Canadian National Railway Co

TSX:CNR

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon. My name is Abby, and I will be your Operator today. Welcome to Canadian National Railway's Third Quarter 2022 Financial and Operating Results Conference Call. [Operator Instructions]. I would now like to turn the call over to Paul Butcher, Vice President of Investor Relations. Ladies and gentlemen, Mr. Butcher.

[Paul Butcher;Vice President of Investor Relations, executive]

[Foreign Language], Abby. Good afternoon, everyone. And thank you for joining us for CN's Third Quarter 2022 Financial Results Conference Call. Before we begin, I'd like to draw your attention to the forward-looking statements and additional legal information available at the beginning of the presentation. As a reminder, today's conference call contains certain projections and other forward-looking statements within the meaning of the U.S. and Canadian Securities Laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements and are more fully described in our cautionary statement regarding forward-looking statements in our presentation.

After the prepared remarks, we will conduct a Q&A session, and I do remind you to please limit yourself to one question. The IR team will be available after the call for any follow-up questions. Joining us on the call today are Tracy Robinson, our President and CEO; Rob Reilly, our Chief Operating Officer; Doug MacDonald, our Chief Marketing Officer; and Ghislain Houle, our Chief Financial Officer. It is now my pleasure to turn the call over to CN's President and Chief Executive Officer, Tracy Robinson.

[Tracy Robinson, executive]

[Foreign Language] Welcome to our CN call. I'm very pleased to be here with you all today. Whether you're with us by phone or webcast, we appreciate you joining. I will start today with some comments on the year. Now when I joined this team earlier this year, we were coming out of a very difficult fall and winter. We declared at that time that we were going to lean into a scheduled operation and focus on moving our assets more quickly. We said that we were going to be intentional about building our book of business to ensure that we sold into the strengths of our network and our operating plans.

We intended through this to improve the service we provide to our customers and the consistency of our operations and our interactions with our supply chain partners. We started this on April 1, and we have progressively leaned into this program over the last 6 months. I can't tell you how pleased I am with the efforts and the focus of this team and of the results that they are producing. You can see it across our operating and service metrics, and you can see it in our financial results. Our intent was to demonstrate that this discipline would drive the growth in our top line to the bottom line, and we're doing just that. This team has done a great job of driving this program forward. We're not finished yet, but we have a great start and some positive momentum.

Now as a result of this work, we're adjusting our expectations of our results on the year. We now expect to deliver an increase of about 25% in EPS this year, and this is up from what we expected to be 15% to 20% growth earlier this year as we came out of winter. And we expect to produce free cash flow of approximately $4.2 billion, up from our previous guidance of $3.7 billion to $4 billion. And this comes as a result of every member of this team leaning into a single plan. I'm proud of how we're all working together, and I'm even more excited about what we can create.

Now the third quarter. Our performance this quarter has put us in the position to deliver the results I just spoke of. Rob, Doug and Ghislain will go through the details on the quarter and what we see for the balance of the year in just a moment. But before they do, let me highlight just a few key points about our Q3 performance.

Volumes turned positive this quarter, up 5% on an RTM basis. And when combined with solid pricing, fuel surcharge revenues and a lower Canadian dollar, we delivered record revenue. While we're seeing some early signs of softness in certain markets, we will continue to be very busy through the fourth quarter, particularly on the western part of our network. Doug will provide you with the details on volumes and on our top line performance.

We continue to make good progress in Q3 on the discipline of running to our plans. We're running at nearly 90% on time from an origin perspective, probably close to optimal. Our car velocity was 212 miles per day in the quarter, which is the best third quarter car velocity since 2016. Rob will provide you with a few more insights on the operating side and on some very important improvements in safety.

And finally, as we grew volumes in Q3, we were able to deliver to the bottom line as well. EPS of $2.13, up 40% on an adjusted basis, representing a quarterly record and an operating ratio of 57.2%. Ghislain will provide you with the key elements that are driving that performance. So, a very good quarter delivered by a very strong team. And on the team, I mentioned when I joined earlier this year that I was launching with 15 but I would assess as we leaned into our plans. I'm very pleased today to announce that Doug MacDonald, who stepped into our Chief Marketing Officer role on an interim basis, has now been officially made our Chief Marketing Officer. Congratulations, Doug. And we'll continue to assess the team as we move further into our plans. And on that note, let me pass it on to the team, starting with Rob.

