result of low API2 pricing.Looking forward, we will continue to see a sequential increase in run rate for Canadian coal in Q4 and expect the same for U.S. coal. The Canadian grain crop has been delayed as a result of poor weather conditions. We ended the quarter 1% below last year. We expect to recoup those volumes in the spring of 2020.Again, our market reach is a structural advantage. We run longer trains with direct CN to CN service for country elevators to West Coast ports. The new G3 grain terminal in Vancouver is expected to be in service in the second half of 2020. This will be the first grain loop track to loop track supply chain in Canada and will facilitate quicker asset turn times and allows the ship more tonnage with fewer cars.We are creating new capacity and increasing resiliency to…

Thank you, James, and good afternoon, everyone. The consumer markets produced strong results in the third quarter. Our ability to adapt to the market realities with strong cost management, as well as our ability to provide our customers with solutions have allowed us to outperform our markets.Revenues were up 13% and RTMs were up 2% for the group in the third quarter versus 2018. In both, Intermodal and Automotive, we continue to win with our unique network reach and consistent high levels of customer focus. The cost-effective and efficient gateways, with which we serve, continue to produce sustainable long-term results.Starting out with Automotive, CN's team has worked extremely well together to provide our customers with solutions that generated slightly above 5,600 carloads growth, allowing us to outpace the industry growth rate and setting record monthly volumes.Our strategy to increase the number of Autoport storefronts, as well as providing a very solid supply of railcar capacity is winning in the market. Our new Vancouver Autoport facility is also now open and producing results. In intermodal, the initiatives we presented at our Investor Day will continue to provide efficiencies and additional capacity in our inland terminals. CN has room to grow and we continue to generate new ways to improve our position as a cost leader in this segment.In the international intermodal segment, trade uncertainties have contributed to lower industry volumes. We have been able to leverage our network of efficiencies gateways, our extended reach into the hinterland and our points of product differentiation to outperform the industry.For example, Prince Rupert finished the quarter at run rates of 1.35 million TEUs, which is right at the terminal's nameplate capacity. Expansions are coming in 2021 and 2022 to take that capacity to 1.8 million TEUs. CN and our partner DP World have a…

Thanks Keith. Starting on Page 11 of the presentation, I will summarize the key financial highlights of our third quarter performance. While we have witnessed weaker volumes driven by softness in the general economy, we swiftly right-size our resources to changing demand while being conscious of the mid to long-term structural opportunities that are in front of us.Revenues for the quarter were up 4% versus last year at slightly higher than CAD3.8 billion. Operating income came in at CAD1.613 billion, up CAD121 million or 8% versus last year. Our Q3 operating ratio is 57.9% or 160 basis points lower than last year. Note that CN's operating ratio always excludes the benefit of any asset sales.Net income is just shy of CAD1.2 billion or CAD60 million higher than last year with reported diluted earnings per share of CAD1.66 versus CAD1.54 in 2018 up 8%. Excluding the impact of a large asset sale in 2018, our adjusted diluted EPS was up a solid 11% versus last year. The impact of foreign currency was favorable by CAD5 million on net income in the quarter or CAD0.01 of EPS.Turning to expenses on Page 12, our operating expenses were up 1% versus last year at just above CAD2.2 billion. Express on the constant currency basis, expenses were flat versus last year.At this point, I will refer to the variances in constant currency. I will cover some of the key highlights. Labor and fringe benefit expenses were 2% lower than last year. This was mostly the result of lower incentive compensation by over CAD40 million, partly offset by higher wages, driven by the onboarding of TransX employee.Purchase services and material expenses were 13% higher than last year. This was mostly the result of higher trucking and transport expenses due to the inclusion of TransX and higher…

Well, thank you Ghislain. And before we open up the Q&A, I just like to do some concluding comments here. So as was mentioned during the call the consumer economy in North America continue to perform. So we have low inflation, low unemployment, fast government spending, sustained consumer spending. But business capital investment is weaker, manufacturing has slowed down, energy as improved by rail and tracks and is quite volatile and trade is under -- is putting us under much pressure. These suggest the North American rail industry volume, which was negative by 4.5% in Q3, will continue to underperform at GDP. While at CN, we continue to aim for carload volume to outperform our rail industry in North America.We're focused on long-term sustainability in every sense of the world. We have an exceptional balance sheet; where investment grade credit rating, a debt-to-EBITDA of less than two, we have a track record for increasing dividend for 23 years in a row, and we have a dividend yield that currently stand at about 1.9%. We're passionate about building, innovating new supply chain for the future of the rail industry, we mentioned a couple of those on the call, and we manage cost very tightly during a slowdown in cycle.On that point, Patrick I'd like to turn it over to the Q&A session.