[Rob Reilly, executive]

Thank you, Tracy, and congrats, Doug. Thanks to the team on delivering another excellent quarter of operating results. I also want to take an opportunity to acknowledge the outstanding efforts of our engineering team that worked around the clock to restore service for our customers in Northern Alberta after a bridge fire. The branch line was returned back to service in just over a week's time in an area where customers rely heavily on rail to ship their products to market. The third quarter demonstrated the power of adhering to the plan we put in place.

As we laid out last quarter, on running to the plan, ensuring trains leave on schedule. Our origin train performance at key yards has continued to trend upward, reaching 87% this quarter, up 12% from last year. More trains are also reaching destination on schedule. This resulted in better utilization of resources like crews, where we've seen daily average deadheads and recrews decline by 12% and 38%, respectively, versus the same quarter last year. We are moving cars across the network with more speed and consistency. Our third quarter average car velocity was 212 miles per day which is a 5% improvement over the third quarter of last year. This was the best performance since Q3 of 2016, and we achieved this despite handling 10% more GTMs over that same period.

Also, with grain season in full swing now, we're off to a very good start, recording the second largest amount of Canadian grain we've ever moved for September, and just 2 weeks ago delivering an all-time weekly record as well. What I'm most proud of is what we've achieved -- that we've achieved these outstanding results while maintaining a safe operating railroad. Our accident ratio improved 19% versus Q3 of 2021, and our injury rate has improved nearly 30% versus the third quarter of 2021. And it's now been 658 days since our last fatality and 469 days since the last serious injury, both streaks representing the longest in our company's history. These are the results that help us live up to our safety vision of an uncompromising commitment to the health and safety of our employees, the customers we serve, and the communities and environment in which we operate.

On Slide 8, we are prepared to meet our customers' needs in the fourth quarter. We've laid out a solid operating foundation, and we have alignment with Doug and his team so they understand where there is and isn't excess capacity on the network, which informs their commercial decisions. And we have the resources in place across the network. Approximately 400 conductors have been qualified so far this year with an additional 1,000 currently in training. All 47 locomotives acquired this year are now in service and pulling freight, and we have an additional 10 coming early next year.

We remain committed to add to our railcar fleet to accommodate growth opportunities. We've added 500 high-capacity grain hopper cars this year with more to come in 2023, and we will be adding 800 box cars by the end of next year. We have continued with capacity investments this year, particularly in Western Canada, with new sidings and sections of double track that are in service to support the operation this fall and winter.

And finally, we released our 2022/2023 winter plan which sets out the actions we are taking to improve our resiliency and enhance our capabilities during periods when winter impacts our ability to operate the railway at normal levels. While winter will provide its challenges, our preparations will help mitigate its impacts. I'll now pass it over to Doug to provide some color on the marketing side. Doug?

[Doug MacDonald, executive]

Thank you, Rob. Congratulations to you and the operating team for another stellar quarter. My team continues to work closely with the operations organization as we lean into this operating plan to deliver for our customers. Let me take a few minutes to highlight our solid top line performance in Q3 as well as speak to our expectations in a number of key markets for the balance of the year. We delivered record revenues of $4.5 billion, up 26% over Q3 of 2021, driven by a 5% increase in RTMs across all major business segments. Higher fuel surcharge, solid pricing gains, and a lower Canadian dollar also contributed to the revenue growth in the quarter.

We saw a rapid uptick in Canadian grain starting in September when the new harvest started coming off the field. We were quick to deploy resources and our customers are very impressed with how the whole team, both commercial and operations, came together to efficiently meet the surge in traffic. As we laid out in our green plan earlier this year, we are confident that we have the resources to move this year's crop over the crop year, and we expect to see continued strong Canadian grain volumes well into next year.

Petroleum and Chemicals continued its strong performance in the third quarter with sustained strength in refined products, our export propane programs, and higher volumes of crude oil as we filled some of the available capacity due to the lower Canadian grain volumes earlier in the quarter. Our Forest Products and Metals segments remained strong through the quarter as demand persisted above empty car supply. On the Intermodal front, volumes overall were flat, but we continue to get a good traction in Halifax with our second daily train as Halifax volumes were up 21% or 10,000 containers in Q3. We continue to achieve inflation plus pricing as contracts come up for renewal.

Turning to Slide 11, we continue to assume low single-digit RTM growth for the year, which implies a strong volume uptick in Q4. Canadian grain will be the feature of Q4 volumes as we continue to execute on moving the new crop. With the recent change in the water levels in the Mississippi River, U.S. grain now looks very strong in Q4 and into Q1 2023. The U.S. crop on CN lines came in very strong. We are seeing positive demand from a number of other segments. We expect automotive demand to remain strong for the balance of the year and well into 2023 as manufacturers continue to ship into the backlog that we are being told is 9 to 12 months. With metallurgical and thermal coal prices both remaining strong, demand remains solid for Western Canadian coal and U.S. coal. We will also be moving some of the coal backlog now that the West Shore Coal Terminal is back up and running following their strike.

On the other hand, we are seeing some signs of market softness. We are seeing demand roll off for international intermodal as inventory levels remain elevated and the supply chain continues to sort itself out. Lumber prices have dropped to about $500 per thousand board feet from a high of $1,400 earlier in the year and some mills are taking downtime to adjust inventory. We are seeing flattening demand in chemicals with some impact due to the economy slowing. While we expect another strong propane season for the export and domestic demand, refined fuels are coming down as people and trucks are driving less.

Before I pass it on to Ghislain, let me double click on our recent announcement on the EMP program. CN is proud to announce our exclusive partnership with Union Pacific and Norfolk Southern in the Equipment Management Program, or EMP program, effective October 8. The EMP program is a domestic interline service providing extensive coverage throughout North America, offering a fleet of more than 40,000 containers. The EMP program provides seamless access to all major cities within Canada, the United States and numerous major markets in Mexico.

EMP shippers will benefit from CN's double-stacked scheduled intermodal service to and from all Canadian origins and destinations from coast to coast. CN will continue to invest in broadening our range of intermodal services in North America, and over the next 3 years, we will invest in approximately 2,500 containers and chassis to position ourselves for the future growth. CN's expansive 3 coast network and industry-leading service provide increased flexibility and expanded reach for shippers throughout North America. In all, we believe this opportunity over time could represent an incremental 5% in volumes for our Domestic Intermodal segment. With that, I will pass it on to Ghislain.

[Ghislain Houle, executive]

[Foreign Language] I will talk to Page 14 of the presentation, which will provide more visibility on our third quarter performance. These results highlight the strength of our franchise as we delivered volume growth of 5% in terms of RTMs and 26% growth in revenues despite some headwind from Canadian grain at the beginning of the quarter. The top line performance, combined with solid operating performance drove record earnings in the quarter.

Let me provide you with more details on the quarter, and I will speak to the adjusted numbers, which excludes a merger termination fee received in the third quarter of 2021. Labor expense was up over $40 million in the quarter versus last year, driven by a $47 million incremental wage accrual for the tentative agreement reached with our unions in the U.S. Going forward, we will adjust our labor expense on the basis of this tentative agreement. Our fuel expense was up 80% FX-adjusted as fuel prices remained high in the quarter relative to Q3 of 2021. We have an effective fuel surcharge program that deals with fuel price fluctuations that we've seen this year, but it does create some noise in the short term. In the quarter, we benefited from a favorable fuel surcharge lag versus last year.

We delivered operating income of over $1.9 billion in Q3, up 31% on an adjusted basis, which is a quarterly record. Our Q3 operating ratio came in at 57.2%, which was 180 basis points lower than the adjusted operating ratio for the same period last year. Diluted EPS of $2.13 for the quarter was up 40% versus last year on an adjusted basis and also represents a quality record. We generated free cash flow of over $1.3 billion in Q3, up nearly $600 million from last year, mainly due to higher earnings. This brings our year-to-date free cash flow to over $2.9 billion, an increase of nearly $900 million through the end of September.

Under our current share repurchase program, which runs from February 1, 2022, to January 31 of next year, we have repurchased nearly 23 million shares for $3.5 billion as at the end of September.

Moving onto Page 15, following a solid performance after 3 quarters and strong volume expectations in Q4, we are raising our 2022 financial outlook and now expect adjusted EPS growth of approximately 25% and free cash flow to be around $4.2 billion. We still expect an operating ratio that starts with a 5 and an ROIC of approximately 15% for the year.