Thank you. [Operator Instructions] The first question is from Brandon Oglenski from Barclays. Please go ahead.

Hey, good afternoon, everyone and thanks for taking my question. So I guess Ghislain or JJ, you guys definitely mentioned an incremental slowdown in manufacturing in the industrial side of the house, but retail remaining okay. I guess in that context and some of the contracts that sounds like Keith was talking about that incrementally come under the business next year. I mean, is this where we should expect CN can still outperform the industry from a volume perspective?

So, it's JJ. Thank you, Brandon for the question. There's two things that we're trying to do. We try -- as an industry, as an automotive industry, we’d like to outperform the GDP, obviously, not possible short-term. And as CN, we would like to outperform our own industry and that is our goal.So, we did that in the third quarter. We had volume flat and the industry was at minus 4.5%. You see the carload stats so far quarter-to-date, the carload stats for the industry actually are more challenging than they were in the third quarter for all of the railroad, and CN’s objective whether this fourth quarter or next year is to outperform the industry. But, while the economy is difficult for manufacturing, energy, trade, and natural resource, the rail industry may not be able to outperform the economy. Hopefully, that helped.

Yes. Thank you.

Thank you, Brandon.

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

Thanks very much and good afternoon.

Good afternoon.

So, clearly, we've had a slowdown in the economy, but it does seem to me that some of the volume growth that you were anticipating in 2019 has simply been differed. And there I am thinking about crude-by-rail, the Coalspur mine and Canadian grain. So, I appreciate that it's too early to 2020 yet, but maybe you could just give us some more color in those areas?

So, I think James that's your newest market space. Maybe you can provide color in these three segments?

Yes. So, we were disappointed to see the late harvest for the Canadian grain craft. We’re still confident that moving forward we're going to have a pretty good grain year this year. All indications are that it could be one of the largest crops in Canadian history, so we're eager to start moving that. We have the resources to do so.On the crude side of things, a little more difficult. There were some government intervention that took place in that market segment and we built out capacity to move about 300,000 barrels a day of crude.In September, we moved about 180,000 barrels a day. We still have that latent capacity available to move that crude, if in fact it does become available. Indications are pretty clear that we will see the Alberta government crude contracts going to private hands here, in short order, possibly by the end of the month and we're very excited to start moving that at crude volume when it does.Talking about at the Coalspur mine, it had some challenges kind of ramping up, but right now they're kind of where we expect them to be at annualized rate of about 3 million tons a year. We're hopeful moving forward that that rate is going to continue to accelerate. We could see sequential improvements and get to that 5 million ton per year pace. Thank you for the question Cherilyn.

Thank you. That’s my one.

Thank you.

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

Hey, thanks. Good afternoon.

Good afternoon.

I wanted to touch on the topic of volumes and I guess sort of the outlook getting a little softer as we move forward here. You started the year expecting I think high single-digits from an RTM perspective and it's come down progressively at the years gone on. If we see sort of the weakness linger through the first 2020, how do you think about sort of resources? Are you well-positioned you think from matching resources relative to potentially softer volumes, particularly around headcount?

Thank you, Chris. I think I will start and then Rob can add to that. But definitely the overall strategy is quite simple. We need to adjust the resource to the demand. When demand goes up, we need to size up resource. When demand comes down, we need to size up the resource to the new volume. So, we talked about locomotive, rolling stock, people. So, I don't know if you want to add some color Rob?

Yes. Absolutely. Thanks for the question, Chris. So, I talked about some of that in my comments. Some of the things we're doing certainly in locomotives. I talked about turning back the leased locomotives were doing that adjusting to it. We've got 150 locomotives laid up right now and we'll continue to adjust as we go on.From a rolling stock standpoint, JJ talked about it, we’ve got 5000 cars, we're readying ourselves up, another 6,000 laid up, that are of car hire release. We'll continue to be aggressive in that area. From a people standpoint, we continue to adjust our hiring model year-over-year. So we've done that as the year has gone on, we'll continue going into next year. And then finally I talked about the mechanical footprint that we're looking at from an alignment standpoint. As we see the volumes dropping, it is about getting our locomotives to the right shop, reducing inventory, increasing the liability and ultimately that will need less people to do that. So we'll continue to be aggressive in this area and continue down that path.

That's right. And more effort on fuel efficiency and even in IT we're in the process – I've been in process now for a few weeks and we're going to do that between now and year-end to convert what we call two-page check of consultant with one page check of permanent employee.So you will see some money moving from purchased services into added white headcount, but the net of that is almost a ratio of 1.9, so net of that is dollar savings because the employee at CN are – the way we have it sorted out, the cost is less than the purchased services of the consultant. I don't know if that helped.

Very helpful. Thank you very much. Appreciate it.

Thank you, Chris.

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

Yes, thank you very much. So my question is more on the intermodal site. Prince Rupert is currently running at month late, there is also additional business with Costco in Vancouver. But I was just wondering whether the slowdown in volume is, kind of, slowing down the port expansion? And any thoughts about the blank sailing, whether it's more specific to particular geographic region? Thanks.

Yeah. So, I think Keith can answer that. In your question that's sort of the short-term, which is the peak season and then late sailing and the long-term, which is those expansion, which will take place. Keith?

Yes. In the long-term those expansions will go on. There’s no discussion about stopping that in the short-term. With regard to the blank sailings, we are seeing blank sailings. And let's all remember what a blank sailings is. It's where the operator of the vessel is looking to consolidate volumes and maybe stop calling on a particular port, maybe skip a port and a lot of that has to do with capacity management. And we are seeing those and they are mostly on the West Coast. We are not seeing as many on the East Coast as of yet.

Thank you very much

If I may add Benoit, so if you go in our deck for this core, you go on page 21 and you will see the expansion that are being worked on by DP World. And there's $300 million – $4 million of jointly funds track in different infrastructure outside of terminal cell, which can be built for the next 24 months by CN, the federal government and the Port of Prince Rupert. So they're investing and we're investing and those infrastructure are going ahead.

Okay. Thank you very much for your time.

Thank you, Benoit.

Thank you. The next question is from Ken Hoexter from Bank of America. Please go ahead.

Hi, good afternoon. Maybe just a little clarity on that outlook, Ghislain. Are you – just to understand, are you now targeting negative earnings in the fourth quarter given that the upper-teens or mid-teens kind of grows in the first couple of quarters? And I guess just trying to understand, is this beyond economic? Is it forest product, secular shift or delayed coal grain crude that could ramp up as we move forward? Just want to try to understand how you roll into the fourth quarter and then into early 2020? Thanks for the time.

Yeah. Thanks Ken for the question. I can take the first part and then maybe I'll turn it over to you James for the commodity outlook. Obviously, I mean, Ken you can do the math, but we went from low double-digit EPS growth and now we're high-single-digit EPS growth.So, obviously we -- Q4 will be a challenging quarter. And if you look just on the volume standpoint, month to-date, I mean, our volumes and we do report our volumes both in terms of carloads and RTMs, our volumes are down 10%. So, obviously that impacts EPS. And I'll let you do the math, but obviously that – the volume deterioration or challenge is the story. Maybe James you want to touch quickly on some of the commodities?

Yeah. I'll talk about the capital market. You mentioned forest products. The forests product that is a structural change and BC forest products industry that business is not coming back, but you can expect to see the same run rate in – or similar run rate in Q4 that we saw in Q3.On the crude side of the business, that's a little different. If you look at the comps from last year Q4 compared to Q4 of this year, we had an all-time record 232,000 barrels a day that we moved in Q4. As we're getting the ramp-up, we take on the additional capacity and the government contracts that were coming to bear, that didn't happen. And this year we're not going to see that level of shipment, and we don't expect to see the same level of shipment that we saw last year just going to be a very difficult comparison year-over-year basis.Coal is going to continue to be a very, very favorable year-over-year comps in Canada. Coal in the U.S. as much as we are seeing a improved run rate from Q2 into Q3, and expect to see that continue into Q4. We are not going to hit the record core volumes of U.S. export that we saw in 2018. I hope I could get to the root of your question there.