From a volume perspective, we continue to expect RTMs to be up in the low single-digit range for the year. This assumes strong growth in Q4, led by a top 5 all-time Canadian grain crop that started to move in September. We now assume that in 2022, the average price of WTI will be approximately USD 95 per barrel and the value of the Canadian dollar in U.S. currency will average approximately $0.77 for the year. We are not modeling any major service disruptions in the balance of the year.

In conclusion, let me reiterate a few points. Volume expectations in Q4 remained strong, driven by Canadian grain, and we remain disciplined on pricing. We have a strong bulk franchise, including grain, potash and coal that is less impacted by economic fluctuations and a current backlog of lumber and automotive traffic. The network is fluid and running well as we continue to run a scheduled railroad with a focus on car velocity. We are closely monitoring the impact of inflation on our costs, making sure that we control our expenses. We have a strong balance sheet that provides us financial flexibility, and we will allocate our capital in a manner that drives long-term value for our shareholders. Let me pass it back to you, Tracy, for some closing comments.

[Tracy Robinson, executive]

Thanks, Ghislain. I'm pretty proud of this team. They've delivered another solid performance in Q3. We have strong momentum heading into Q4, and we know that we'll have a busy end of the year from a volume perspective. This team is delivering on what we said we would do. We're running the railroad to the plan, and we're doing it in an integrated way at every level of the organization. And we're driving top line growth to the bottom line. I'm comfortable that we will deliver on our upgraded guidance of 25% EPS growth in 2022, and we remain committed to deliver value to our customers, to our employees and to our shareholders. And with that, we look forward to your questions.

[Operator]

[Operator Instructions]. The first question comes from Ken Hoexter from Bank of America.

[Ken Hoexter, analyst]

Congrats on a great job, Tracy and team. Great to see it really come together. Tracy, a few times throughout the conversation, I guess you and Doug and Rob mentioned kind of capacity and the -- we use spare capacity to move some oil. We kind of -- then the grain crop is coming back. So maybe talk a bit about the balance you see here in terms of being able to meet the expectations, particularly given kind of government focus on available capacity with the need to catch up CapEx. Or is there a need to catch up on some CapEx or where we could see congestion if we see certain areas stay stronger than you expect?

[Tracy Robinson, executive]

Thanks, Ken. It's an important question. And as we've leaned into the scheduled railroads, and it's one of the points of the scheduled operation is that you get a pretty good look at where you have capacity and where you don't, and so we focus Doug and his organization in making sure that we have sold properly into the capacity in the network. And that's what's allowing us to deliver consistently to our customers. The worst thing you can do is sell capacity that you don't have.

As we're running the railroad well, as our velocity continues to improve, that frees up the next level of existing capacity. As we look forward, in order to -- for the supply chain in its entirety to run, we need a number of things. We need to have some visibility in advance of what volumes are coming our way. All of us across the supply chain. We need to have the capability to anticipate the volume, whether it be through an economic swing or on a more emergent basis. We need the ability to communicate with each other and to respond to glitches in the supply chain, whether they be in the railroad, in the trucks, in the terminals, or at our shippers' facilities, and to coordinate our response to that very effectively.

A supply chain only runs when all of the pieces of the supply chain are running well. That takes collaboration. And we are willing, we're at the table in all of the supply chains that our customers are involved in. And generally, we are very willing to invest as we see growth coming. Those are conversations that we have with all of our customers. And where we have sustainable growth, we're eager to step into investing in capacity over the long term with our customers.

[Operator]

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

[David Vernon, analyst]

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

[Ghislain Houle, executive]

Yes. Thanks, David. I can start, and then Rob, you can jump in a little bit on resources. But in terms of the accrual, as I said in my opening remarks, we did have an accrual for the U.S. wage tentative agreement of $47 million. That was taken in the third quarter. When you look and you look forward in terms of labor costs, I think what you need to do to have a sense of what it looks like, is you need to remove that $47 million, and that run rate will be good for the fourth quarter and the first half of next year. And then in the U.S., as you know, you will add another 4% for the second half of next year.

In terms of resources, I think as Rob mentioned, we are getting some locomotives. We are getting some cars. I think we need to continue and we will continue to improve on our margins. I mean that's the key. And I think we've said it before. I think that we need to continue. But to do this, we need to have a tight operation. We need to improve on our margin, have a tight operation, sweat our assets, improve velocity. That will create capacity and that will allow us to bring top line at low incremental costs. I don't know, Rob, if you want to add on resources.

[Rob Reilly, executive]

Yes, David, just on the resource side, regarding manpower, we'll still have needs from an attrition standpoint in some of our hard to hire locations, so we'll continue to hire those locations. If, and when we start to see the volumes drop, we can modulate our hiring plan, taper it out over time to adjust to that. From a resource standpoint in terms of cars and locomotives, we've proven through downturns we're really good about laying those up, and we'll do that in a very quick manner if and when we see that. Thanks for the question, Dave.

[Operator]

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

[Konark Gupta, analyst]

Tracy, I wanted to ask you, this is your first time leading a Class 1 railroad. How do you plan to approach a potential economic downturn scenario from a railroad perspective? And how do you kind of really prepare for that scenario where you don't know what's going to happen here?

[Tracy Robinson, executive]

Happy to. Again, it's a great question that we're all talking about a lot, and I know it's on your guys' minds as well. I'm going to start us off, and I'm going to hand it over to Doug. This is, going through various economic ups and downs, is something that this railroad and every other railroad has managed over time. We have a pretty good sense of how these things go. We have the ability. Now it's important to note that we have a pretty diverse book of business. Not all of it is sensitive to a recession type of environment. And Doug can go through some more details on that in a moment. We're looking very closely. We're watching as to those areas that are more recession-sensitive, what's happening on those. And as we look forward, we are positioning our resources in a manner to respond.

As Rob just said, I think we have a track record of starting to park the least efficient locomotives. As we need them, we tuck away cars pretty quickly. We've started to do that already in the international side. We need to keep our velocity up. We'll contract where we need to contract. But there's a big chunk of our book that is not going to be hit by the recession. There's some muscle in this organization around how to do this. We're watching it pretty closely. Doug, do you have -- did you want to comment on where we're seeing, what we expect from a recession perspective?

[Doug MacDonald, executive]

Yes. Great question. And some of the major commodities that normally you would think would be hit by a recession, that's changed. Strictly mostly because of the Ukrainian war. As an example, we're going to see strong grain in the U.S. and Canada no matter what moving forward. We don't see any impact from an economic standpoint from any recession. Same thing with coal. Coal is also very strong, mainly due to the war going on over there. With that comes some other commodities like potash and fertilizer, all very strong.

We expect to see it going over the next 3, 6, 9 months. It's not going to be your typical one. Lumber, we expect to see very strong as well, so strictly because our fleet is sold out even anything above 1.3 million housing starts. And lastly, automotive is going to be strong for at least the next 9 to 12 months of the backlog. Anyone out there trying to buy a car, I think you'll find that's about the wait period still. Thanks for the question.

[Operator]

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

[Christian Wetherbee, analyst]

[indiscernible] into 2023. It seems like fuel surcharge maybe decelerates sequentially, but just wanted to get a sense roughly of kind of how to think about yields. If you can talk about pricing and FX in there, too, that would be super helpful.

[Tracy Robinson, executive]

Let me start that off, Chris, and then I'm going to hand it over to Doug. As we've kind of leaned into this scheduled operation, or velocity has improved, that's given us an opportunity to improve the customer service. We had some strong demands. Those are pretty some great pricing environments and Doug and team have done a great job of leaning into that. And in truth kind of dealing with some of the issues that we needed to deal with upfront. As we look forward, you're going to see that kind of discipline continue. Doug will tell you that he's got -- he's put a mandate on his team of inflation plus pricing. But, Doug, I'll let you add a little detail to the way we're looking at this.

[Doug MacDonald, executive]

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

[Operator]

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

[Cherilyn Radbourne, analyst]

As we look ahead to next year, you've given us a good rundown on where you have more versus less visibility. But I was hoping that you could speak to the opportunity to recapture market share that was temporarily lost by Vancouver and Prince Rupert to LA Long at the height of the supply chain congestion. And in a related vein, the potential to arrange more backhaul traffic for network balance now that you've got access to a large grain crop.