Absolutely. I appreciate it. Thanks, James.

Thanks, Ken for the question.

Thank you. The next question is from Ravi Shanker from Morgan Stanley. Please go ahead.

Hi. Good afternoon. You’ve got Sawyer Rice on for Ravi. Maybe just bring it back to crude by rail here. I guess, the question is how quickly could you get teams in place to be a little move higher volumes in the event that the Alberta government does transfer the program to private hands and release curtailments there? And then maybe just any way to frame how you guys could see volumes to ramp into 2020 in that case?

So, maybe I can start on the resource side. We have the locomotive, the people – and the capacity to ramp it up now up to the 300,000 barrels that we talked about earlier. In terms of what's been happening in the marketplace, I'll let James talk about what the – what's the color there.

Yeah. I don't – it's unclear to us what might happen in 2020 as far as what crude is going to look like. It's really going to be dependent on if the Alberta government is successful on placing the contracts in private hand. And if they lift the curtailment on production, there's about 200,000 barrels a day of crude that is not moving that's in the ground and wants to move, if the production curtailments are lifted.And if that does happen, we're ready willing and able to move that volume. Rob asked me all the time he said, when is the crude coming? When is the crude coming? I'm saying, why you're ready to go Rob? But as soon as I know I'll make sure that you know.

Great. Appreciate the color there.

Thank you.

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

Thanks. Good afternoon. I just wanted to ask a little bit about the Q4 guidance, and specifically, the OR. Seems like the implied operating ratios maybe a bit worse sequentially than we've seen historically. So I was wondering if you could talk about the factors that might be driving that, if it's mixed driven, if there's any seasonality with TransX that we need to think about. Any color would be helpful. Thank you.

As you know. Allison, we don't do guidance by quarter, but let's see if Ghislain can help you a bit with that.

Yes. There's always -- when you look at the OR, Allison, on a quarter-by-quarter basis, there's always some seasonality. I mean, remember, we are the railroad of the north; so obviously, the winter hits us earlier than others. So there’s some seasonality there. I mean, we just had quite a dump of snow in Western Canada about a week or two ago.So there is some seasonality there. And as I said, some of it is volume and some of it, remember, is we are reducing or rightsizing our resources, but as I've mentioned a few times, there is always a lag when you do that, where, by the time that we identify cars or locomotives to be returned, sometimes that benefit, it comes a couple of months after, because you need to inspect, you need to know where you're going to return those assets to the lessors and so on. So there is a lag.So as JJ mentioned, we don't guide on a quarterly basis on OR, but there is seasonality. Winter, it comes every year. And then there is a lag when we reduce cost. Hopefully, that gives you color, Allison, and thank you for the question.

Thank you.

Thank you.

Thanks.

Thank you. The next question is from Jason Seidl from Cowen. Please go ahead.

Thank you, operator, and afternoon, everyone. You guys, obviously, mentioned you're rightsizing throughout the quarter and fully understand the lag effects of that. But it's hard to right-size CapEx, because a lot of the programs have already been started. How should we start thinking about 2020 CapEx, as it relates to the levels of 2019?

Go ahead. I can take that one Jason. Like we've said and at CN, we do, what we say we were going to do. So, again, we've said that we would have two years of elevated CapEx, 2018 and 2019. This money we will need, because this is on our core route going from essentially Western Canada, Edmonton, Winnipeg and then to Chicago. So we believe that we will grow this railroad in the mid to long term for sure.I mean, you just heard Keith talk about Rupert being the gift and keeps on giving. So we will need that capacity and that will be good for us. We've caught up now, so now we need to keep up with our partners and DP World and their expansion, but we will go back to historical levels.So, again, next year – and we've said that to people, that next year we would go back to historical levels and you've been following us for years, you know what that mean. And frankly, as we finalize our business plan with our Board this fall, we will provide more visibility on the absolute number in January, as we typically do, but rest assured that CapEx will go back to historical levels in 2020.

Yes. That was my one. Appreciate a lot.

Thank you for questions. Thank you very much.