[Doug MacDonald, executive]

Thanks, Cherilyn, it's Doug. Great question. You look at today, and I'll say we're still very much sold out at Prince Rupert and Halifax on the intermodal side, so that's a great news to hear. And Vancouver is a little bit slow right now. The majority of our business is actually coming into Montreal and Toronto and the U.S. business has softened somewhat for us. Having all those containers has been great. We're going to continue to move those inbound, and as the supply chain decongests in the Montreal and Toronto markets, we expect that to come back to normal very quickly. Those containers, obviously, are going to be great for the grain crop. We're moving surplus containers into the Western Prairies for stuffing right now at record paces. That's about to start up very quickly. The crop always comes in a little bit later than what moves in carload, so we're expecting volumes to pick up there by the end of the month.

[Operator]

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

[Fadi Chamoun, analyst]

Just a couple of follow-ups first, Doug. On the price above inflation, can you give us an idea of how you're thinking about cost inflation going into 2023, just to kind of anchor this pricing comment that Doug just gave? And really, my main question is, winter has always kind of been challenging for your network historically. And I think you've always mentioned time over time you're always kind of learning from how to deal with winter better. I'm just kind of wondering, coming out of the last 9 months of kind of operational focus, again, are you approaching winter any differently than you have in the last 5 years? What are some of the things you are doing perhaps differently to kind of ensure you don't lose that operating momentum you're coming out of right now going into the winter?

[Tracy Robinson, executive]

Maybe I'll start with that, Fadi, thanks. As to what does cost inflation look like next year? Well, isn't that the question around what inflation is going to look like? We do know what we've experienced this year. We do know that there's -- there can be a bit of a lag to some of our material inflation. We have a clear view of wage inflation in the U.S. We have commenced some collective bargaining in Canada. It would be very early for us to make a statement of what we think cost inflation is going to be this year. But without a doubt, whatever that is, Doug and team will be looking to price above that. Doug, any comments? And then, Rob, over to you for the winter plan.

[Doug MacDonald, executive]

I would just say a good proxy to use is the ARR index, the all-inclusive index less fuel. It's as good a proxy to use as any as for all the railways. Rob, do you want to talk?

[Rob Reilly, executive]

Yes, Fadi, as far as winter, we're always preparing for it. We actually have a very robust winter action plan. Every winter we go through, we learn different things and we prepare for adding those lessons learned. Our winter prep started some time ago in the yards and locomotives, winterizing those. Our aircar fleet, which we have 100 of, is now up and ready to go. We've replaced more air gaskets and air valves in cars than we've ever done going into a winter. As you know, air is the enemy in winter and we're doing everything we can to make it as seamless as we can. We know when it gets to -30, -35, -40, it will present challenges and our efforts are really to try to mitigate that. Thanks for the question, Fadi.

[Operator]

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

[Brian Ossenbeck, analyst]

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

[Doug MacDonald, executive]

Brian, you cut out right at the beginning, so I'm not sure what part of the question you asked there.

[Brian Ossenbeck, analyst]

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

[Doug MacDonald, executive]

Yes. No, we got it all, we just missed the stronger U.S. dollar part. The stronger U.S. dollar definitely helps us in certain areas. It also probably hurts us in a few other areas. But it's a balanced approach we have to it. And honestly, we don't see a major impact overall. Ghislain?

[Ghislain Houle, executive]

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

[Operator]

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

[Benoit Poirier, analyst]

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

[Tracy Robinson, executive]

Bonjour, Benoit. I'm going to start that, and then I'll hand it over to Rob. I'm really happy with the way this team has leaned into this scheduled operation. And as you mentioned, all our metrics are better. We're moving on time, we're moving faster, we're delivering better to our customers. Now it has taken a whole bunch of our team working hard together across the organization to make this happen. We all know that we have traction, but we also know that there's more opportunity here in making sure that we're resourced properly. You heard Rob talk about all the work that we're doing on that to ensure that we drive the service and we drive the next level of speed and that we're able to deliver the growth, which we're looking forward to talking to you about in May at Investor Day. But Rob, do you want to make some comments on that?

[Rob Reilly, executive]

Yes, you bet. There's always room for improvement. Very happy with the progress that the team has made. We'll continue to focus in on it. I know Tracy talked about 90% on time being optimal. We're not going to accept that. We're going to keep pushing even higher. We want to get closer to 100% on that. There's always opportunities to improve the first mile, last mile. There's going to be opportunities to make a more consistent intermodal service out there that the team will work on working with our hubs. And then we're focused in on the grain right now. We're in the middle of a Canadian grain that's very strong, and our focus is on delivering for them. Thanks for the question.