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

Okay. Thanks very much. Good afternoon, everyone. So I'd like to start on pricing and perhaps, I don't know, if Keith you want to chime in on the intermodal side, because I know JJ you mentioned you were pricing above inflation and you're not providing specific. But is it fair to say that pricing is being -- is less robust than it was previously? And is that due to excess capacity or truck capacity? Is it due to excess or more intense rail-on-rail competition? Any color you can give in terms of not necessarily the absolute value pricing, but perhaps a directional change in pricing than where it’s been earlier this year?

Thank you, Walter. Maybe I'll start and Keith will come in. We are definitely pricing above rail inflation and as you know rail inflation right now is not that high. So, the gap between what we get on price and the rail inflation is something that we feel good about. Keith you want to talk about some of your segment?

Sure. Walter you talked about competition. We compete against all the Class I railways, we compete against the truck. But I also compete internally against James for money for capital. So, if I bring a project where I want to grow the business to Ghislain and JJ, and I don't meet the hurdle rates, then I don't get the money. So, we have a very disciplined approach inside that if we need things, then we have to have a good track record and we have to have gained confidence from JJ and Ghislain that we are doing the right things from a pricing standpoint. So, thank you for your call.

Okay. Thank you.

Thank you.

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

Yes, good afternoon guys. Just a quick one for me on forest if I may. James, I think you mentioned early in the call that forestry is down to a more stable run rate now. Are you getting good indications from the BC customer, the mill is that is that the predominance of the capacity curtailments are shutdown that have hurt this far? Should we see -- should we expect or are we at risk of another step down, one some of that log experts grew, just curious any colors you might have there? Thanks.

I think longer term as you look out past 2020, 2021, you're going to see additional takedown in capacity just because of the allowable cut. Right now the indications we're getting is it's stable pricing. Indications are that we've kind of reached a new stable level that we've seen through Q3 that we expect to continue on moving forward and that's what we are resourcing again, Steve.

And if I might add, so this prove that the fine needle is actually moving in the province of Alberta and there's a number of producer that tell us that they think the province will have to do what BC has done, which is to control the prime beetle, they will have to open up the forest to the higher rates of cut.So, at some point, even though this fast-paced of cutting of the pine in BC is done, at some point, we might see some of them in Alberta in an area that's favorable to CN, which is North and Midwest.

Understood. Thanks guys.

Thank you.

Thank you. The next question is from Seldon Clarke from Deutsche Bank. Please go ahead.

Hey thanks. I just wanted to get back to CapEx for a second. So, can you guys help me better understand why the intensity of investments wouldn't come down next year, sort of, I guess below your typical historical range given your envelope this year is unchanged at $3.9 billion, RTMs have been -- your RTM assumptions have come down from up high single-digits to now down slightly year-over-year. So, could you just give us a sense of why that -- you wouldn't see savings rollover into next year based on your capital envelope for this year?

Yeah. Maybe I can start. The entity of the CapEx will go down next year. We've been very clear about this for quite a number of months. And what will be the final CapEx program, we’re going to decide that in January at the Board meeting, because we would like to see what the fourth quarter will do in terms of total volume. There is, obviously, a direct relationship between how the business is doing and how much CapEx we need to layout.And I think right now I’ve been in the part of the economy that's moving fairly fast, we would like to have benefit of knowing what the fourth quarter will do in terms of railroad -- in terms of volume for all the railroad before we find out the CapEx, but the CapEx especially is going to come down, including at CN. Anything else you want to add to that?

Maybe I just want to – I just want to Seldon tell you as well that again, our use of cash strategy has not changed for the last 15 years, it's always the purchase of cash is towards the business. And we have a very focus on return on invested capital as you know and we've publicly said that, we are targeting 15% to 17% in the next two to three years.So we have a very disciplined approach. But if we have projects at CN that can generate a return in that range, we'd rather do that than do share buyback -- and because that creates real shareholder value.So to JJ's point I think, our capital intensity or capital envelope will be right-sized and resized because now we're out of the catch-up CapEx, now we need to keep up CapEx. But again, we manage this business for the mid to long term, and we understand that quarters are important, but some of these investments we're making will actually feed this network for many years. And remember DP World is investing hundreds of millions of dollars in increasing its footprint in Rupert. We need to keep up to make sure that with our partner, we make that gateway competitive and continue to take market share from LA/Long Beach.

Okay. Thanks.

Thanks for your question, Seldon.

Thank you. The next question is from David Vernon from Bernstein. Please go ahead.

Hey, good afternoon, guys. So I think at the Investor Day, you guys had outlined $1.3 billion to $2.4 billion of incremental revenue opportunity in 2020 to 2022. It feels like we're going little bit in the opposite direction. Is there anything outside of the structural shift you've seen in the forest product market perhaps that has changed in terms of what that incremental upside opportunity could be? Or should we just think -- be thinking that this has pushed out a year or two as we get through this soft past in the economy?

I think and if I may start. So definitely, if our railroad -- manufacturing sector is actually probably producing negative growth versus positive growth. The Alberta energy space whether it's frac sand or crude is also going to be producing short-term negative growth as suppose to positive growth to the point made earlier by James. There is crude but actually available in Alberta, but it's being curtailed, so we obviously we can't move it.In the case of forest product, the fact, the price of lumber is down and the price of the cost of stumpage is up and the fact that forest has not as many dying trees than it had is a is a combination of secular shift and also just cyclical, cyclical is about the price of the stumpage fee and the selling price of lumber.So, the story about U.S. coal, U.S. coal company who are producing terminal coal are increasingly having a tough challenge making any money, and obviously that has an impact on how much volume is available for the railroad, in the case of CN we're talking the export markets.So I think the issue here is more about the broad economy environment than our customers not being able to perform in their space. Their space is under pressure, so all of them are either producing less or they have had to take some curtailing production.So, we can only -- we're not losing market share, but the market that we are serving on manufacturing, natural resource, energy and trade is not as big as it was, and I think that's true for all of the North American railroad. When you see volume down for the North American railroad, it's way beyond just Precision Scheduled Railroading impact. A big part of that is what demand is available for us in terms of the overall economic environment.

So the projects that were identified are still going to be there, or you're just going to have some offset to work through, is that the right way to interpret that, or are there specific…?

That's right.

Okay.

So the DP World expansion in Rupert is going ahead. AMCI who bought the coal and the bulk terminal, that's going ahead. There's expansion coming up at two of the container terminal in Vancouver. We're still very much focused on the Rupert of the East. We have a number of initiatives on the carload side. The biggest one is crude-by-rail. We can actually execute as soon as either the production curtailment are lift or when the province of Alberta transfer these commercial contract into the hands of private shippers as for example.

Thanks a lot for the time.

Thank you.

Thank you. The next question is from Jordan Alliger from Goldman Sachs. Please go ahead.

Yeah, hi, afternoon. Just a question, a follow-up on intermodal. The yields, the revenue per RTM were up 11%, revenue per carload, up 12%. So just curious, if you could sort of frame that? Is that mix? Is it price? And how do we think about it looking ahead, because it is a big number? Thanks.

Keith you want to do that?

Sure. Thanks, Jordan. The revenue uptick there included TransX.

Okay.

So when you look at that it’s about CAD100 million or so.

Okay, great. Thanks. That was my question.

Thanks.

Thank you.

Thank you. The next question is from Brian Ossenbeck from JPMorgan. Please go ahead.

Hey, afternoon. Thanks for taking the question. I just wanted to come back to crude-by-rail one more time, and it sounds like you're keeping a lot of resources ready in terms of capacity and employment level, so it's coming at a cost to CN. So wanted to see if you're able to get any of liquidity damages as an offset and then if you have any specific comments on the volume number embedded in the updated guidance that would also be helpful?

Yeah. So I think let's maybe talk. So we do have locomotive. As Rob mentioned, a number of them are parked. And then how many are parked Rob?

150.

And then we are returning the last of the lease locomotive. On the people side, we do have the qualified crews and either they are on furlough or they’re taking vacation and it's partly across we can avoid, partly across we have to carry. And when it comes to the take-or-pay system, maybe you want to add color James?

Yeah. When we got back to the crude-by-rail space, we were very clear to have these new contracts based on take-or-pay volume commitments. So we always want to move the rail part. We always want to move the crude, but if we don't, these are take-or-pay contracts.