[Operator]

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

[Amit Mehrotra, analyst]

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

[Rob Reilly, executive]

Yes, we can hear you.

[Amit Mehrotra, analyst]

Okay. I just wanted to ask about -- I know winter happens pretty much around the same time, so I'm just wondering if there's anything to read into kind of the sequential implied decline in earnings from the guidance. And then the other thing is, Canadian National is the only railroad that has a AAA credit rating, which is fantastic. And maybe that's really important to the company. But is there an opportunity to kind of remain solidly in investment grade, just not AAA, and use some of that balance sheet capacity to further reduce the share capital base of the company?

[Tracy Robinson, executive]

Okay. We're just going to ask you, Amit, to clarify the first question going into winter. What are we looking at there?

[Amit Mehrotra, analyst]

I was just -- what I was trying to get at is the 25% growth in earnings implies lower earnings 4Q versus 3Q, just on an absolute basis. And you've got more grain and mix improvements and volume improvements. I understand winter can maybe introduce some risk, but I'm just trying to understand what the puts and takes are in terms of the implied down earnings 3Q to 4Q.

[Tracy Robinson, executive]

Yes. Well, let me say this. We haven't modeled in any significant impact to operations from weather or from any other events. But we are looking at volumes and at a range of outcomes over the fourth quarter, and this is -- we've landed on 25%. Pretty comfortable with that number and our ability to deliver it. As far as our balance sheet and our capacity there, you're right, it is a great thing to have, particularly staring down the potential for a slowdown or a recession. We are looking as part of our strategic planning on what we'll do with that capacity and where the right sweet spot is for us, and we look forward to sharing our plans with you in May when we get together at Investor Day.

[Operator]

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

[Scott Group, analyst]

Wanted to just ask the timeline on the EMP volume win that you were talking about. And then on the labor side, you guys just announced a 3% -- a deal, a small deal in Canada for 3% annual wage increases. Obviously, the U.S. deals were much bigger increases. Do you think that that's a sustainable spread between the 2? Or do you think that the Canadian labor deals are going to have to catch up to what we're seeing in the U.S.?

[Doug MacDonald, executive]

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

[Rob Reilly, executive]

And Scott, as far as the labor, you're right, we did come to an agreement with IBW on a 3% increase, and we're pleased for both them and us in terms of getting that done. As far as future negotiations, I'm certainly not going to prognosticate on where that will end up. We'll go into it and be very open and transparent with our teams, and hopefully, we get to a quick resolution. Thanks, Scott.

[Operator]

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

[Walter Spracklin, analyst]

Just checking it, can everyone hear me?

[Tracy Robinson, executive]

We can, yes.

[Walter Spracklin, analyst]

Okay. Awesome. Tracy, when you first took over the role, you pointed to 4 key areas that you wanted to focus on. You wanted to improve operations, you wanted to curate the book of business, better align sales and op, and invest for growth. And I want to zero in on where you -- what part of number 1 and 2 in terms of improving operations, and particularly curating the book of business, do you think you're -- what inning you're in on those 2? Particularly in curating the book, how much of your business do you believe you still have the opportunity to significantly reprice to get the return better or to shed if the return is not compensatory?

[Tracy Robinson, executive]

Thank you, Walter. I don't know if this is a 4 or 12-inning game or what this is, but this is a long-term focus for us as to how we're going to run our railroad. It's the way we believe in providing the service to our customers. We will continue to tweak and refine as we go forward. I'm really happy with the launch of this scheduled operating plan and what the team has done with it, both from an operations perspective as well as from a commercial perspective. Because you can only deliver what you have the capacity and the operating model to provide.

There were some things we needed to look at pretty early on as far as the book goes. I'm comfortable that we've taken care of those that are most urgent. We've got right now a book that fits our network, but this is something that we'll be intentional about as we go forward. And as we look at growth, we're going to be doing it through the same lens. We are prepared to invest in our network and invest our growth, but we'll do it very intentionally to make sure that as Doug and team sells, we have both the capacity and the operating model to deliver to our customers as we go forward. It's going to be an ongoing tweak. We are a long-term game here.

[Operator]

Your next question comes from the line of Tom Wadewitz.