That's right. So the -- what's done from the beginning, the capacity was going to be made available, which obviously we have. I just mentioned that we have the capacity. We could do up to 300,000-barrel a day. We could do that in October, November, December, if need be.But in order for us to create the capacity there was an agreement in this contract for us to be protected with some minimum amount of cash just to have the capacity available, even if you don't move the crude. So I hope that answer your question.

And the fourth quarter expectation similar to 3Q? And so these issues give you --

You want to give some color on the fourth quarter crude-by-rail volume, James?

Yes. I would say we’re looking at -- again, looking at difficult comps. But if you look at Q3 going into Q4, we were flat Q3 from Q2. We're going to be slightly down, I think in crude-by-rail volume going Q3 to Q4, unless something changes.At the end of the day, if the customer’s phone us up that have these take-or-pay contracts and say I'm ready to move, let's go. We're going to be ready to move. The differentials aren't quite there yet. We're looking at differentials somewhere in the range of $14 to $15 per barrel.It should be a strong pricing signal moving forward to get back in the game. But, again, I think, the government curtailment and the capital in the amount of crude produced, puts an artificial cap on the differential. Customers look very, very hard about getting back in the crude-by-rail space without some notion of longevity.

Yes. So fourth quarter of last year on average, we moved 233,000 barrel per day and the peak month was the month of December where we moved 250,000 barrels per day. We actually provide you with those stats on page 19 of our appendix. So, it gives you the reference point of what is comparable for crude-by-rail.

Got it. Thank you very much.

Thank you.

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

Hey, thanks. Afternoon, guys.

Good afternoon.

So RTMs are going to be down a little bit this year and earnings going to be up high-single digits. If we think -- if we assume RTMs are going to be down a little bit again next year, may be down in the first half, up in the second half, but we'll call it down a little bit. Do you think it's harder or easier to do high single-digit earnings growth next year? Just anything you honestly be thinking about comps wise easier, tougher to do high single next year relative to what you're doing this year?

It's in the crystal ball for next year, it's not clear yet. So I would think that we would know a little more about the first half than the second half, because it's closer to us. So the first half might be more challenging than the second half on the overall business environment, the economy. But how we manage all these things with cost -- we don't want to be giving guidance today for 2020, but maybe we can give some hint. But I think one of the hints is the first half might be more challenging than the second half.

Maybe I can give a little bit of color to your point JJ. On this one, you will have to stay tuned and we will provide visibility at the end of January as we typically do. And frankly, as JJ is mentioning, the first half, like, again in Canada being the railroad of the north, the winter comes every year. So that's -- we never know how that's going to impact us.Now, we've done quite a bit of investment to help us through the winter, like, for example, we have 40 more air cars around that we will be able to use. So now we’ll have 100 air cars and this typically allow us in – when it's very cold to have long – to be able to have longer trains and if we wouldn’t have them.So there's things that we did and that we're doing that will help Q1 and – but in terms of cost takeouts and volumes, Scott, on this one, I mean, as you know the environment is changing quickly and I would tell you to stay tuned on that one and we'll provide more visibility in January as we typically do for the entire 2020.

Yes And Scott, you could go back to some of the comment made at the beginning by Rob about rolling stock, locomotive, the shops where we do maintenance work, the overall headcount. These are all areas right now that we're looking at and actually executing PSR.

Okay. Thank you, guys.

Thanks, Scott.

Thank you. The next question is from Konark Gupta from Scotiabank. Please go ahead.

Okay. Thanks operator and good afternoon, everyone. Just a question on pricing, what kind of discussions, if any are you having with your customers or ship line partners regarding the impact of IMO 2020?

Keith?

Yes. Konark, thanks for the question. We do have those discussions with our liner customers. We know that they are in – they're discussions with the beneficial cargo owners. We've seen some of those dates that those surcharges will go into play. We've seen some of them get pushed out from maybe someone want to start in October, we've seen someone pushed to December, maybe some in November.But that is something they're going to have to do to recoup their higher cost. We also see some of the BCO's with their own surcharge that they're going back to the lines with. So it is a very dynamic situation and one that we're keeping a priced up but it really should not impact us at this point in time.

Okay. Thank you.

Thank you.

Thank you.

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

Good afternoon, Tom.

Yeah. Good afternoon. Thanks for the chance for question. Wanted to see if you could offer some thought sequentially on headcounts? And Rob, if you could kind of ballpark some of the commentary on the mechanical resource reductions, are you talking about 50 people or a couple of hundred people, what's the magnitude of potential reduction in resource in that bucket? And how quickly you can respond on headcount in the fourth quarter? Thank you.

You want to add some color Ghislain?

Well, maybe high level and then I'll let Rob jump-in. But if you look at our headcount on a sequential basis between Q2 and Q3, we're basically flat. If you look at headcount on a year-over-year basis Tom, Q3-over-Q3, if you got to take into consideration TransX here. If you do take into consideration TransX then naturally our headcount is down about 1%. And so – and then I'm going to reinforce JJ's point and then turn it over to Rob.When you look at headcount you've got to be careful because we're focused on cost. And headcount is part of the story, but its not the entire story and the example that JJ talked about a little bit is – is in IT, in our technology department where actually headcount there maybe a little higher, but we're getting rid of a lot of high paid consultants. And therefore on a net basis, it's a net-net win for us. So that's what we're focused. At CN, we use the nomenclature of being focused on paychecks and paychecks include consultants. So, Rob I'll let you cover the mechanical piece.

Right. And the only other thing I'd add to that Ghislain is that from a T&E standpoint, productivity is actually up 2% year-over-year from an employee per GTM. So, we're actually seeing improvement that – in that piece year-over-year.On the mechanical piece, we're in the process of rolling that out right now it's one that's going to last through the end of the quarter and into first quarter of next year. Obviously, there's a lot of communication to go with that. Really don't have a number to give you in terms of that. We will have fewer heads in the mechanical department as we react to the volumes that we're seeing right now. And it isn't just about fewer heads, it's really about aligning our resources in our mechanical department that will allow us to have better productivity, really schedule our maintenance on our locomotives better and create greater reliability overall. Thanks for the question Tom.

Okay. Thank you.

Thank you.

Thank you. The next question is from Justin Long from Stephens. Please go ahead.

Thanks. Good afternoon. And maybe just start about building on that last question. As we think about comp per employee, based on some of the things that you just described, should we expect downward pressure in comp per employee as we get into next year?And then also I wanted to ask about the impact from TransX to the OR. I believe at the Investor Day you talked about it being around 100 basis point headwind. So curious if that's still what you're seeing play out today? Thank you.

Ghislain?

Well, the TransX – TransX as you know, we did say that in Q2 that it had about 100 basis points. I would say that its still the same. But TransX is part of the family. So part TransX is part of the family. Keith is working very hard with myself and others to get a very successful integration of TransX. I think we're well on our way. We're very pleased with the acquisition and the integration is going quite well.In terms of your question related to employee productivity. I think – I wouldn't assume a more pressure on employee productivity, absolutely not. I think that as we continue to advance, as we continue to deploy technology, actually it'll make us more efficient. And frankly as we deploy RPA and as we deploy some of the handheld devices that you have in the deck at the end here, that actually employee productivity will be better on a year-over-year basis. I don’t know whether Rob or JJ, you want to add anything.

Rob?

No, I agree with everything you said. As technology continues to roll out not just next year but into the year after, we'll continue to see the benefits not only in efficiency, but also in safety as well.

And then in regards to finally your comp per employee, I wouldn't go in that level of detail. I think at that of the day, we're all – I mean, if you look at either TransX employees or our employees, we're all part of the family. And I wouldn't go in that detail at this point Justin.

Okay. Fair enough. I appreciate the interest.

Thank you, Justin. Thank you.

Thank you. This concludes today's question-and-answer session. I would like to turn the things back over to Mr. Ruest.

Thank you, operator. Thank you, Patrick and thank you for all of you to join us tonight. And I'd like to take the occasion to take a very special thank from myself to all of the CN employees. They are dealing with every challenge as they come to us, but first and foremost with safety in mind, everybody at CN has a can-do attitude.So I appreciate very much the effort of all the CN team who makes possible this solid EPS and operating ratio that we'll be producing in the third quarter. So thank you for joining us. Thank you, Patrick. This is the end of today's call.

Thank you.