[Thomas Wadewitz, analyst]

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

[Tracy Robinson, executive]

I would say that we've got this place running pretty well right now. None of us would say we're done on that. We'll keep leaning into it. But as we look forward, we lift our heads and say, where are we going to take this place from a growth perspective? The first place we always start with that, of course, is with our customers and what business, what volumes are out there, where we can be helpful in providing solutions and how we need to invest in our network, our capacity, whether it be rolling stock, track, people or capability, in order to provide those solutions going forward.

And we'll lock arms with our customers and step into that where we can see it on a sustainable basis. All of that gives us the chance to continue to look at our existing business as well. And Doug will tell you that about 1/3 of our portfolio comes up every year out of -- from expiring contracts. That gives us an automatic mechanism to take a look at that business which we've already moved. And as we sit down with our customers, we're always looking at the business that we don't currently move and whether it is something that should naturally find its way to our network.

[Operator]

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

[Steven Hansen, analyst]

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

[Ghislain Houle, executive]

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

[Tracy Robinson, executive]

Operator, are you there?

[Jonathan Chappell, analyst]

It's Jon Chappell. Can you hear me?

[Paul Butcher;Vice President of Investor Relations, executive]

Yes.

[Jonathan Chappell, analyst]

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

[Ghislain Houle, executive]

Yes. Jon, casualty and other, when you look at it every quarter, the run rate is about $100 million to $120 million a quarter. There are some things that goes in there, obviously, when we do have unfortunate derailments. I mean, a lot of the cost goes in there. And some of those are -- they happen, they're one-timers type of thing, but they happen. The other thing that we have in there is a bunch of things like updates on provisions for legal claims, updates for provisions on workers' comp. There's a lot of different things in there. But I would tell you that essentially, when you look at a run rate of about $100 million to $120 million of casualty and other, that's -- but there may be some noise in a given quarter due to some things that may happen, but that's the run rate.

[Paul Butcher;Vice President of Investor Relations, executive]

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

[Ghislain Houle, executive]

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

[Operator]

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

[Ariel Rosa, analyst]

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

[Doug MacDonald, executive]

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

[Operator]

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

[Brandon Oglenski, analyst]

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

[Doug MacDonald, executive]

Well, we haven't seen -- I'll talk about the international side outside of the share shift that was earlier, way earlier in the year, is we've seen very stable. But what it's shifted from, instead of having a normal U.S. volume coming through the Canadian ports, it's actually the increased Toronto, Montreal domestic freight that's coming in. And that's just a lot of overordering. People were afraid that they were going to have shipments late because of COVID, so we're seeing a dramatic amount of retail volumes sitting in warehousing in the Toronto, Montreal and other markets. And what that now has done is it started to back up that supply chain all the way to Asia. We're going to see some blank sailings in November from the overseas side. On the domestic side, we're still sold out in all of our slots, so things are going well. We're not seeing the premiums we were getting at the peak of the economy, but we are seeing very steady business and we continue to grow that. And the EMP business is a solid add-on to that which will only help us grow that business as well.

[Operator]

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

[Justin Long, analyst]

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

[Tracy Robinson, executive]

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

[Doug MacDonald, executive]

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

[Operator]

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

[Ravi Shanker, analyst]

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

[Tracy Robinson, executive]

Well, that sounds like a fantastic discussion for Investor Day in May, which is what we intend to do. That was the first mission as I came into the railroad was to get the scheduled operation going. We've got a lot of muscle memory in this organization, and wow, I'm very impressed with the traction that we have. And so that was mission number 1. Not declaring any kind of finish on that. We've got a ways more to go on that, but that is driving the customer service that we've got and it's driving some of the margins. You combine that with the efforts that Doug and team are making to make sure that we've got the right book of business, and we're pricing profitably.

That presents and kind of crystallizes a baseline for that. From there, we spent a couple of days with our Board this week talking about the growth opportunities we see ahead of us. We know that running that tight, efficient operation is a necessary condition in order to kind of lift our head and grow, but we're pretty excited about some of the growth opportunities that we see as we go forward and around capitalizing them both in existing capacity in our network as well as in some areas that we look forward to investing to expand our capacity. As I said, great conversation for us in May for Investor Day. We're looking forward to it.

[Operator]

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

[Jeffrey Kauffman, analyst]

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

[Doug MacDonald, executive]

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

[Tracy Robinson, executive]

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

[Operator]

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